Give Your Retirement Plan an Annual Checkup

Just like your annual physical to protect your health your company retirement needs an annual checkup. Regulations are in a constant state of flux, plus there are advancements within the industry. Remember the 401k is becoming the sole source of retirement for most Americans and should be offered as such.

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Regular Plan MaintenanceIn addition to conducting an annual plan review, plan sponsors should perform regular maintenance to ensure seamless plan operations. This includes staying current on regulations, watching out for common mistakes and reporting to the federal government as required. Plan sponsors are responsible for establishing a program of internal controls, including monitoring and oversight controls surrounding the retirement plan.

A retirement plan committee can help the monitoring and oversight function. However, the committee won’t be effective unless it conducts regular meetings. These oversight meetings should not only review investment results but also check that internal controls related to plan administration are effective and operating appropriately to assist in identifying and detecting operational failures. The retirement plan committee should be well versed in all aspects of the plan, including review of investment performance, keeping current on law changes and monitoring of third-party administrators.

Employers where hiring an ERISA 3(38) Investment Manager does not work, the establishment of a retirement plan committee is recommended. Be certain that this committee meet regularly and documents all meetings. This is necessary in the event of an IRS audit.

Please comment or call to discuss this process.

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Should Your Company Hire an ERISA 3(38) Investment Manager for The 401(k) Plan?

The 401(k) plan has attracted substantial attention, some wanted, some unwanted, in an effort to improve the quality of retirement plans for American workers. New regulations are being added or considered every day. For instance the new 408(b)2 fee disclosure regulations become effective later this year. These regulations are expected to change the ways plans are sold and by whom. These regulations are a real game changer.

Rewarding Eco-Friendly Farmers Can Help Combat...Because of these changes and the increased acknowledgement of fiduciary risks for plan sponsors, many sponsors are considering hiring an ERISA 3(38) Investment manager. By hiring this manager plan sponsors transfer the fiduciary responsibilities and risks to the investment manager.

The ERISA 3(38) Investment manager will follow the fiduciary process by:

  1. Developing an Investment Policy Statement (IPS)
  2. Select and Monitor Investment Options
  3. Offer Investment Education

The ERISA 3(38) Investment Manager will minimize their fiduciary liability by choosing index or structured funds.

Who can serve as an ERISA 3(38) Investment Manager?

  1. A bank
  2. An Insurance company
  3. A Registered Investment Advisor (RIA) subject ot the Investment Advisors Act of 1940.

Special note: stock brokers and broker-dealers can never be a 3(38).

Although the plan sponsor (employer) transfers all investment fiduciary risks and responsibilities to the ERISA 3(38) Investment Manager the plan sponsor must monitor the manager. This fiduciary responsibility cannot be delegated away. This entails meeting with the investment manager at least annually and review the process.

Is this for all plan sponsors?

No, however this fits well for small to mid-sized businesses who are too busy running their company to manage a retirement plan. When it fits it works very well. Not only will the plan sponsor outsource a very vital task, the plan participants will benefit from a prudently managed retirement. Ultimately, the goal is a successful retirement for the plan participants including the business owner.

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401k Plan Sponsors and the Risk of Fiduciary Liability

Many plan sponsors have a ‘so what?’ attitude about their fiduciary risks regarding retirement plans. When you consider the majority of baby boomers ill prepared for retirement many will be looking for someone to blame. And why not their ‘rich’ employers? Plan sponsors do have the fiduciary responsibilities and risks. These fiduciaries are personally liable in that they are not protected by the corporate veil. Most plan sponsors would be well advised to hire professional fiduciaries to manage their plan. This includes hiring an ERISA 3(38) investment manager to assume the risks and responsibilities of investments in the plan and the monitoring. They will continue to have fiduciary responsibilities to monitor the investment manager.

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With trillions of dollars tied up in corporate retirement plans, there’s no doubt trial lawyers see a ripe target for both class action suits as well as individual actions. And it’s the plan sponsor that typical wears the bulls-eye for any perceived sleight. Borror predicts “participants will continue to claim their account balances have been materially reduced due to failure of the fiduciary to either ensure the fees charged were reasonable in relation to the services provided, or to select and to monitor the retirement planservice providers with the skill of a prudent professional.”With the potential of claims coming from so many directions, what’s a 401k plan sponsor to do?

“The costs of responding to any of these claims are astronomical when compared to the costs of making affirmative corrections,” says Borror. He offers this conclusion: “In short, any employer that even mildly suspects his or her plan is vulnerable to such a claim should have the plan reviewed by an independent professional.”

Plan sponsors will be required to follow the new fee disclosure regulations beginning August 31, 2012. At this time plan sponsors must inform all plan participants of the fees the participant pays for their plan. This will increase complaints by participants partly because law firms will be promoting their services. With many baby boomers unprepared for retirement some will look to litigation to correct their shortfall.

Please comment or call how you can protect yourself and your company.

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Why things just got a lot tougher for 401(k) plan sponsors

The big question is..Why have service provders been fighting fee disclosure so diligently? Do they have something to hide? from plan sponsors or participants or both? Should participants pay for all the cost in their 401(k)? The 401(k) is the sole source of retirement for most Americans and must be treated as an employee benefit. When these regulations become effective many plan participants will ask many questions. Are You, the plan sponsor, prepared?

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Here’s where things start to go south. What happens if a service provider fails to disclose its feesor only discloses a portion of them? Will plan sponsors get by merely through offering their best efforts to obtain this fee information? Probably not, if you read between the lines of the DOL comments. Borzi’s actual comment to the press indicated the 401(k) plan sponsor must fire any service provider that fails to properly disclosure its fees.So, in addition to knowing all the ins and outs of their specific plans, and the ERISA laws that govern them, plan sponsors have now been summarily deputized by the DOL to enforce compliance on service providers.

If you think about it, it’s a smart move by the DOL. It’s also in keeping with the whole self-policing philosophy that pervades this Internet generation. What better way to protect the masses if the masses have the authority to unilaterally punish wrongdoers (albeit, it’s only by firing them). If the DOL is really inventive, it can create a disclosure site where plan sponsors can report their compliance related lack-of-disclosure firings.

This would help other plan sponsors become aware of potential non-compliance liabilities resulting from hiring these vendors. In turn, a public disclosure file, similar to the on-line “complaints” log the SEC provides to investors, might just provide an incentive for service vendors to comply.

In the end, this just might make things a lot easier for 401(k) plan sponsors.

The new fee disclosure regulations will make both the plan sponsors and plan participants on the fees they pay and why. The plan participants will benefit because lower expenses results in higher return. Remember an extra 1% in fees over 40 years of saving makes a huge difference.

Please comment or call to discuss how your plan will be affected by the new fee disclosure regulations.

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Who’s On The Hook For Decisions Made In Your 401(k)?

In my opinion the best plan will offer less choices and have more of a pension fund like feel. Plan participants are confused by all the choices most plans provide. Many plan sponsors believe because theeir broker tells them so that more fund choices will reduce their fiduciary risks. This is not true. Given the increasing regulatory changes taking place now and in the future plan sponsors would be wise to hire an ERISA 3(38) investment manager to manage the investments in their plan. This transfer the

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fiduciary risk to the professional investment manager.

The Reality

The Board of Directors or the owners of company are busy trying to make their companies successful. Spending time understanding and properly supervising the 401(k) is often way down their list of things to do. This “bottom of the list attitude”, towards the 401(k) is often demonstrated by the staff administrating the plan as well.

The common result is no one is properly supervising the 401(k). The people “up the chain” think that the people “down the chain” are “taking care of it”.  The people “down the chain” do not have the training or experience to really “take care of it” and they do not want to disappoint those “up the chain”. They often overly rely on their financial services providers (Merrill Lynch, John Hancock, ING, Fidelity, Wells Fargo etc.) who look at the 401(k) as a “cash cow”. The result is that the plan participants are often harmed.

The mandate for better supervision of 401(k) plans needs to start at the top with the company owner or in the boardroom. The reason is for the betterment of the plan participants and for the company owner or Board of Directors avoid looking foolish in a deposition.

This is additional proof that plan sponsors do not provide the necessary time and resources to managing their 401(k) plan. The regulations require that if the plan sponsor lacks the expertise or resources they are required to seek outside professionals to assist.

Please comment or call to discuss how this affect you and your company.

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Are Target Date Funds The Answer?

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Target date funds have become popular with 401(k) plans (defined contribution) because of their simplicity. Based on the participant’s age a projected retirement date is determined, for example a 37 year old will retire at 65 in 2040. Therefore this participant would choose the 2040 portfolio and as the participant ages the portfolio would automatically become more conservative. Problems arose during the ‘Great Recession’ participants in the 2010 portfolios thought they were very conservative and lost 38%. Hardly the conservative choice participants expected.  It turns out all target date funds are not created equal.

An alternative has been gaining momentum. Professionally managed risk adjusted globally diversified portfolios. These portfolios have a defined expected return and expected volatility (risk), there will be no surprises. These portfolios, like target date funds, provide a pension fund like investment without the uncertain level of risk. Managed portfolios provide a level of clarity and defined risk and volatility.

The Pension Protection Act of 2006 allows plan sponsors to utilize the Qualified Default Investment Alternative QDIA. This Act allows the participant to be automatically put into the appropriate portfolio based on their age. The participant is moved automatically, to a more conservative portfolio as the participant ages.

In this plan design the participant has three options:

  1. Remain in the default portfolio
  2. After an assessment determine the proper level of risk and adjust the portfolio either more conservative or more aggressive.
  3. Opt out of the model portfolios and choose their own fund mix.

Combine this design with the plan sponsor hiring an ERISA 3(38) Investment Manager and the plan sponsor will realize minimized fiduciary risk and a quality retirement plan for their employees.

A number of studies have determined that most plan participants prefer the model portfolios (QDIA) to choosing their own fund mix. After experiencing the extensive volatility participants are looking for guidance from their employers.

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Fiduciary DOL Proposal Puts CFO Liability in Question.

Any plan provider that refuses to agree in writing to serve as the ERISA 3(38) investment manager should be asked why not. Why will they not be accountablefor the investment choices being offered by the plan. The reason in most cases is there is a conflict of interest. Plan sponsors must begin to realize that they must act in the best interest of the plan participants and their beneficiaries. They are personally liable for these decisions.

Fiduciary Trust Building
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For now, CFOs serving as fiduciaries will need to ferret out this information themselves. One easy way to do that is to require that any consultant providing investment advice to the plan fiduciaries specifically acknowledge (in writing) that the consultant agrees to be treated as a fiduciary under ERISA. CFOs with fiduciary responsibility may want to consider implementing that change now. (On a separate note, many CFOs of public companies with retirement plansholding company stock have stepped down from fiduciary committees in light of potential conflicts between securities laws, ERISA, and related “stock drop” litigation.)

The new fiduciary standard for retirement plans will improve the quality of the plans corporations provide for their employees. Corporate executives can improve their plans immediately by asking their plan provider to agree in writing to serve as the ERISA 3(38) Investment manager. This makes the plan provider accountable for the investment choices in the plan.

Please comment or call to discuss how this can help your company offer a true benefit to your employees.

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Are You Committing a Prohibited Transaction?

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Many business deals are done with a “wink..wink”. These deals can result in prohibited transactions and perhaps criminal charges. In these cases the plan sponsor (employer) stand alone with the liability. Remember plan sponsors must act for the sole benefit of the plan participants and their beneficiaries. The current adminsitration has ramped up the audit teams for retirement plans.

Take, for example, a sales rep which has no service agreement with a plan and who is compensated solely by commissions. Let us say this rep gets word that a 401(k) client is considering moving its business to a different vendor (and a different sales rep). The rep approaches the clients and offers to pick the TPA fees of the plan if the plan continues to purchase the investment productsthrough him.  It is clear that this kind of arrangement can be sound when it is made properly part of a negotiated service agreement with a plan vendor.  But with a sales rep without a service agreement- a problem?Another example could be “tying” arrangements, where a bank has a client’s 401(k) plan as well as holding a corporate loan with the plan sponsor.  The plan sponsor notifies the bank that it is moving its 401(k) to another institution. The bank responds by threatening to call the loan, or not to extend any future credit if the 401(k) plan is moved- a problem?

This is a criminal statute. Unlike the “civil law” ERISA prohibited transaction rules where “intent” doesn’t matter,  “scienter” (that is, intent) is still a critical element.  But still the word is caution.  Compliant compensation schemes are difficult enough to design, given the prohibited transaction rules and the forthcoming 408(b)(2) regs. But don’t forget about the non-ERISA criminal rules when addressing these issues.

Many plan sponsors are unaware of the prohibited transactions they are committing when dealing with plan providers. All it takes is one employee complaining to the Department of Labor and the plan sponsor will be liable.

Please comment or call to discuss how this affects you and your company.

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The Difference an Adviser Can Make

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The qualified retirement plan industry has been taken over by salespeople. This must stop if we want our employees to successfully retire. Your employees look to you for guidance, like it or not it is your resonsibility to guide them to a successful retirement. Your company retirement plan should be treated like a pension fund like plan not a lead generation tool for financial salespeople.

Partnering with a professional retirement plan adviser offers benefits for plan sponsors, according to a study for the Retirement Advisor Council.  —

However, only 25% of 401(k) and 403(b) plan sponsors, with 100 or more employees and plan assets between $5 million and $500 million, partner with a professional retirement plan adviser. Most of the others do business with a generalist adviser; some do not use an adviser or consultant at all. Laura White, vice president at Diversified, a partner in the research, told PLANADVISER, historically, advisers other than professional retirement plan advisers have held a larger share of the not-for-profit market, but Diversified expects the gap will close with time.

Half of respondents who use a professional retirement plan adviser say it is a necessity to retain the advisers’ services for their plans. Forty-four percent say retaining the services is very beneficial to their plans. In addition, 16% of respondents with no adviser said retaining one is a necessity and 59% said retaining a professional retirement plan adviser would be very beneficial.

Overall, 46% of plan sponsors have measured the retirement readiness of their participant population more than once. Clients of professionals are unique in that 75% monitor year-over-year changes and 31% say more than 70% of their participants are on-track to achieve a successful retirement. These superior outcomes may be the result of plan designs that encourage saving. Another contributing factor could be new ideas that clients of professionals adopt more readily than other plan sponsors.

More than any other category of plan sponsors, clients of professionals rely on a retirement plan committee that meets regularly to make plan decisions. White said 74% with a professional retirement plan adviser state a committee who meets at regular intervals makes decisions regarding the design of the plan or array of investment options. In addition, 70% complete an investment review at least twice a year; 40% twice a quarter.

Only 41% of those with another adviser type complete a periodic review of investment options with their adviser as compared to 79% with a professional retirement plan adviser; 73% of those with a professional retirement plan adviser state it’s absolutely critical to review investment options periodically, White said.

A professional retirement plan adviser dedicated to your company plan will lead to improved results and less burden on your staff. Many advisers use the 401(k) plan as a lead generation tool to sell ‘product’ to your employees. This concept can lead to disgruntled employees if the products don’t work out.

Please comment or call to discuss how this can affect you and your company.

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