MEPs, Mediocre Employer Protection....Just Kidding, continued

As a follow-up to an earlier post from July 6th regarding Multiple Employer Plans, this author recently discovered (thanks Alan) an article that discusses the matter in much greater detail, linked here


http//www3.cfo.com/article/2011/8/retirement-plans_trouble-ahead-for-multiple-employer-retirement-plans

This article, published on cfo.com, titled 'Trouble Ahead for Multiple-Employer Retirement Plans?" is very thorough in its description of MEPs, concerns of the DOL and what the perceived and actual benefits to employers are for participating in them.

This author beleives that meaningful gains can be had in both the area of fiduciary relief and in economies of scale, but that it requires properly vetted and structured MEP programs. Given the amount of recent attention given to these programs, and a trend towards "open" MEPs, or MEPs of unrelated employers, the DOL was promted to make its voice heard on the matter.

Based on the DOLs comments, and our own interpretations of the statutes, we still believe that MEP programs can work well, but from a prudence perspective, we believe they are better structured as "closed" MEPs, meaning that the employer is CLEARLY related. An example of this can be a corporate entity and a group of franchises of the corporate entity.

Final thoughts (for now):

When, as a Plan Sponsor, evaluating whether to adopt a MEP or, as an advisor, whether to advise a client on the merits of a MEP program, I think a detailed evaluation of the structure should be documented and stored in employer minutes, thus, aiding in satisfying the fiduciary requirement of prudent selection. Even though the decision to join a MEP is typically stated as a settlor function, meaning business decision, the control of assets that typically follows puts that decison maker into fiduciary status.

In the previously linked article, the author raises the concern of a TPA sponsoring a MEP program which would be then offered out to its clients. This is a perfect example of an issue that would be discovered if the MEP program is vetted structurally. Under this scenario, the TPA, as an employer would be the primary adopter (or MEP Sponsor) and therefore clearly a fiduciary to the plan. Any financial benefit that TPA would then receive from the MEP, for example fees they charge to administer it for any/all future adopting employers, could then be (and likely would be) interpreted as self dealing. This is a clear violation of the Prohibited Transaction rules of ERISA, but one that the TPA likely isn't even aware they are violating. This is just an example, but their are many other equally risky scenarios that can play out. Caution is advised before proceeding into these types of arrangements without an expert level of understanding. In other words, if there was every a place to consult rather than sell to a client, this is it.

Quantifying the Drivers of Retirement Success

The collective retirement industry spends an extortionate amount of its resources on marketing efforts to promote the quality and superiority of its various investment managers. In fact, most industry professionals would agree that “absolute return”, “alpha”, and “compound interest” are the concepts that really stimulate plan sponsors and participants to act. On a path laden with headwinds and hazards for most participants, absolute returns and manager outperformance are perceived to assemble a path with less resistance. Meanwhile, focusing on—and chasing—these elusive concepts typically does little to materially improve a client’s retirement outlook relative to other important factors.

In a recent article written by Jason Grantz and David Blanchett (available here), the driving factors of a successful retirement outcome were explored and quantified on a relative basis. The authors analyzed four factors that contribute to positive (or negative) retirement outcomes: asset quality, actuarial assessment & intervention, asset allocation, and savings rate. In somewhat of a surprising revelation, the study concluded that asset quality, defined as selecting an asset sufficient to consistently outperform its peers, was the least important driver of success. It accounted for just 4% of the relative importance the factors promoting success.

This analysis tells us that focusing on picking the next great mutual fund is not the activity that’s going to maximize the probability of retirement success for a retirement plan or its participants. We all know that savings is important, but historically it has been difficult to relay the relative importance of savings in quantitative terms, which is now possible. The analysis conducted for this paper suggests that savings rate is clearly the primary driver of retirement success by a wide margin.

Although improving savings rates can be difficult, spending additional time having meetings with participants, sending targeted mailers or implementing “smart” plan defaults like automatic enrollment and automated progressive savings are some relatively easy things to implement in order to improve deferral rates in retirement plans.

DOL Officially extends fee disclosure....again....

In a notice on its website, the U.S. Department of Labor announced the extension of the applicability date of the fiduciary-level fee disclosure regulation issued under ERISA section 408(b)(2) until April 1, 2012. The Department had previously proposed to extend the applicability date only until January 1, 2012.

The DOL also announced an amendment to the applicability date of the participant-level fee disclosure regulation. Initial participant-level disclosures must now be made no later than 60 days after the first day of the plan year beginning after November 1, 2011; or if later, 60 days after the effective date of the fiduciary-level fee disclosure regulation.

Previously, the Department had proposed a 120-day transition period to provide the initial participant disclosures. The final rule is available here. http://www.dol.gov/ebsa/pdf/extensionofapplicabilitydatesfinalrule.pdf

and a fact sheet for it here. http://www.dol.gov/ebsa/newsroom/fsimprovedfeedisclosure.html

This delay doesn't change our views on the matter. Ultimately consumers should know what they pay for all goods and services and Plan Sponsors who are engaged in a trust arrangement, which all Qualified Plans are, further have an obligation to determine the reasonableness of a contract or arrangement.

In the absense of knowing all compensation arrangements, how can one determine that an arrangement is reasonable? The delays, nonetheless, are frustrating, another small win for the lobbyists.

MEP's - Mediocre Employer Protection.....Just Kidding

Actually, the purpose of this post is in response to those seeking some "opinions" on whether MEP's, Multiple Employer Plans, are a good idea or not. The pros/cons are out there, on the pro's side is potential economies of scale and, theoretically, increased fiduciary protection. It has been this author's contention that the MEP is not a silver bullet (as has been sold by various MEP sales people), but isn't a bad idea necessarily. There is a place for all creative designs in the marketplace.

We believe that with a contained, related group of employers and the proper service providers in place, that a MEP structure can work quite well. Think about that small group of franchise owners who are related, but don't have a good employee benefit while the main franchise has a very strong one. Assuming the vendors can work with the group to allow it to be feasible from a cost perspective, this group could benefit quite well from a MEP structure.

That said, although an Employer who adopts a MEP plan for their employees is giving up 'Named Fiduciary' status, meaning they will no longer be the named Plan Sponsor or the Named Administrator or Named Trustee, we believe they will still be a fiduciary under ERISA and will have some remaining obligations. Specificully, under the definition of a fiduciary, ERISA §3(21) has 3 parts. Two of those parts deal with the ability to or the actual excercising of discretion over plan assets. It is under this formal definition that an employer who adopts a MEP is still a fiduciary. Ultimately, at their discretion they are opting into and may opt out of the MEP and this is an excercise of control over plan assets. Therefore, they are still a fiduciary and still have quite a bit of residual responsibilities and risk.

Recently, a series of opinions and subsequent postings have appeared that provide the user with some cautionary advice on MEP programs. See these two links, one from ASPPA and one from The Law Offices of Ilene H. Ferenczy, LLC.

http://www.asppa.org/document-vault/pdfs/asaps/2011/11-22.aspx

https://app.e2ma.net/app/view:CampaignPublic/id:18861.7106427767/rid:fcf0ab2197415e4f2bd0df8fc3501b8c

Interestingly, these are more from the administrative point of view, but also site DOL opinions and a recent discussion held between members of the DOL and IRS with members of the Govt. Action Committee (GAC) of ASPPA. The result is a stated opinion that many of the so-called MEP programs out there wouldn't qualify as MEPs at all because many of the employers are unrelated and therefore fail to meet the qualification. Under those scenarios, if discovered, those plans would be required to file their own 5500's, test separately, have their own fiduciaries, etc. This is VERY different than the way that these increasingly popular "open-end" MEPs are being sold in the marketplace. I think this is a good case of 'Buyer Beware'. The employers are buying a Panacea or Cure-All for their responsibilities, but in reality they aren't gaining much, if anything.

As always, we welcome any differing view points or clarifications. Please, nothing commercial or it will not be posted.

Surprise! Another Delay - Fee Disclosure Revisited....again...

Over the last year or so, we’ve been keeping tabs on the rules surrounding fee disclosure in all of its forms current and newly proposed. Specifically, the new proposals are the final 408(b)(2) disclosures and the Participant fee disclosure rules under ERISA §404(a)(5). The 408(b)(2) rules have been delayed twice and are currently due to come into effect on January 1st, 2012. In a filing just published at the Federal Register, the U.S. Department of Labor has officially proposed the previously discussed extension for those 408(b)(2) regulations. The Federal Register filing formally effectuates that intent.

The new announcement in this filing is that the DOL stated it would propose an amendment to the participant level fee disclosure regulation which would provide a 120-day transition period (instead of 60 days) to provide the initial participant disclosures. However, it does not appear there will be any extension provided for quarterly expense disclosures. According to the DOL release , a calendar year plan would have to furnish the initial participant disclosures no later than April 30, 2012. The quarterly expense disclosures required by paragraphs (c)(2)(ii) and (c)(3)(ii) of the regulation (e.g., quarterly statement of fees/expenses actually deducted) would have to be furnished no later than May 15, 2012.

In essence, this gives the service providers an extra quarter to get into compliance. Not a big deal, but worth noting as in previous posts we referenced Q4, 2011 and now it will be Q1, 2012.

Strong Words from EBSA Regarding 408(b)(2) Compliance

Fil Williams of the DOL's EBSA recently stated at the Mid-Atlantic Benefit Conference on May 5, 2011: “…for those employers to whom the new Section 408(b)(2) rules do apply, responsible plan fiduciaries ultimately will be obligated to terminate contracts or arrangements with service providers that do not comply.”

Even though the DOL has aready postponed the final 408(b)(2) regulations once, they are scheduled to become effective January 1, 2012. This along with the new participant disclosure regulation (effective in November 2011) will make for a busy Thanksgiving, end of year, for retirement plan services providers.

An associate of ours at Unified Trust, Pete Swisher, recently published a column in the ASPPA Summit Newsletter addressing the regulations and six ways to prepare your practice by November. It is available by clicking here.

ERISA Trumps everything…..

In the latest edition of Investment News Weekly, they published an article called ‘401(k) rights trumped by ERISA', linked here http://www.investmentnews.com/article/20110515/REG/305159996.

This was an unusual article to see published in a general information publication like Investment News, unusual in that it deals with a highly specific legal ruling dealing with Participant, Spousal and Named Beneficiary rights in a death situation.

The gist of the article is that the participant named his three children as beneficiaries to his 401(k) Plan in the event of his death. He did so properly using a beneficiary form and did so after the passing of his first wife, so spousal consent was unnecessary at the time the form was completed. Flash forward some time later and he remarries, doesn’t update the form, and six weeks later passes away. The new wife (now a widow) is now in a legal battle as to who has rights to the 401(k) assets. The children say they do as they were named on the form, the spouse says she does because she never waived her rights to the assets. The court sided with the spouse and based on the facts/circumstances listed in the article seems to be the appropriate decision.

The important takeaway here is that ERISA (which is our rule book) trumps everything! It may have been the deceased participant’s wishes to award the assets to his children, but it doesn’t matter. The rules state that a spousal waiver must occur otherwise the wishes of the participant are irrelevant. It doesn’t stipulate in this rule as to whether or not the participant was, in fact, married when he/she filled out the form!

Often I’m asked by financial advisors where/how they can add value and earn their fee. This question is often posed in the context that my firm acts as a Discretionary Trustee and we make 100% of the Investment Decisions for plans which is often an area that financial advisors provide service.

This is a great example of how an advisor can add value to a plan. It isn't sexy, but it is very effective. If the advisor stays front and center with the participants of the plans that they are serving and understands the rules of the game, than they can ensure current and complete forms, that intentions are being followed and situations like the one above, however uncommon, don’t occur. This article can be a great sample of a scenario that can be presented to Plan Sponsors as to where/how advisors value is earned and there are a million other small ways like this that are part of the service.

By the way, aiding in this manner is not a fiduciary act, so for those Registered Reps out there who aren’t permitted to act as fiduciaries, there is still a way to build a value proposition and not provide fiduciary services directly yourselves.