Financial News

PSNC 2018: Fee Considerations - Wed, 06/20/2018 - 19:01

Retirement plan fee litigation has led plan sponsors and providers to rethink service and investment fees for retirement plans and their participants.  


Fee-levelization, an approach where administrative fees are divided equally among enrolled plan participants, is no exception to newly trending strategies. A panel at the 2018 PLANSPONSOR National Conference (PSNC) elucidated the gist of fee-levelization, flat fees, zero-revenue sharing, and all other retirement plan fees considered.


Michael Volo, senior partner at Cammack, explained there are two paths to breaking down fee-levelization: per capita and on a basis point fee. Per capita fees, he said, have been stigmatized by plan sponsors in the past, as many believe they are not the fairest way to charge participants. “Fee leveling is simply every participant paying their share. It’s a very transparent approach,” he said. “Even with some plan sponsors, it’s pushing a rock up to hill to convince them.”


Among the fee requirements under the Employee Retirement Income Security Act (ERISA) is ensuring participants pay reasonable fees, a requirement especially notable given the series of fiduciary liability lawsuits that have sprung in past years. To combat litigation, Volo suggested providers inform and alert plan sponsors about fees. “Almost all fiduciary lawsuits have to do with fees,” he said. “With all of our clients, we’ve spent the past two years educating them on fees.”


Scott Everhart, president of Everhart Advisors, connected the largest aspect of fee-levelization to revenue sharing. With investment lineups, he said, institutional classes with zero revenue sharing are favored.


The idea of disclosing fees to participants was reviewed as well. In the past, fee explanation has proven difficult for participants, as its overpowering data can scare employees off, especially those learning the material alone. Instead, Volo recommended plan sponsors, advisers and recordkeepers should implement a Q&A. Utilizing a questions and answers forum, or a FAQ, can consolidate material and ease the learning path for participants.


“What I’ve seen in success is, having a Q&A is important. We try to take the best of the best, so then we have all the resources mitigate questions and then if they come, you have the best resources,” he said.


Another way to educate participants, Everhart said, is to encourage participant meetings and communications with the plan’s providers. This, in turn, can increase participation, knowledge and engagement with the plan. “We want our provider, or our provider’s team, to be out with participants,” he said.

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DOL Finalizes Regulations to Extend Small Business Access to Health Plans - Wed, 06/20/2018 - 16:34

The Department of Labor (DOL) has finalized regulations to expand the opportunity to offer employment-based health insurance to small businesses through Small Business Health Plans, also known as Association Health Plans (AHPs).

According to a DOL announcement, many small business owners cannot afford to offer health insurance to their employees. The percentage of small businesses offering health care coverage has been dropping substantially. For the self-employed, the individual market exchanges do not offer affordable coverage either; premiums more than doubled between 2013 and 2017 with deductibles increasing even more.

“This reform allows small employers—many of whom are facing much higher premiums and fewer coverage options as a result of Obamacare—a greater ability to join together and gain many of the regulatory advantages enjoyed by large employers,” the announcement says.

Under the DOL’s new rule, AHPs can serve employers in a city, county, state, or a multi-state metropolitan area, or a particular industry nationwide. Sole proprietors as well as their families will be permitted to join such plans. In addition to providing more choice, the new rule makes insurance more affordable for small businesses. Just like plans for large employers, these plans will be customizable to tailor benefit design to small businesses’ needs. These plans will also be able to reduce administrative costs and strengthen negotiating power with providers from larger risk pools and greater economies of scale.

The rule includes several safeguards. Consumer protections and healthcare anti-discrimination protections that apply to large businesses will also apply to AHPs organized under this rule. As it has for large company plans since 1974, the Department’s Employee Benefits Security Administration (EBSA) will monitor these new plans to ensure compliance with the law and protect consumers. Additionally, States will continue to share enforcement authority with the Federal Government.

The Congressional Budget Office (CBO) estimates that millions of people will switch their coverage to more affordable and more flexible AHP plans and save thousands of dollars in premiums. CBO also estimates that 400,000 previously uninsured people will gain coverage under AHPs.

More information about AHPs can be found on the DOL’s website.

A lawsuit coming

While some employer groups have applauded the regulation for helping more employees gain access to health care coverage, other groups have expressed fear that it will increase pricing on Affordable Care Act (ACA) market exchanges by taking a number of consumers out of the pool.

In a blog post, Mercer says, “This regulation opens a large door for associations, small employers and sole proprietors to access competitive health care benefits. Association Health Plans are arrangements where employers band together to purchase health coverage. By banding together, smaller employers can access benefits currently afforded only to large employers, like cost savings, reduced administrative complexity, and less regulatory burden.”

The Foundation for Government Accountability (FGA) says it commends the Trump administration for their commitment to lowering costs and increasing competition in the nation’s health insurance marketplace. “The rule thoughtfully addresses the needs of working owners, maintains rules for existing AHPs to prevent disruption, and seeks to ensure national associations have a clear path forward to operate,” it said in a statement.

However, New York Attorney General Barbara D. Underwood and Massachusetts Attorney General Maura Healey announced they would sue the Trump administration over the regulation. They released the following statement: “Yesterday’s announcement by the Trump Administration to dramatically expand the footprint of Association Health Plans will invite fraud, mismanagement, and deception—and, as we’ve made clear, will do nothing to help ease the real health care challenges facing Americans. We believe the rule, as proposed, is unlawful and would lead to fewer critical consumer health protections. We will sue to safeguard the protections under the Affordable Care Act and ensure that all families and small businesses have access to quality, affordable health care.”

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PSNC 2018: Investment Lineup Construction and Design - Wed, 06/20/2018 - 14:54

From collective investment trusts (CITs) and environmental, social and governance (ESG) testing, to tiered arrays and managed accounts, plan sponsors are considering additional strategies to guarantee their participants are retiring with more money.


Session panelists at the PLANSPONSOR National Conference (PSNC) reviewed which of these investments can help plan sponsors in achieving the first steps needed to ultimately accomplish a retirement savings goal. Panelists discussed the impending future for managed accounts, tiered arrays and their separate stages, and the future of ESG investing, especially with Millennial participants.


As target-date funds (TDFs) have risen in popularity with increased usage, panelists commented on the future behind managed accounts. Known for their extreme customization and personalization features, managed accounts have received mixed criticism for their often-complicated benchmarking strategies, leading plan sponsors to prefer TDFs instead. According to Joe Szalay, director of Defined Contribution Investment Strategy at BlackRock, managed accounts would best benefit older participants contributing to the plan for years. 


When we look at a managed account, participants who have been in a plan for a while and generated a larger balance will benefit most,” he said. “If you look at new members who haven’t contributed, a TDF provides them with the growth they need in a cost effective way.


Stepping away from the subject of managed accounts, panelists discussed retirement tiered investment lineups, a generally new term that amplifies engagement by providing information to targeted participants. The system consists of three tier levels, all connecting specific participants to preferred investments, whether that includes TDFs, core investments, brokerage windows, or mutual fund windows. Tier levels vary with participants, depending if they would rather self-direct or not.


Dan Bruns, vice president of Product Strategy at Morningstar, believes that the system does work, as long as plan sponsors recognize and connect tier levels to participant needs.


“We generally believe the structure of it is very good for the plan sponsors,” he said. “Ask yourself, what tiers are best for your participants? When you’re thinking about your tier structure, it’s important to recognize your primary tier is where all the assets will be. All the rest serve as secondary.”


To develop a second tier, which highlights core investments for participants interested in self-direct investments sans specialized fund choices, Szalay mentioned the idea of investment consolidation. 
“One thing we often see is people are looking at performance when consolidating investments,” he said. “It’s important to look at how the alpha is generated. It is important to break down that return stream to ensure the funds are generating alpha in a way that is true to the asset class.”


In addition, he mentioned adding white labeling options, which reduce costs and complexity, all centering towards participant engagement.


“There’s multiple mediums, it’s all about what drives that participant engagement. Be creative, get people involved,” he said.


Among a list of notable investment funds and accounts—from CITs, TDFs and managed funds—lays the lesser-known fixed income options and ESG strategies. Once widely unfamiliar, both are gaining popularity as industry professionals urge plan sponsors to amplify investment choices.


“You’re seeing menus that only have stable value and core fixed income. That may have been okay 10 to 15 years ago, when plan members were trying to grow,” said Michelle Rappa managing director and retirement client adviser at Neuberger Berman. “Now, you have those participants retiring and you have to think about what you have that you’re offering to them.”


While Jeffrey Kletti, senior vice president and head of investments at Wells Fargo said ESG strategies have seen little implementation in assets and plans, talks of the option has risen significantly since its inception. “There’s more stakeholders asking companies what’s in a portfolio, how we should think about that and what plan investment committee members are thinking about that,” he said.


Rappa echoed that statement, adding how the investment option can appeal to certain demographics—particularly Millennials—due to the high focus and impact towards sustainable efforts. 


“We are having a lot of conversations surrounding ESG. The conversations have risen to really understanding if there is a way for participants to engage more, because you’re offering a fund that lets them think they’re doing well by doing good,” she said.


Away from talk of investment strategies, panelists mentioned how participants just want augmented options and customization in their plans, parallel to the cornucopia of choices and personalization normalized in today’s society.


“People want customization on their cellphones,” said Bruns. “They’re going to want it in their defined contribution (DC) plans as well.”

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PSNC 2018: Developments in Participant Advice - Wed, 06/20/2018 - 14:39

Given the recent 5th U.S. Circuit Court of Appeals decision to vacate the fiduciary rule, industry professionals on a panel during the second day of the 2018 PLANSPONSOR National Conference (PSNC) reviewed changes plan sponsors should keep an eye on.


Paul Sommerstand, senior Employee Retirement Income Security Act (ERISA) consultant at Blue Prairie Group, warned plan sponsors to stay cognizant towards their recordkeepers’ connection as a fiduciary. “Be aware, as a sponsor, ask recordkeepers where they are being a fiduciary,” he said. “Ask if contracts and agreements will change. That is something to be clear on, as this is a fluid environment.”


Leah Hill, partner at Shepherd Financial, reiterated this sentiment, emphasizing on the severe implications behind the court’s verdict. “The biggest takeaway for myself is that this is something important, so many assets are at stake,” she said. “It’s not something that is going away or that will be taken lightly. People do care and want these assets and the advice to be taken seriously.”


In response to the court’s decision, the Department of Labor (DOL) issued Field Assistance Bulletin (FAB) 2018-02, announcing a temporary enforcement policy, “defining who is a ‘fiduciary’ under ERISA and the Internal Revenue Code of 1986 (IRC), and the associated prohibited transaction exemptions, including the Best Interest Contract Exemption (BIC Exemption), the Class Exemption for Principal Transactions In Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs (Principal Transactions Exemption), and certain amended prohibited transaction exemptions (collectively PTEs).”


Because of heightened fears among financial institutions, advisers, and retirement investors, the DOL determined financial institutions must comply with the temporary enforcement policy, until additional guidance is released.


Whereas advisers must be wary of violating prohibited transactions rule, most concerns from plan sponsors depends on the adviser, says Sommerstand. “Most plan sponsors that we’ve partnered with are looking to help the employees,” he said.


According to Sommerstand, qualities plan sponsors search for in advisers include assistance with Social Security, extensive experience in the field, and a passion in helping participants achieve their retirement savings goals. Similar to how plan sponsors need advisers to increase participant savings, advisers assess an employer’s drive towards their workers’ future, mentioned Hill.


“The best part of my experience depends on the plan sponsor,” she said. “When they take to really promote and pass something on site, care for employees, I think workers really resonate with that.”


A subtopic throughout the fiduciary landscape is the role of mobile technology, and its effect compared to one-on-one, personalized advice. In an era of technological advancements, human interface continues to extensively impact society, said Hill. Whereas robo advisers, web features and app updates seem to govern communications, it’s the basic form of engagement—social interaction—that appeals to a participants’ basic needs.  


“We live in an age of technology. As we continue to advance, we’re realizing that we still need each other,” she said. “People still need people and that everyday interaction. Those words and feelings can never be discounted.”


Yet, this doesn’t mean that plan sponsors cannot use technology to their—and their participants—advantage. Live webinars, emails, and even swift website chat messages can help those employees searching for quick and reliable solutions. It’s up to the plan sponsor, then, to implement these features, and utilize its greater good for the participants’ wellbeing.


“Especially for certain demos, this works very well. However, technology is only as good as you use it…” Hill said. “What we would [do], is take our calculators and then print out a one-page report and put it in the hands of workers.”

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DC Plan Participants Largely Stuck With Investments in May - Wed, 06/20/2018 - 14:30
The Alight Solutions 401(k) Index shows that in May, a mere 0.14% of defined contribution (DC) plan balances were traded. On average, 0.014% of balances were traded each day.

There were 13 days favoring fixed income, representing 59% of the trades, and nine days favoring equities, representing 41% of the trades. There was only one day when trades were above normal.

Outflows were primarily from target-date (35%), emerging markets (27%) and company stock (27%) funds, and inflows went mainly to stable value (26%), small U.S. equity (20%) and bond (18%) funds.

At the end of May, 68.5% of DC balances were invested in equities, up slightly from 68.4% in April. As for new contributions, 68% went towards equities in May, down slightly from 68.2% in April. Target-date funds were the asset class with the largest percentage of assets at the end of May (27%) followed by large U.S. equity funds (24%) and stable value funds (10%). Asset classes with the most contributions in May were target-date funds (46%), large U.S. equity funds (20%) and international funds (8%).

Domestic market returns were positive last month, with small U.S. equities (represented by the Russell 2000 Index) up over 6% and large U.S. equities (represented by the S&P 500 Index) over 2%. U.S. bonds (represented by the Bloomberg Barclays U.S. Aggregate Index) followed suit, gaining close to 1%. International equities, however, fell more than 2% in last month.

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401(k) Participants Tend to Hold Lower Cost Mutual Funds - Wed, 06/20/2018 - 14:26

The downward trend in the expense ratios that 401(k) plan participants incur for investing in mutual funds continued in 2017, according to Investment Company Institute (ICI) data.

According to the report, “The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2017,” the average expense ratio 401(k) plan participants incurred for investing in equity mutual funds fell from 0.48% in 2016 to 0.45% in 2017. The average expense ratio 401(k) plan participants incurred for investing in hybrid mutual funds fell from 0.53% to 0.51%, and the average expense ratio 401(k) plan participants incurred for investing in bond mutual funds fell from 0.35% to 0.33%.

The expense ratios 401(k) plan participants incur for investing in mutual funds have declined substantially since 2000, the data shows. In 2000, 401(k) plan participants incurred an average expense ratio of 0.77% for investing in equity mutual funds. By 2017, the average expense ratio experienced a 42% decline. The average expense ratios that 401(k) plan participants incurred for investing in hybrid and bond mutual funds also fell from 2000 to 2017, by 29% and 46%, respectively.

According to the report, 401(k) plan participants investing in mutual funds tend to hold lower-cost funds. At year-end 2017, 401(k) plan assets totaled $5.3 trillion, with 40% invested in equity mutual funds.

ICI says it uses asset-weighted averages to measure the expense ratios that mutual fund investors actually incur for investing in mutual funds. The simple average expense ratio, which measures the average expense ratio of all funds offered for sale, can overstate what investors actually paid because it fails to reflect the fact that investors tend to concentrate their holdings in lower-cost funds.

401(k) equity mutual fund investors tend to pay lower-than-average expense ratios than for the industry. In 2017, the asset-weighted average expense ratio for all investors in equity mutual funds was 0.59%, while for 401(k) equity mutual fund investors, it was 0.45%.

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PSNC 2018: Pension Risk Transfer Options - Wed, 06/20/2018 - 13:25

The transferring of risk, or de-risking, from defined benefit (DB) plans has become a focus of pension plan providers over the past few years.

Risk transfer or de-risking transactions addressing pension plan risks can include several options: the purchase of annuities from an insurance company that transfers liabilities for some or all plan participants (removing the risks cited above with respect to that liability from the plan sponsor); the payment of lump sums to pension plan participants that satisfy the liability of the plan for those participants (either through a one-time offer or a permanent plan feature); and the restructuring of plan investments to reduce risk to the plan sponsor.

At the 2018 PLANSPONSOR National Conference, David Hinderstein, president, Strategic Retirement Group, Inc., in White Plains, New York said, “Many pension plans are frozen and these plan sponsors have been waiting for something to happen. They are hoping and hope has become expensive.”

Maintaining a frozen pension plan is expensive, according to Hinderstein, and it means contributing fees to the Pension Benefit Guaranty Corporation (PBGC). The flat-rate-per-participant premium for single employer plan increased 130% since 2013. The variable rate is a percentage of a plans unfunded status. 

Hinderstein said, “Plan sponsors have begun to take action to deal with liabilities but there are a few service providers that can help plan sponsors keep their frozen plans which slows down the process. Why derisk? To help fund the plan they are derisking.”

An example of a partial risk transfer is how FedEx recently entered into an agreement to purchase a group annuity contract with Metropolitan Life Insurance Co. to transfer about $6 billion in pension plan obligations. By taking on a portion of the payment obligations of the FedEx DB plan, it will help the company secure its pension obligations and provide its retirees with financial security. Companies are chunking out their liabilities so that those funds do not grow.

In addition, many plan sponsors are offering terminated employees lump sums payments. Hinderstein said there is on average a 65% take rate.

Mike Devlin, principal, BCG Pension Risk Consultants, which specializes in assisting plan sponsors with managing their pension risk, stressed the importance of a plan sponsor keeping control of its plan as it derisks.  He said, “Restructuring the plan through an IRS determination letter can be complex and interest rates are unpredictable. Instead transact under your own conditions and you can predetermine the timing with the market as to what you do. Plus, never move all your retirees at one time. Figure out how much you will save over X amount time and do what makes sense economically.”

Michael Kozemchak, managing director at Institutional Investment Consulting interjected, “It’s going to cost more to keep the liabilities than to move them to an insurance company. It makes more sense to move it right now. Figure out what the annuity price needs to be for it to make sense financially for your plan.”

The fourth quarter of the year is very busy for these insurance companies according to Marty Menin, director of retirement solutions division at Pacific Life, specializing in pension risk transfer and other group annuity contract solutions. “[Insurance providers have many] other companies to look at that time and plan sponsors are back to losing control of their transaction. When insurance companies get busy they won’t be as competitive and you want the best price for the annuitization.”


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PSNC 2018: Health Meets Wealth - Wed, 06/20/2018 - 04:05

According to Nathan Voris, managing director for business strategy at Schwab Retirement Plan Services, and Michael Kane, managing director of Plan Sponsor Consultants, there is an increased recognition among employers that employees’ stress about debt and finances can be just as detrimental to physical health and job performance as a serious illness.

The pair shared their outlook during a panel discussion on the final day of the 2018 PLANSPONSOR National Conference, held last week in Washington, D.C. As Voris and Kane explained, the vast majority of retirement plan officials they speak with feel financial stress is significantly impacting participants’ daily lives, diminishing their ability to plan effectively for retirement and resulting in a lack of productivity.

To combat the challenge, employers are looking for new ways to help employees with monthly budgeting, planning for college savings or medical costs, and reducing debt.

“All of these are crucial and interrelated financial decisions, and they should have an impact on what health care plan employees select,” Voris observed. “It really doesn’t make sense from the participant perspective to bifurcate these issues, health and wealth. And from the employer’s human resources perspective, these two subjects must be linked for effective service.”

Kane agreed, observing that one important purpose of offering more holistic benefits and education that links health and wealth concerns for employees is that it “prevents the 401(k) plan from being treated like a checkbook.”

“There a numerous academic studies out there demonstrating the various ways financial stress impacts productivity and absenteeism, leading to delayed retirements,” Kane said. “Just take the prevalence of 401(k) plan loans for people with less than $60,000 per year in income—it’s something like 60% or more. The statistics show the wellness need is huge.”

Voris and Kane noted that retirement plan recordkeepers and advisers each can help plan sponsors build a plan for better linking health and wealth topics.

“A big part of this effort will be building out a marketing plan,” Kane suggested. “We have seen plan sponsors have success getting participants to go through education modules or take specific actions by using gift card giveaways, for example. What is the most impactful thing you can do? Have your CEO write a letter directly to employees and explain why this is important and that employees’ physical and financial health are valued. If this is tied to a digital rollout it can be incredibly powerful.”

Voris added that “picking goals and metrics for measuring the performance of any new programming will be very important.”

“When it comes to setting goals and designing a strategy, I always recommend starting with the data and bringing together the stakeholders,” Voris noted. “This will include the recordkeeper, the health care provider, and maybe even your insurance providers as well. The goals, strategy and time frame are different for everyone, so getting the objectives set and mapping out the required data is key.”

Kane concluded that “the use of an adviser or coach is huge here.”

“In our experience, the adviser will be critical in getting these programs created and actually rolled out,” he said. “You may also consider integrating the efforts of customer relationship managers from the recordkeeper for the financial wellness topic.”

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Firms Offer Framework for Planning for Retirement Health Costs - Tue, 06/19/2018 - 19:02

Vanguard has issued a new framework, jointly developed with Mercer, that helps pre-retirees and retirees better understand the financial planning implications of annual health care costs and long-term care expenses.

The research paper, “Planning for healthcare costs in retirement,” outlines key health care cost factors and personal considerations, as well as frames health care expenses as an annual cost rather than a lifetime lump sum. “Most analyses available in the marketplace today point to a daunting out-of-pocket healthcare expense over the lifetime of a retiree. These large dollar values can be demotivating for investors from a psychological and behavioral perspective,” Jean Young, co-author and senior research associate in the Vanguard Center for Investor Research, says. “Instead, our model focuses on the more manageable task of planning for incremental, annual healthcare costs, while separately considering and integrating the potential for long-term care expenses.”

Based on the joint analysis, Vanguard recommends several important changes to the way health care costs are typically discussed and modeled, and recommends that investors focus on five key areas: health care cost factors, replacement ratios, annual cost framing, substitution effects, and long-term care.

According to Vanguard, one of the most impactful inputs in understanding potential costs is the volume of health care services a person may consume in retirement, which can be estimated based on pre-existing chronic conditions and family health history. Another significant influencer on out-of-pocket health care costs is the type of Medicare coverage that a retiree selects, and whether their income dictates additional surcharges. Individuals retiring before age 65 will need to have a financial strategy to bridge their health care coverage until Medicare eligibility begins.

Due to the variations in a person’s life and health status year over year, the research encourages investors to focus on factors they can control and plan accordingly using the following guidelines:

  • Understand costs. Individuals should understand how their health status and other personal factors might affect their annual health care costs. Coverage choices should be informed by health status, retirement age, and income.
  • Understand employer subsidies. Individuals should understand the difference in the health coverage cost they pay now with the help of any employer subsidies, and what they will have to spend in retirement. Having a clear picture can help avoid potential “sticker shock” and better prepare retirees for their out-of-pocket health care expenses.
  • Target higher replacement ratios. Some retirement savers may encounter a large incremental change in health care costs when they retire due to the loss of generous employer subsidies or declining health, and may want to save at higher rates now to offset these factors in the future.
  • Consider health savings accounts. Health savings accounts (HSAs) can be used as a means to save, in a highly tax-efficient manner, for unforeseen health care expenses in retirement. Investors can save in these accounts today, and reduce the impact of future health care costs by having earmarked tax-free savings.
  • Weigh Medicare enrollment options carefully and revisit annually. Decisions involving the choice between traditional Medicare coverage only, traditional Medicare with a supplement, or Medicare Advantage depend on each retiree’s needs and circumstances. Retirees should assess their situation each year and make adjustments accordingly. However, the opportunity to adjust may be limited.

Long-term care costs

Long-term care costs represent a separate planning challenge given the wide distribution of potential outcomes, Vanguard notes. Half of individuals will incur no long-term care costs—but 15% could incur expenses exceeding $250,000. Even if the probability is low, Vanguard encourages retirees to confront the possibility of an extended, expensive long-term care stay, given the magnitude of the potential cost.

Retirees should first consider unpaid care options such as family support and acceptable types of paid care, as well as Medicaid rules should resources be depleted, the research paper suggests. Funding for long-term care expenses can take many forms, with the biggest resource being private, out-of-pocket spending.

In building a framework for retirement, individuals should have assets that serve as a source of annual income, as well as a contingency reserve to cover long-term care costs or other unexpected expenses. Additional considerations can include home equity, and income annuities for surviving family members.

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PSNC 2018: Best Practices to Protect Yourself and Your Company from Fiduciary Liability Lawsuits - Tue, 06/19/2018 - 16:38

Defined contribution (DC) plan sponsors have faced waves of litigation since at least 2005.

Emily Costin, partner at Alston & Bird LLP, shared with attendees at the 2018 PLANSPONSOR National Conference that the wave in 2005 was focused on the disclosure of plan fees and the concern that plan participants didn’t know what they were paying for their plan and investments. The Department of Labor (DOL) has since issued fee disclosure regulations.

Then, there was a wave of stock drop lawsuits, following the 2008/2009 recession. Costin said those have largely been litigated or settled, and many plan sponsors have pulled company stock from their retirement plan investment menus. She noted that the Supreme Court decision in Fifth Third v. Dudenhoeffer has made it harder for those cases to move forward in court.

Now, Costin said, DC plan sponsors are facing a wave of conflict of interest and self-dealing lawsuits, as well as cases focused on the reasonableness of fees plans and participants are paying for services and investments. These lawsuits are questioning how often fees have been negotiated, who is monitoring fees, and whether particular investment options offer the best deal available. She noted that these types of cases have enough of a hook to get past the pleading stage, so the plaintiffs’ attorneys can get into discovery and really find out what fiduciaries are doing.

Some cases seem to conflict with each other, which can be very confusing for employers, Costin pointed out. “No good deed goes unpunished. We’ve seen cases where the committee did look into fees and switched investment options, then they got slapped with a lawsuit saying they didn’t do so soon enough,” she said.

“The best way to ensure you are doing the right thing is to have particular processes and conversations before making decisions,” she told conference attendees.

Jamie Fleckner, partner at Goodwin Procter, said there are so many cases because plaintiffs’ lawyers have the ability under the Employee Retirement Income Security Act (ERISA) or other statutes to get an award. Where there are settlements, there are sizable payments for the class as well as attorneys, which encourages them to bring more cases.

Fleckner said more cases are going to trial, but courts continue to struggle with decisions. He hasn’t seen many solid trends, but noted that in university 403(b) cases, courts have been pushing back to some extent, giving plan sponsors latitude on the number of investment options they offer. In addition, in cases arguing whether stable value or money market funds are more prudent, courts are hesitant to say that having one investment over another is a breach of fiduciary duties, according to Fleckner.

Having a prudent process

Regarding DC plan litigation, Fleckner said plan sponsors are in a situation where they are not seeing clear guidance in courts about what is right to do, except that if plan sponsors have an unconflicted, diligent process, they have done what they should. He noted that in Tibble v. Edison, the court found a breach for not offering cheaper share classes because there was no evidence of a conscious decision made in choosing the investments. “If they had offered this evidence, I think there would have been a better decision [from the employer perspective],” he said.

Fleckner also noted that in Tussey v. ABB, fiduciaries in that plan had switched from a balanced fund to target-date funds (TDFs) offered by the recordkeeper, and the court made factual findings that the investment policy statement (IPS) for the plan hadn’t really accounted for TDFs, so the funds were new and untested and could have been chosen for reasons other than for the benefit of participants. “The court was not saying a plan sponsor can’t use TDFs over a balanced fund, but that the plan fiduciary did not have a prudent process for making its decision,” he pointed out.

Costin said the Sacerdote v. New York University 403(b) plan excessive fee suit is the first suit of this type to go to trial. She said the interesting thing from the transcripts for the case is that the judge seems to be focused on whether fiduciaries knew their duties and knew enough to be in a position to choose investments. “The judge seems to be struck by how uninformed and uneducated committee members were,” she told conference attendees.

Insurance for fiduciaries

Rhonda Prussack, senior vice president and head of Fiduciary and Employment Practices Liability at Berkshire Hathaway Specialty Insurance, said fiduciary liability insurance at its core is designed to protect directors and officers and any organization’s fiduciaries in ERISA litigation. “It provides a defense for these types of litigation and covers damages whether from a court finding or a settlement,” she told conference attendees.

Prussack suggested that plan sponsors do not list individuals in the insurance policy because they want as broad coverage as possible. “In these lawsuits, many name committees and members of committees, but also name members of the board of directors who select members of committees,” she noted.

The sponsor organization is insured and the plan is insured, and insurance companies shouldn’t require a listing of plans. There are exceptions to this for multiemployer plans and certain governmental plans that may have separate boards or trustees.

Fiduciary liability insurance should cover violations of employee benefits law, not just ERISA violations, and coverage for ministerial mistakes in the day-to-day handling of the plan is provided, Prussack continued. Benefits promised are not covered under the policy; it covers damages for actual breach of fiduciary duties.

Fleckner stressed that these are complicated cases to defend, and there are a lot of depositions. Plan sponsors may have to bring in experts to say whether they would have done something similar or testify about what they see. Trials are very expensive, so availability of fiduciary liability coverage to pay those costs is hugely important.

Prussack added that plan sponsors don’t want to use company counsel for these cases, but want an expert in ERISA class actions of the particular type of case—excessive fees, stock drop, etc. She noted that what underwriters look for has gotten more detailed, but what Fleckner and Costin talk about is what Berkshire Hathaway looks for—a diligent process. “We ask how the plan sponsor determines the reasonableness of plan fees. We want to see they have a robust process in place that is not new, but has been in place for a while,” Prussack said. “Committees should have fiduciary training. What we’re trying to get at is that fiduciaries know what they are doing and know their duties.”

According to Costin, documentation is a good thing, but whether it should be general (committee looked at this and decided to do this) or very specific (committee considered this and for these three reasons decided to do this) is hard to answer. “Take meeting minutes. You will never will capture every word, but I don’t see a problem with having more detail,” she told conference attendees.

Prussack added that up until several years ago, there wasn’t a type of coverage for settlor functions, like amending the plan or doing a re-enrollment, for example, because there is no breach of fiduciary duty under ERISA for these functions. But, Berkshire Hathaway offers settlor coverage, and some other carriers may offer it.

When deciding how much coverage to purchase, plan sponsors should look at how many plans and how many transactions they have. Prussack said insurance brokers should be well-versed in what is appropriate. She noted that the threshold for plan litigation used to be $1 billion, but the threshold has fallen quite significantly as more attorneys become active in the space. For this reason, all plan sponsors should consider the adequacy of coverage and get as much of a coverage limit as they can.

Fleckner concluded that plan sponsors should always make changes they think are better for participants; that is the ERISA standard. “If you are taking steps just due to litigation fears, you are breaching your fiduciary duty because you must be looking at the best interest of participants,” he said.

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Categories: Financial News

PSNC 2018: A Shift in Educating Participants—What Is Financial Wellness? - Tue, 06/19/2018 - 15:45

For years, education and communications for participants centered on investing themes; times have changed, however, and the topic of “financial wellness” is clearly gaining favor. 

While the interest in financial wellness among retirement plan sponsors is clear, that doesn’t mean the trend is easy to define or measure. Indeed, as noted by a panel of industry experts convened on the second day of the 2018 PLANSPONSOR National Conference, held last week in Washington, D.C., the real challenge for the industry is to make sense of what financial wellness is—and how to make the most of it for participants.

Throughout a detailed wellness conversation led by moderator Mark Davis, senior vice president and financial adviser with CAPTRUST, attendees heard from a diverse group of industry experts and stakeholders, including Nathan Voris, managing director, business strategy, Schwab Retirement Plan Services; Edward O’Connor, managing director and head of workplace wealth solutions and corporate retirement, Morgan Stanley; Jen Harmer, assistant vice president, customer experience strategy and development, Lincoln Financial; and Rachel Weker, vice president and senior manager, investment platforms and services, T. Rowe Price Retirement Plan Services.

Asked to reflect on what makes “financial wellness” hard to define, O’Connor pointed to the fact that there has been lasting regulatory uncertainty and waves of litigation that have blurred the lines between what is advice, what is education and what actions or services are to be considered “fiduciary” in nature in the tax-qualified retirement planning context. Perhaps the broadest and most intuitive definition shared by the panel came from Voris, who suggested that “financial wellness at the core is about helping people identify goals and then move towards scratching them off the list.”

“This is what financial wellness is always about, regardless of the regulatory or litigation environment,” he said.

As Harmer and Weker pointed out, one aspect of the conversation that is quite clear is that there are too many symptoms of “financial un-wellness” in the U.S. work force to be ignored by those entrusted with running retirement plans.

“There are so many symptoms of a lack of financial wellness out there that it just cannot be ignored by providers, by advisers, by recordkeepers or by sponsors,” Harmer said. “We are all starting to think more about how to best educate and support participants on their foundational financial needs, and how these needs such as budgeting or debt management link to and promote retirement planning. We must view this as a very broad topic and a crucial topic.”

O’Connor urged plan sponsors with questions about what financial wellness is and can be, to look at their more progressive peers for ideas about what’s possible.

“I’m consistently impressed by how quickly providers and sponsors are developing their offerings and approaches,” he explained. “Month over month, there are changes occurring for the better. So it’s an exciting time for plan sponsors and participants, and it’s a time to be paying close attention to the latest developments.”

Voris echoed that sentiment and noted that recordkeepers, in particular, feel like they have a lot more to offer in this domain.

“The data and connectivity that we can take advantage of as a recordkeeper, versus the capabilities of your average third party wellness vendor, is night and day,” he suggested. “We can see so much about your participants from our position as the recordkeeper, and we can use that to guide all of our efforts. Of course, we also have to be open to partnerships with advisers and other vendors to fill the gaps.”

Weker went on to suggest another high-level consideration for plan sponsors assessing financial wellness opportunities; measuring the return on investment (ROI) is not always a straightforward affair, but there are ways to get a handle on it.

“For measuring ROI, you first need to identify goals from both the employer and employee perspectives,” she suggested. “Ask yourself some guiding questions. Are you trying as the plan sponsor to tamp down on turnover? Are you simply trying to make participants a little less stressed about money? More productive, perhaps? Depending on the goals you set and your approach, it can take more or less time to see the impact. We see the most success and the most return when the employer takes an active role and creates a culture of sharing information about debt, budgeting, etc. To be successful, we need to build an environment where people feel comfortable sharing information.”

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Categories: Financial News

Brokerage Accounts, Dividends Critical Sources of Retirement Income - Tue, 06/19/2018 - 15:38

A new Hearts & Wallets report, “Retirement & Funding: Building Informed Expectations About Sources of Income in Retirement,” found that for retirees with dividends, this represents 19% of their income. For retirees with $2 million or more in investable assets, this jumps to 34%. Future retirees expect dividends will generate 16% of their retirement income, and for the wealthiest future retirees, they say it will generate 27% of their income.

Turning to taxable brokerage accounts that retirees take withdrawals from, this source supplies 21% of income, 23% for retirees with $500,000 to $2 million in investable assets, and 29% for retirees with more than $2 million in investable assets.

“Dividends and taxable brokerage accounts are quiet sources of retiree incomes,” says Laura Varas, CEO and founder of Hearts & Wallets. “Retirement account withdrawals, in contrast, have gotten lots of attention, with whole infrastructures built around them. Different sources of retirement income are the threads that retirees weave together to form a protective blanket for their senior years. By studying actual retirees, we gain important insights into income sources for specific groups that can shape personalized product and advice solutions going forward.”

Future retirees expect that withdrawals from retirement accounts, such as defined contribution (DC) plans and individual retirement accounts (IRAs) will supply 16% of their retirement income, but in fact, these accounts supply 22% of income. For retirees with $500,000 to $2 million in investable assets, this jumps to 24%, and for those with more than $2 million, 30%.

Employment also is a source of income for retirees, supplying 36% of income. Future retirees expect that employment will supply 25% of their income, and for households with less than $100,000 in investable assets, they say work will supply 30% of their retirement income. This drops to 16% for households with $500,000 to $2 million in investable assets but rises to 25% for those with $2 million or more.

“Consumers may want to work longer as a retirement of 20, 30 or more years isn’t necessarily practical,” says Amber Katris, author of the report and a subject matter expert with Hearts & Wallets. “These expectations must be tempered as work opportunities can run out for older consumers.

Additionally, real estate supplies 22% of retirement income, 20% for those with less than $100,000 in investable assets, and 24% for retirees with $500,000 to $2 million.

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Categories: Financial News

PSNC 2018: Understanding Asset Allocation Vehicles - Tue, 06/19/2018 - 15:36

At the PLANSPONSOR National Conference (PSNC), a day two session covered the latest trends among asset allocation vehicles, particularly target-date funds (TDFs) and managed accounts.

At the start of the session, 84% of audience members said they have TDFs as qualified default investment alternatives (QDIAs) in their plans. Whereas once managed accounts and TDFs had reigned as equals, the first question the panel asked was if, in a TDF-dominated world, there is any room for managed funds and accounts.

Greg Jenkins, managing director and head of institutional defined contribution at Invesco, replied that, whether managed accounts or TDFs, the answer is communicating with participants to understand what account or fund works best with their needs. Instead of debating superior investment options, plan sponsors should educate participants on what TDFs and managed accounts are, he says.

“We’ve been doing research on language, and we found again and again that the word target date, glide path, etc., participants don’t know about them,” he said. “There’s a real disconnect between what participants understand and what’s possible in your plan. It all depends on your company and how you communicate with participants.”

Joseph Lee, senior vice president and head of retirement investment solutions at First Eagle Investment Management, agreed, adding how important it is for plan sponsors to ask questions.

“Gather more information. The solution that requires the least amount of assumptions is probably right,” he said. “The thing that we need to determine is what is the right solution for our employees? Is everything okay in their life? We need to dig into that a little further.”

Chad Cowherd, vice president and head of client relationship management at American Century Investments, believes TDFs and managed accounts can prosper in the same plan, but he said the latter may prove tough, due to their well-known issue with regards to benchmarking. While managing a TDF can be difficult, benchmarking managed accounts has shown far more of a challenge due to their increased personalization and customization features.

“TDFs and managed accounts can live in harmony in a plan … Managed accounts are also a little bit harder to benchmark and compare. They tend to lean more towards low-cost and passive,” he said.

On the subject of multiple target-date suites in a single plan, Cowherd added that while industry professionals previously believed more is better, that ideology has since diminished. Instead of helping participants, greater investment options may only overwhelm them, he said.

“The industry has gone from thinking it’s better to get more, but now we’re going back because it’s not,” he said. “You need to make things simple. Participants actually stop deferring when they have too much choice and when it gets complicated. If they’re not using it the right way, that’s in nobody’s interest, not even mine.”

Circulating among recent industry and investment trends are robo advisers, and the question of whether these online tools can increase participant engagement or interaction. Since their inception, robo advisers have expanded to launching retirement planning products and services, but Cowherd sees the feature as a wealth solution instead, adding how a robo advisers’ help is only exemplified with a real-life adviser near.

“That feels like more like a wealth solution than retirement,” he said. “I feel like if you’ve got a robo product and an adviser sitting with a participant, that robo becomes more real.”

In an effort to relieve questions and confusion from plan sponsors, panelists discussed a series of recommendations to help employers get on their feet. Suggestions included hiring consultants and informing them of the plan, relaying hard work to employees, and understanding the plan’s needs.

“At the end of the day,” continued Cowherd. “It’s looking at what you have and what can help you move forward.”

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Categories: Financial News

PSNC 2018: Planning for Post-Employment - Tue, 06/19/2018 - 15:30

“The number one duty of defined contribution (DC) plan sponsors is to act for the best interest of plan participants. And, beneficiaries and terminated employees are still participants,” Jamie Greenleaf, lead advisor and principal at Cafaro Greenleaf, pointed out to attendees of the 2018 PLANSPONSOR National Conference.

Terry Dunne, senior vice president and managing director of Retirement Services at Millennium Trust Company, added that when plan sponsors spend so much time and energy trying to create a retirement plan, they should not just focus on the specific period of time when someone works, but also for when someone retires. “Make sure you are doing as much as you can for participants when they retire or leave work,” he said.

Dunne noted that the Department of Labor (DOL) and the Securities and Exchange Commission (SEC) efforts to create conflict of interest standards are focused on the adviser community to make sure advisers are going to present opportunities, investments or IRAs in the best interest of participants—making sure costs are not too significant and investments are not too risky, and there is a proper level of diversification in investments for retirees or terminated employees.

Greenleaf pointed out that these regulations and discussions around them have put the focus back on participants—the end user of the plan. Some plan sponsors didn’t know they were fiduciaries until this discussion, she said.

She suggested that retirement plan committees put together a mission statement, hopefully looking at the plan as a retirement benefit—not just addressing the accumulation phase, but also the decumulation phase. “Look at distribution options and investments that are optimal for those near and in retirement,” Greenleaf told conference attendees.

Dunne added that plan sponsors should think through carefully what to do if a participant is leaving employment. Plan sponsors need to improve their communications and make terminating participants feel they are well-advised and understand what their options are. Plan sponsors should also encourage individuals to stay connected with the company if they leave their assets in the plan. “Just turning decisions over to participants at the time of termination or retirement without guidance can hurt their retirement success,” Dunne said.

Assets left in the plan can drive overall costs down, but when an employee leaves the company, plan sponsors have less contact with them, and fiduciary duties to provide notices becomes more difficult if the plan sponsor loses track of them, Greenleaf noted.

Dunne said “missing” participants are not really missing. Plan sponsors just need to use the right tools to find them.

Tools for second phase in life

Protecting DC plan participants from themselves so that they can be better prepared for retirement post-employment means protecting the benefits the plan sponsor is trying to provide for them, according to Greenleaf. She said the retirement plan committee needs to reduce the potential for plan leakage—reduce the number of loans participants can have, increase the interest paid on plan loans, and do not allow age 59 ½ in-service distributions, for example.

Greenleaf also questioned why terminated participants with a balance less than $1,000 are treated differently than those with a balance between $1,000 and $5,000. She suggested plan sponsors rollover, rather than cash out, balances less than $1,000 to keep participants’ investments protected for future use. “Hopefully the participant will decide to move the money to a new employer’s plan,” she said.

Regarding the plan leakage issue, an attendee suggested plan sponsors let terminated participants take loans from the plan so they are paying back money into the plan, as well as allowing participants who terminate to repay loans after termination.

Dunne said his firm is seeing larger plan sponsors implementing sidecar individual retirement accounts (IRAs), creating an opportunity for individuals fully contributing to the plan to continue to contribute towards retirement if able.

He also pointed out that there is so much conversation among legislators and regulators to encourage people to have guaranteed income. “I think it will take a few more years for things to happen, but there is movement in that direction. Participants are interested in that. We need to create a [defined benefit] element for DC plans for income in retirement,” Dunne said.

In the meantime, Dunne suggested plan sponsors provide information, education, and calculators to help participants turn their DC assets into income in retirement. “If a plan sponsor can invest in an adviser or other person to provide direction for terminating or retiring employees, that would be extremely helpful,” he said.

Greenleaf added that engaging retirement plan participants is difficult, but engaging them at retirement is a lot easier because it is relevant and meaningful to them. She suggested plan sponsors hold education meetings specific to the participant group close to retirement, focusing not only on what to do with DC plan assets, but about Social Security and Medicare.

Responding to an attendee question about handling uncashed checks of either required minimum distributions (RMDs) or cashouts of low balances, Dunne reiterated that there are many tools to search for “missing” participants.

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Categories: Financial News

PSNC 2018: The Importance of Educating Investment Committees - Mon, 06/18/2018 - 19:35

Day two of the PLANSPONSOR National Conference featured a session on investment committee education, the basics surrounding it, and the best resources available to plan sponsors.

Josh Itzoe, partner and managing director of Greenspring Advisors, and Gordon Tewell, principal of Innovest, spoke about what makes an efficient committee. Itzoe noted the importance in keeping an updated roster of committee members, and recommended allocating anywhere from three to seven members for each group. Tewell emphasized diversity in each committee, especially concerning ranks in the workforce.

“Bring in different perspectives in the plan, from different work levels,” he saif.

Itzoe agreed, adding, “You want people who are committed, consistent, and are open-minded when considering all the facts and possibilities.”

For those plan sponsors continually catching members skipping out on meetings or unsure of meeting times, Itzoe said scheduling meetings in advance will minimize absences and delays.

“Schedule all the investment committees at the beginning of the year,” he said. “If they can get the whole schedule then they can time it, which is helpful.”

The effects of education and training were touched upon throughout the session. For novice committee members, retirement industry terminology alone can scare them from serving.

“Terms are really hard. As a positive, people will come in enthusiastic, but because the educational content is overpowering, it’s hard to get people” to remain committed, Itzoe said.

While Itzoe stressed the significance behind ongoing education and consistently communicating terms with members, Tewell highlighted the importance of training members on the fiduciary role they’ve gained.

“If we think about training, it’s that more upfront fiduciary focus piece that we need to get someone up to speed and involved in the committee,” he said.

Among key subjects to incorporate in education and training are developing the investment policy statement (IPS), the retirement industry as a whole and prudent fund lineups. An IPS, Itzoe said, is critical when understanding the role investment advisers, and managers, take on. Investment professionals, Itzoe said, can help educate committee members.

“Clients are hiring us to lead a leadership team,” he said. “These companies don’t know what they don’t know, so if you can go in and help them understand not just the what, but the why. If you tell them of the why, people much more embrace it.”

Yet, it’s these committee members responsible for documenting meetings, informing participants and updating their awareness on investments, the Employee Retirement Income Security Act (ERISA) and the latest fiduciary duties. Ultimately, plan sponsors should look to recruit individuals with the capability of handling these tasks, speakers said. 

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Categories: Financial News

DOL Assists Custodians With Cleaning Out Abandoned Plans - Mon, 06/18/2018 - 18:56

Metropolitan Life Insurance Company and Brighthouse Life Insurance Company have agreed to work with the U.S. Department of Labor (DOL) to determine whether more than 2,000 retirement plans in their custody are abandoned.

If plans are found to be abandoned, the companies will submit them to the Department’s Abandoned Plan Program (APP). This may result in distributions of up to approximately $116 million to 20,000 participants. Ascensus Trust Company will be submitting plans to the Abandoned Plan Program (APP) on behalf of MetLife and Brighthouse.

The companies also have agreed to terminate and wind up 400 additional “de minimis” plans, and to distribute the assets to their participants. A de minimis benefit is one for which, considering its value and the frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical.

The Department’s Employee Benefits Security Administration (EBSA) approached the two companies regarding the assets of Employee Retirement Income Security Act (ERISA)-covered individual account plans that had no activity for at least 12 consecutive months.

A plan is considered abandoned if, among other things, no contributions to or distributions from the plan have been made for a period of at least 12 consecutive months. Such a plan may be appropriate for the APP if, after making reasonable efforts to locate the plan sponsor, it is determined that the sponsor no longer exists, cannot be located, or is unable to maintain the plan.

When a plan is abandoned, custodians (like MetLife and Brighthouse) are left holding the assets of the plan, but lack the authority to terminate the plan and to distribute the plan’s benefits to participants. In such scenarios, participants and beneficiaries of the plan have great difficulty accessing the benefits they have earned. EBSA created its APP to address this situation. The program provides a safe and efficient process for winding up the affairs of abandoned individual account plans so that benefit distributions are made to participants and beneficiaries.

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Categories: Financial News

PSNC 2018: Helping Participants Maximize Their Savings Opportunities - Mon, 06/18/2018 - 18:56
To make it practical for defined contribution (DC) plan participants to maximize their savings opportunities, they first need to get their financial house in order.

Alvin Shaver, director of compensation and benefits at Southeastern Freight Lines Inc., a 2018 PLANSPONSOR Plan Sponsor of the Year finalist, told 2018 PLANSPONSOR National Conference (PSNC) attendees that having an emergency fund is important for participants. He noted that stats show many cannot come up with even $400 to cover an unexpected expense. “If they can’t handle that piece, it affects all other pieces. If they can’t pay bills, they cannot think about saving for retirement,” he said.

Shaver stressed that employers need to help their workers become financially literate. He said they should also work with them on decreasing debt, so those individuals have the cash flow to put money into savings vehicles.

When choosing how to save in their DC plans, Jania Stout, practice leader and co-founder of Fiduciary Plan Advisors, and winner of a 2016 Retirement Plan Adviser of the Year Award, said whether they contribute on a pre-tax or Roth after-tax basis depends on the individual. She noted that automatic enrollment most likely defaults participants to pre-tax savings, but questioned whether young people who have just entered the work force and have a lower income really need that pre-tax deduction. Depending on participant demographics, she contended, plan sponsors should encourage recordkeepers to rethink the default.

However, Kenneth M. Forsythe, assistant vice president, product strategy, at Empower Retirement, noted that plan sponsors must consider what is matched by employers—usually only pre-tax deferrals get matched.

Shaver added that using tools/calculators is important. Plan sponsors can lead participants to tools to help them decide whether pre-tax or Roth would be better.

Saving for long-term health care

Kevin Robertson, chief revenue officer at HSA Bank, said the very first thing DC plan participants should do is educate themselves, using resources from plan sponsors and providers about how much they will need for retirement, including how much for health care. He noted that estimates by groups range from about $250,000 to $500,000.

Forsythe advocated for a savings optimization model. “It’s important to give employees a very clearly defined, three-step process on what to do when [wanting] to save for retirement. First, they save enough in their DC plan to get the full match formula, then save up to the IRS maximum into a health savings account [HSA] and lastly, if they have anything, else to put it in the DC plan.”

He said Empower research found 97% of plans use a match formula up to 50% of a specified deferral amount. “Saving up to the match is a break-even point. Participants won’t get better returns from saving after that than the tax benefits they get from an HSA,” he contended.

Stout told attendees she had a client whose employees, for years, never knew they had an HSA available, because education was coming from the health plan broker and not the retirement provider. “I think the two should team together to educate participants,” she observed.

Forsythe added that plan sponsors and providers should align HSA savings with retirement savings—that way, participants can go online and see both.

As for investing HSA assets, Stout noted that the HSA industry is behind the DC plan industry as far as investing. She contended this is another argument for why retirement plan providers and advisers should be more involved with educating about the accounts. Some HSAs mirror investments in the plan sponsor’s DC plan. “I’d like to see legislation allowing HSA contributions to be defaulted into a target-date fund [TDF],” she said.

Stout said, if a plan sponsor wants its adviser to also advise on HSA investments, it should put that in his contract. She warned that those services may cost more.

Robertson stressed that HSAs are not plans; they are individually owned accounts. And, because they are not Employee Retirement Income Security Act (ERISA) plans, plan sponsors have to be careful about the investment offerings; there is no safe harbor for mirroring the DC plan investment lineup.

Shaver noted, however, that many plan sponsors are still trying to educate their employees about why high-deductible health plans (HDHPs) and HSAs are important, so adding education about investing HSA dollars has yet to be a high priority.

He also pointed out that maximizing DC plan and HSA contributions is not practical for every employee.


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Categories: Financial News

Non-ERISA 403(b)s Could Be Affected by SEC Conflict of Interest Proposal - Mon, 06/18/2018 - 18:46

An Employee Benefits Law Alert discusses how an Employee Retirement Income Security Act (ERISA) retirement plan would not satisfy the definition of “retail customer” in the Securities and Exchange Commission’s (SEC)’s Regulation: Best Interest section of its new proposed conflict of interest standard; however, non-ERISA 403(b) plans may satisfy the definition.

The Regulation: Best Interest section of the proposal will “raise the standard for broker/dealers to make it clear that they have to keep customer interests first when serving retail clients.” And lastly, SEC staff explained, the proposal will recast the fiduciary standard under the Advisers Act, “in order to reaffirm and clarify the SEC’s views on the standards of conduct applicable to investment advisers, who are fiduciaries.”

According to The Wagner Law Group, the Regulation Best Interest is applicable to certain transactions between broker-dealers and a retail customer, defined as “a person, or the legal representative of such person, who: (1) receives a recommendation of any securities transaction or investment strategy involving securities from a broker-dealer or a natural person who is associated with a broker-dealer; and (2) uses the recommendation primarily for personal, family, or household purposes.” Thus, while the definition applies to persons, not simply natural persons, an ERISA plan could qualify as a person, but it could not satisfy the second prong of the definition, and therefore would not be a retail customer.

The Alert further explained that under Department of Labor (DOL) regulations, a tax-sheltered annuity program that is funded solely through salary reduction contributions or an agreement to forego a salary increase, is not considered to be established or maintained by an employer and, therefore, is not considered a pension plan under Title I of ERISA if: (i) employee contributions are completely voluntary; (ii) all rights under the contract or annuity are enforceable by the employee; (iii) the employer’s involvement is limited; and (iv) the employer receives no compensation, direct or indirect, in cash or otherwise, other than reasonable reimbursement to cover expenses involved in performing the employer’s obligations under the salary reduction agreement.

If these conditions are satisfied, then the employee owning the annuity contract would likely be treated as a “retail customer” and subject to the protections of the Best Interest rules. “To that end, although they are treated differently for tax purposes, the participant in the non-ERISA 403(b) plan would seem to be in the analogous position to the owner of an IRA,” the Alert says.

However, the Wagner Law Group notes that fixed annuities and fixed indexed annuities are insurance products, not securities, so the SEC cannot regulate them. Variable annuities are securities and are regulated by the SEC. “Since some 403(b) arrangements are funded with fixed and fixed annuity insurance products, state insurance departments might consider adopting the SEC Best Interest standard,” it says.

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Categories: Financial News

PSNC 2018: Rules, Regulations and Other Factors Affecting DB Funding Strategies - Mon, 06/18/2018 - 17:33

The average funding ratio of corporate defined benefit (DB) plans has gone up over time, from 78.8% in 2012 to 89.4% this year, but there is still some room for improvement, Robin M. Solomon, a partner at Ivins, Phillips & Barker, told attendees of the 2018 PLANSPONSOR National Conference (PSNC), in Washington, D.C., last week.

With funding relief starting in 2008 and extended through 2020, there is still a lot of flexibility in setting actuarial assumptions for determining funded status. However, Solomon noted, with funding relief, DB plan sponsors may get a false sense of security. Their funded status may be good, but if they terminate the plan or do a pension risk transfer (PRT), calculations are different and funded status will be lower.

She contended that Pension Benefit Guaranty Corporation (PBGC) premiums have become a tax on using funding relief. Premiums are growing increasingly higher, costing plans more for unfunded benefits. Since 2012, flat PBGC premiums and variable premiums have been increased by legislation, and are now about double what they were. Next year, there will be an $80 per person flat rate. In addition, plan sponsors have been looking at persistently low interest rates, which drive up plan liabilities, and new mortality tables for 2018/2019 increase liabilities by approximately 5%.

Solomon said DB plan sponsors may want to consider voluntary pre-funding of their plans. Why? Tax reform may generate repatriated cash—it offers a one-time opportunity to bring money from overseas at a decent tax rate. In addition, there’s an opportunity this year only to make a contribution and deduct it at the 2017 35% corporate tax rate. Tax reform changed the corporate tax rate to 21% as of this January 1, so the value of a pension contribution deduction will go down. “We think there is enough IRS authority to support that these accelerated contributions can count as 2018 contributions,” she said.

Other reasons Solomon cited for pre-funding are that continued pension volatility gets tiresome; pre-funding can be preparation for de-risking; and plan sponsors can avoid the PBGC variable rate premium.

There are challenges to consider with pre-funding a DB plan:

  • Weighing the cost against other business priorities;
  • Resisting the desire to invest in growth assets while hoping that funding levels improve; and
  • The risk of trapped surplus funds.

“For many years, companies defaulted to the minimum required contribution, and, around 2013, long-term interest rates went up, pension deficits started to close, and plan sponsors got confident, so they didn’t think about contributing more to their plans,” Solomon said. “It’s time to sit down and think of a funding strategy. How much of your plan will be closed by asset growth or interest rate changes? How much in contributions should you make? Identify the appropriate funding level, and what you plan to do with your DB plan—freeze it, close it, terminate it or transfer risk.”

Ways to Pre-Fund Other Than Cash

Aside from making a cash contribution, Solomon suggested borrowing to fund. “It replaces variable/volatile debt[—the type associated with underfunded pensions—]with a fixed-predictable obligation,” she said. “Plan sponsors can compare costs of borrowing with the PBGC variable rate premium.” However, she added the caveat that borrowing to fund is popular now, although this may not continue because deductions on interest will change.

DB plan sponsors can also make in-kind contributions of real property, employer stock, employer notes and Treasury bills. In the first three cases, DB plan sponsors sell property and lease it back to the plan. Solomon points out this may create Employee Retirement Income Security Act (ERISA) issues—plan sponsors need to think about the value of the asset and whether it is prudent for the plan to acquire. In addition, they will need to get a statutory exemption—ERISA Section 408(e) says the selling price may not exceed 10% of plan assets—or plan sponsors can request an individual exemption.

When using Treasury bills, plan sponsors can only get an individual exemption. But unlike a cash contribution, a contribution of T-bills will not reduce a company’s credit rating.

But the “pro” of using these strategies is that plan sponsors can use assets they have lying around and avoid spending cash. “It’s a great strategy if the property is paid for and is heavily depreciated,” Solomon said.

Other creative funding strategies mentioned by Solomon include converting after-tax contributions to pre-tax and converting a noncontributory plan to a contributory plan.

Finally, Solomon told conference attendees if they are lucky enough to have a funding surplus, they can use it to offset future contributions, offset administrative fees, merge with another plan, or fund retiree medical benefits—i.e., in a 401(h) account. If the surplus reverts to the employer, it will have to pay a 50% excise tax, which is reduced to 20% if the assets are applied to a qualified replacement plan.

The post PSNC 2018: Rules, Regulations and Other Factors Affecting DB Funding Strategies appeared first on PLANSPONSOR.

Categories: Financial News

Retirement Industry People Moves - Fri, 06/15/2018 - 20:16

OneAmerica Hires Client Relationship Executives, Nationwide

OneAmerica has hired four client relationship executives to fill existing retirement service posts, taking on geographically crucial roles to support sales growth, the firm says. 

Industry veterans Christopher Drazen (based in St. Louis) and Paul Worthington (in Sparta, New Jersey) are focused on assisting institutional-sized companies with plan assets over $25 million, while Doug Reber (in Dallas) and Gordon Stiff (in Atlanta) are regionally positioned to serve core plans that focus on small to midsize employers. 

“We are pleased that these four individuals have chosen to join the OneAmerica family,” says Pete Welsh, vice president, distribution, OneAmerica Retirement Services. “The association of such quality individuals with OneAmerica further demonstrates our commitment to the highest level of service to our plan sponsor clients.” 

Worthington, who joined OneAmerica in May from Wells Fargo, serves clients in the New York City metropolitan area, as well as Maine, Massachusetts, New Hampshire, North Carolina, Rhode Island, Vermont, Virginia and Washington, D.C. 

“I’m very excited to join OneAmerica,” says Worthington, calling the company “a premier retirement plan service provider well-positioned to continue growing,” and adds, “my focus on client satisfaction and participant outcomes aligns well with OneAmerica’s solid reputation and culture of providing exceptional service.”

Drazen joined OneAmerica in April, following nearly three years with Transamerica. “Plan design and employee education, combined with an award-winning service structure, is the route to making impactful, positive retirement outcomes. It can certainly help employers with this task, and I look forward to working with clients in this role,” says Drazen.

Reber has been involved with financial services companies in a variety of roles, bringing three decades of experience, including 18 years at American Century Investments. He serves clients in parts of four Southwestern states. 

Stiff brings a wealth of knowledge and experience starting with 10 years at TIAA-CREF, then another nine at Empower, focusing on relationship management.

AssuredPartners Acquires NIS to Serve 403(b) Plans

Brookfield, Wisconsin, insurance agency National Insurance Services has been acquired by AssuredPartners Inc. in Lake Mary, Florida, for more than $50 million.

NIS provides employee benefits consulting and brokerage services for more than 2,500 public-sector organizations nationwide. It also administers about 600 403(b) plans, health reimbursements, flexible spending accounts (FSAs), employee benefit trusts and retirement incentive payouts for schools, cities and counties.

Under the terms of the deal, all of NIS’ 129 employees will continue to operate out of the same office under the guidance of President and CEO Bruce Miller. The NIS owners also set aside more than $1 million for the non-owner employees, who will receive a portion based on their time of service if they stay on at least one year from the transaction close.

“Because we’re so fortunate, we just wanted to share with those others,” says Terry Briscoe, NIS founder. “The owners are all coming out well on this deal. There are 110 or something other employees who are not involved with that so … we’re trying to be helpful to the employees.”

A separate insurance company, National Insurance Co. of Wisconsin, is being liquidated in a separate transaction, he says. “It will be a separate event. We’ll get there some day,” Briscoe says. “We transferred all the advantages of the insurance company over to the agency before we sold that.”

The acquisition of NIS is expected to broaden AssuredPartners’ reach in the public sector.

“We focus on partnering with agencies with strong management that demonstrate a dedication to growth and building lasting relationships—we have found this with NIS,” says Tom Riley, president and chief operating officer (COO) of AssuredPartners.


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Categories: Financial News
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