Remember your company sponsored retirement plan is the sole source of retirement for your employees and yourself. If you nor your staff have the time to manage the plan, please outsource to an independent fiduciary. If business owners do not provide an efficient plan the federal government will.
Investment Frontiers Symposia (Photo credit: apec2011ceosummit)
Educate yourself. Do you understand all of the different types of fees 401(k) plans have, including investment costs, trustee or custodial expenses, transactions costs such as commissions and administrative and record-keeping fees?
Compare your plan. Do you know the average 401(k) plan expense for plans of your size, and have you used an independent benchmarking service to evaluate your current vendor fees? (Best practice here is not to rely on services recommended by your current vendor.) If you can’t answer “yes” to both questions, how will you be able to respond to questions asking why the plan is so expensive?
Review your investment line up. When was the last time you reviewed the plan’s investment lineup for performance relative to fees, and do you change the lineup when better options become available? This would be a good time to do so if you haven’t looked at your investment lineup recently. Also be prepared to explain that it is appropriate to pay more for better service, such as better than average investment performance. Ask a registered investment advisor who will acknowledge being an ERISA fiduciary for expert help.
Don’t Limit Your Menu to Retail Funds. Do you have index funds and institutional class shares in your lineup to lower investment costs? Have you asked that any minimum investment requirements for institutional share funds be waived?
Examine revenue sharing arrangements with a critical eye. Do you understand that expenses paid through revenue sharing are actually being paid by the participants? Have you picked the best investments for them, not the funds that pay the most revenue sharing and therefore limit your plan sponsor responsibility for fees?
Check out new vendors. Have you done an RFP recently to see whether better alternatives are available? You may love your current vendor, but an even better, cheaper alternative may be available. (And you might be able to use the RFP to renegotiate your current fees without actually switching to a new record-keeper.)
Plan sponsors need to address this issue now. The DOL is watching as well as Congress. If you rely on a service provider who has not agreed in writing to serve as a fiduciary you will be solely responsible.
DOL Sec of Labor Hilda Solis at VA Hospital in Minneapolis MN (Photo credit: US Department of Labor)
Hopefully, you, the responsible plan fiduciary to an ERISA retirement plan, are happily ensconced in your office, reviewing thorough and compliant ERISA Section 408(b)(2) disclosuresfrom the plan’s covered service providers. But what if you didn’t receive the disclosure, or if it is inadequate?The Department of Labor (“DOL”) regulations provide that the plan fiduciary must request the missing information in writing from the service provider. Guidance does not dictate a specific timeframe under which the fiduciary must make this request; it must be done “upon discovering” that the service provider failed to disclose. Presumably this would be within a reasonable time after the fiduciary determined the disclosure had not been provided or was inadequate. What constitutes a “reasonable” timeframe may depend on how many disclosures you have to review. Of course, if no disclosure at all was provided, those requests should go out posthaste.
If, after the written request is made, the covered service provider fails to comply within 90 days, the fiduciary must notify the DOL of the service provider’s failure to disclose in order to protect the plan from a prohibited transaction. The notice to the DOL must be filed not later than 30 days following the earlier of: (1) the service provider’s refusal to provide the information requested by the plan fiduciary; or (2) 90 days after the plan fiduciary’s written request is made. The DOL has posted a model fee disclosure failure notice. Currently, the notice may be mailed or emailed to the DOL, but last Monday, a direct final rule was published that announces a new online submission process for such notices. As of the date of this post, the online system was still under development by the DOL. Notices may still be mailed to the DOL even after the online system is up and running, and the DOL has provided a new dedicated mailing address in the direct final rule. Because it is not clear whether that new dedicated mailing address should be used immediately or beginning with the effect date of the direct final rule (September 14, 2012), prudent fiduciaries will mail any such notices to both the old (as published in the February 3, 2012 final rule) and new mailing addresses.
Aside from notifying the DOL, a plan fiduciary who does not receive a disclosure or has only an inadequate disclosure will need to determine whether to terminate the arrangement with the covered service provider, in accordance with the ERISA fiduciary duty of prudence. If the information that was requested by the plan fiduciary and was not provided relates to future services, the plan fiduciary must terminate the arrangement as soon as possible.
Plan sponsors will need to address this now or after their employees receive their statements with fees disclosed. In some cases I have read the fee disclosure requirements sent to sponsors with 42 pages of detail. Have you read and understand this document?
Please comment or call to discuss what it means to you and your participants.
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.
Image by ToastyKen via Flickr
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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What ‘Fee Disclosure’ Rules Really Mean for Plan Sponsors (401kplanadvisors.com)
When the new fee disclosure rules become effective in 2012 plan participants will learn what they are paying for in their retirement plan. An independent analysis of your plan will help determine how and if the plan should pay for administrative fees.
“Direct contribution plans have a lot of moving pieces that can be relatively complex,” Lucas said. “They need to get their arms around these fees. They need to know how they are paying these fees. The plan sponsoralso needs to be able to explain why some are paying fees and some are not.”Other results from the survey show 37.5% of sponsors that credit revenue sharing back to plan participants do not know how this happens. Also, more than 16% of plan sponsors are uncertain if their plan offers an ERISA (expense reimbursement) account.
The survey also found the leading compliance concern among plan sponsors was the lack of clarity on how to comply with the U.S. Department of Labor’s 408(b)2 fee disclosure regulations; however, coming in a strong second was no concerns at all about compliance. Lucas said she is under the impression that plan sponsors who lack concern in this matter are looking to their recordkeepers to ensure compliance
Plan sponsors should be more concerned with the quality of retirement plan they provide for employees. Many rely on their service provider with mixed results often poor.
Please comment or call to discuss how the new regualtions might affect your plan.
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A Closer Look at Fiduciary Status Under ERISA (401kplanadvisors.com)
Majority of Retirement Plan Sponsors Do Not Feel Prepared for New Fee Disclosure Rules (401kplanadvisors.com)
Fee disclosure facts every plan sponsor should know (401kplanadvisors.com)
Keep in mind this bond does not protect the plan sponsor from fiduciary liability. It offers protection in the event of fraud.
Who must be covered by the bond? As a general rule, every plan fiduciary and every person who “handles funds or other property” of an ERISA-covered employee benefit plan (see below) must be bonded. It should be noted that administrative committee or investment committee members are often considered to be plan fiduciaries. A person is considered to “handle” plan funds if the person has physical contact with cash, checks, or other similar property, is able to secure physical possession of plan funds, or has the potential ability to direct (acting alone or with others) the transfer of plan funds to himself or herself or to third parties.What employee benefit plans are covered? The bonding requirement applies to most employee benefit plans under ERISA, including:
tax-qualified retirement plans;
group medical, dental, and prescription drug plans; and
flexible spending arrangements (FSAs).
You should think about the ERISA bonding requirements any time that you or one of your employees or agents is handling employee money or plan assets.
Tax–Qualified Retirement Plans
Tax-qualified retirement plans will always require bonding because they involve plan assets that are set aside in a trust. Thus, any analysis will need to focus on whether the fiduciary in question “handles” the plan assets, not on whether plan assets exist.
When you sponsor a retirement plan for your employees you are assuming an awesome responsibility. Both legally and morally.
Determining ERISA Fiduciary Status
ERISA states that a trustee, a named fiduciary, the plan administrator, an investment manager or anyone else (as relevant) will be deemed to be a fiduciary of a qualified retirement plan to the extent that the person (1) exercises any discretionary authorityor control in the management of the plan or disposition of the plan’s assets (ERISA section 3(21)(A)(i)), (2) can or does render investment advice for a fee (section 3(21)(A)(ii)) or (3) has any discretionary authority or control in administering the plan (section 3(21)(A)(iii)).Note that the test for fiduciary status is a functional one. For example, anyone from the owner of a plan sponsor on down to the janitor could be deemed to exercise or have “any discretionary authority” with respect to the plan’s assets or administration of the plan. Under ERISA, it’s what an entity actually does with respect to a retirement plan–whether or not such acts are spelled out as duties in a written document–rather than any formal (or informal) title the entity may bear that will make it a fiduciary. As a result, the ERISA section 3(21)(A) functional fiduciary test is very broad. This statutory scheme is a reminder of the broad net cast by ERISA in making sure that anybody working at the employer level (irrespective of title) that has any discretion, or any advisor that has any discretion, will be deemed to be a fiduciary of a qualified retirement plan.
This often overlooked detail can cause many probelems in the future.
The Spouse Is the Automatic Beneficiary for Married PeopleA federal law, the Employee Retirement Income Security Act (ERISA), governs most pensions and retirement accounts. Under ERISA, if the owner of a retirement account is married when he or she dies, his or her spouse is automatically entitled to receive 50 percent of the money, regardless of what the beneficiary designation says.
If another person is the designated beneficiary, the spouse will receive 50 percent of the assets and the designated beneficiary will receive the other 50 percent. A spouse always receives half the assets of an ERISA-governed account unless he or she has completed a Spousal Waiver and another person or entity (such as an estate or trust) is listed as a beneficiary.
A spouse can forgo his or her right to 50 percent of the account by properly executing a Spousal Waiver. However, generally a Spousal Waiver is not permissible under ERISA unless the spouse is at least 35 years old, depending on the type of retirement plan.
These rules can cause problems when the owner of a retirement account remarries. Often, the owner will change his or her beneficiary designation upon divorce and name the children as the designated beneficiaries. If the owner later remarries, though, 50 percent of the retirement assets will go to the new spouse instead of the children, even if the new spouse is not added as a beneficiary.
If the owner of a 401k is single when he or she dies, the assets go to the designated beneficiary, no matter what his or her will states. In addition, the assets will be distributed to the designated beneficiary regardless of any other agreements — even court orders.
For example, assume a man’s wife is the designated beneficiary of his 401k. The couple gets divorced and the man does not change his beneficiary designation, but the woman waives her right to receive any retirement assets as part of the divorce agreement. If the man dies without changing his beneficiary designation and without remarrying, his former wife will still receive the retirement assets, even though the divorce decrees declares that she should not.
Conflicts of interest have been running rampant throughtout the financial services industry. Most advisors have good intentions and work hard for their clients. However it only takes a few to force regulators to step in.
Revenue sharing, or fees that brokerages receive from some securities issuers for promoting those products, can sway advisers to recommend them to IRA investors, even when those products are not in the client’s best interest, Borzi told Reutersin a recent interview.”By and large, are compensating brokers for steering clients to their products,” said Borzi, the proposal’s chief architect. “If a brokerage’s business model is built around compensating them for giving conflicted advice, then they would have to change their advice.”
Until recently, the Labor Dept. focused its attention on 401(k)s and largely left IRA advice alone. That changed with its a recent proposal to update a piece of ERISA.
If the ERISA update moves IRA advice under the fiduciary definition, brokerages will likely have to make significant changes to their compensation models. That’s because they would no longer be able to act in a clients best interest under ERISA in cases where they receive money from a securities issuer.
Your retirement plan should not be a vehicle to speculate. If your investment strategy does not include the expected return and expected volatility you are speculating. Professionally managed portfolios will help you reach your retirement goals.
Make the first and most emphasized data that of the entire portfolio, not its underlying components;
Use the performance measure with the lower absolute magnitude or at least be aware of its effect; and,
Take the time to choose your default or ‘easiest chosen’ plan with much care because many may use it and a considered decision update lowers the opportunity (and real) costs down the road.
As these academic research efforts tell us, 401k plan participants can avoid making the wrong allocation decisions when 401k plan sponsors and any other investment fiduciary provide information about investment options in the right context and with the right emphasis. Here we see another instance where regulators and astute researchers can collaborate to help the financial services industry best serve its customers. Unfortunately, regulatory and industry convention appears to have kept performance reporting from being modified by new insights from research and freely morphing to help employees make better investment decisions for their retirements
Research has proven that 401(k) plans utilizing professionally managed portfolios will out perform plans with individual fund selection. This is a way for plans to offer a pension fund like plan for their employees.
Please comment or call to discuss how this affects you and your organization.
9 things advisors to 401(k) plans must do to keep clients out of hot water
What Small Businesses Should Look for in a 401(k) Plan
New 408(b)(2) “Guide”: Not Necessarily What 401k Plan Sponsors Hoped For
Participant Fee Disclosures and The Duty to Inform When Participants Ask Questions.
