AdvisorNews - October 2013
Advisers pitching 401(k) plans: Do your homework
Research shows plan sponsors turn to referrals from peers to find advisers with whom they would like to work, rather than responding positively to cold calls

By Darla Mercado

Mar 10, 2013 @ 12:01 am (Updated 9:58 am) EST

As more financial advisers jockey for 401(k) business, they will have to find ways to stand out and win plans.

Research from Franklin Templeton Investments shows that plan sponsors turn to referrals from peers to find advisers with whom they would like to work, rather than responding positively to cold calls.

“It's not what you do that's important but how you do it. You're trying to impress upon a plan sponsor why they should choose you,” said Joshua Dietch, a managing director at Chatham Partners and a panelist last Monday at the American Society of Pension Professionals & Actuaries' annual 401(k) Summit in Las Vegas.

It really depends on which adviser candidate is a better fit for the company based on its needs and its culture. Advisers must do their homework and get to know their prospects so that they can showcase their abilities and how they can help.

That extra bit of work can make all the difference when an adviser is competing against a handful of peers for a plan, said panelist Jania Stout, vice president of the fiduciary consulting group at PSA Financial Services Inc.

About a year ago, her firm won the business of a pharmaceutical company with $130 million in 401(k) assets and $90 million in pension assets.

Ms. Stout thinks that understanding the company's culture and doing research on the members of the plan's investment committee were instrumental in beating other advisers who pursued the client.

“We built in the committee's mission statement throughout our whole presentation, and every service we offered tied back to it,” she said.
As happy employees make for happy plan sponsor clients, advisers also ought to think about what they can do to enhance the experience for workers.

For instance, Ms. Stout realized that one of the obstacles to getting participants to raise their 401(k) contributions was that they were hobbled with debt.

She began hosting educational webinars for workers on debt elimination, which were well-attended.

“The feedback they gave their employers was tremendous,” Ms. Stout said. “We can't just be focused on 401(k)s; we have to look at the whole picture.”




Uncertain regulatory climate hasn’t put damper on TPA market
By Paula Aven Gladych

March 13, 2013 • Reprints

Despite an uncertain tax and regulatory environment, retirement plan sponsors are not shying away from the added expense of hiring third party administrators to help manage their 401(k) and 403(b) retirement plans. If anything, TPAs are more popular than ever because they help companies better navigate the murky, and sometimes choppy, regulatory waters.

“It is an interesting time for them. A lot fear that fee transparency will equal pressure on fees, that once plan sponsors get this fee information from providers they may shop around and pick the cheapest plan provider out there,” said Ary Rosenbaum, managing attorney with The Rosenbaum Law Firm in New York. “I don’t think that will be the case. TPAs still offer great value as a service provider. Not all TPAs are equal. Some are better than others, but TPAs need to do better marketing for themselves to tell plan sponsors why they are better than their competitors, why their service is better.”

TPAs offer a tremendous value when it comes to administration, recordkeeping, discrimination and compliance tests and anything that is very technical, he said.

If the TPA a plan sponsor chooses is well versed in plan design, it can save the employer money.

“Plan sponsors don’t understand that across the board, pro rata contribution models may not be what is ideal,” Rosenbaum said. “When it comes to sophistication in plan design it could put more money in the employees’ pockets and less money in the pocket of the government.”

He added that plan sponsors also need to realize that hiring the cheapest provider may not be the best option for them.

Rosenbaum, who is an ERISA attorney, said that he believes the most important service provider a plan sponsor has is their TPA/recordkeeper. “A good one goes a long way to avoid plan compliance errors and maximize employer contributions and creates a lot less of a headache than if you go with someone who is not up to snuff,” he said.

“The worst thing a plan sponsor can do is shop based only on price. Shop for value, what you are getting for your money spent,” Rosenbaum said. “Someone may be offering something cheap, but if their services are lackluster and negligent, you will pay more in compliance fees.”

TPA use isn’t just growing among the smallest companies, said Jeff Schreiber, vice president of TPA business development at The Principal. It also is working up market.

Recent data from the Plan Sponsor Council of America found that TPA use among 403(b) plans also is on the rise.

The 2011 403(b) Plan Survey showed an increase in the percentage of 403(b) plan sponsors who use TPAs, from 24.6 percent in 2010 to 28.7 percent in 2011. The survey also dispelled the myth that TPAs only work in the small plan market, with 56 percent of survey respondents with 1,000 or more participants saying they also use third party administrators.

The Principal, which sponsored that survey, has spent a good deal of time and money looking at what tools and information third party administrators need to do their jobs better. The company has developed a website dedicated to aiding these retirement plan practitioners through all aspects of retirement plan administration online.

“With the ever-changing regulatory and legislative environment, the responsibilities of being a plan sponsor and a fiduciary for the plan are increasing, not decreasing,” Schreiber said. If employers want to offer a plan to employees, they need to make sure it is designed the right way and meets all of the regulatory requirements.

He added that if he were a plan sponsor he would scrutinize the institution or recordkeeper behind the third party administrator to make sure they were experts on plan design and regulatory issues. “TPAs are very well positioned to do that,” he said.

The Principal’s TPA website now offers compliance information, marketing tools and advice on how to get into prospecting for new clients and helping existing ones.

“From The Principal’s standpoint, the role a TPA plays in the model going forward, we are trying to do what is best for advisors and plan sponsors. It is increasingly evident to us, the role of a TPA is important for us to support. We are a big believer in the value they play in the equation,” Schreiber said. “We will do everything we can to support it.”

Bob Benish, interim president and executive director of the Plan Sponsor Council of America, said he has talked to a number of plan sponsors about the issue of third party administrators and most agree they will continue to play a major role in the retirement industry.
“Under ERISA, they don’t assume everyone to be an expert, but they do expect you would use the expertise available to you in the marketplace to get the information you need to make a correct decision as a fiduciary,” he said.

The overwhelming majority of small and mid-size plan don’t have the expertise inside their company to do the job well, he said. “It behooves them to go to outside firms that know about fee disclosure and other plan-related information that can help them implement the best program possible for their employees,” Benish said.

He added he remains a big supporter of TPAs.





Study Reinforces Importance of Advisers’ Role
By Richard F. Stolz

March 19, 2013

A recent academic study examined whether mutual fund companies that act as trustees for 401(k) plans “display favoritism towards their own funds.” Although its conclusions will not shock many advisers, the research can be useful as a source of independent evidence on this important issue, and reinforce the vital role that an independent adviser can play in overseeing plan investments.

The study, titled “It Pays to Set the Menu: Mutual Fund Investment Options in 401(k) Plans,” offers the following conclusions:
  1. Poorly performing funds “are less likely to be removed and more likely to be added to a 401(k) menu if they are affiliated with the plan trustee,”
  2. There is no evidence that plan participants “undo their affiliation bias through their investment choices,” and
  3. The subsequent performance of poorly performing affiliated funds “indicates that these trustee decisions are not information-driven and are costly to retirement savers.”
  4. The average performance deficiency for proprietary funds that underperformed benchmarks averaged 3.6% on a risk-adjusted basis, according to the study.
Strong Trustee Preference
In sum, “We find that despite their fiduciary responsibilities, trustees have a strong preference for their own funds,” stated the study’s authors (Veronika Pool and Irina Stefansu of Indiana University and Clemens Sialm of the University of Texas).

Most of the plans studied were open-architecture, so plan sponsors in theory making changes in the fund line-up should not have been a big challenge. The study noted that when poorly performing funds of one fund organization were on the investment menus of plans trusteed by other organizations, those other plans were much quicker to drop them, than the plans trusteed by the fund provider.

“I think the study is correct,” says Tom Ming, CEO of Tower Rock Advisors in Bakersfield, Calif. “This wouldn’t be happening” as much if more plans “had an fiduciary adviser looking out for them.”

It must be noted that the most recent plan data used in the study was from 2009. Harris Nydick, a founding partner of CFS Investment Advisory Services in Totowa, N.J., says while he has seen some progress since then in the part of mutual fund companies, the fundamental problem remains.

Harris was recently turned down by a mutual fund organization seeking the services of an independent fiduciary to oversee the company’s 401(k) plan investments for its own employees. That happened when he made it clear he would not hesitate to recommend that the company drop any of its own funds from the investment menu if he believed they were not suitable.

He recently requested on behalf a client that the mutual fund trustee servicing that account make specific external funds to available to the plan. “They said they can do it, but it will cost.”

And while higher cost is one variable in the fund selection process, “it’s not the only factor,” Harris says, a basic point that he sometimes needs to remind clients. “The problem is when you don’t see value for what you’re paying.”



DOL Offers Tips on the Selection and Monitoring of Target Date Funds
In February of 2013 the Department of Labor (DOL) published an educational piece designed to assist plan fiduciaries with the selection and monitoring of target date funds. The article, “Target Date Retirement Funds – Tips for ERISA Fiduciaries,” provides an overview of what target date funds are and how they work. It explains the concepts of “‘target date” and “glide path” and the difference between a “to” or “through” approach to asset allocation within a target date fund. It also recommends that plan fiduciaries take the following steps when selecting and monitoring a target date fund:

  1. Establish a prudent process for comparing and selecting target date funds. Include an evaluation of performance, fees and compatibility with the investment needs of plan participants.
  2. Establish a prudent process for periodic review of selected target date funds. Review any changes in the fund, such as a change in the investment manager or any lack of consistency with stated objectives, as well as any changes to the plan’s objectives for offering the fund. Consider replacing the fund if there are changes warranting that action.
  3. Understand the fund’s underlying investments and how they will change over time. Review the principal strategies and risks as defined in prospectus documents. Make sure you understand the glide path and whether the fund will reach its most conservative allocation at or after the target date. Understand what the most conservative allocation is and what degree of equity exposure and risk remains at that allocation. Consider whether that degree of risk is consistent with how employees are likely to use the fund (for example, will they be cashing out the day they retire or taking periodic withdrawals over the course of their retirement years).
  4. Make sure you understand all the fees associated with the fund. This includes fees for the underlying funds and fees for the target date fund itself, as well as any sales loads or other expenses.
  5. Evaluate whether to use a custom or pre-packaged fund. Inquire as to whether it is better to use a “pre-packaged” target date fund, which may use the investment vendor’s proprietary funds as the underlying investments, or a custom fund which may offer the ability to use the plan’s core funds as the underlying investments. Take into account the benefits of diversification as well as the costs involved in using a custom fund. [It should be noted that some pre-packaged funds use a diversified mix of non-proprietary investments as the underlying investments.]
  6. Develop an effective employee communication program. The program should include both legally required disclosures as well as general education about target date funds.
  7. Use commercially available sources of information. Take advantage of information and services that may assist in the evaluation of the target date fund.
  8. Document the selection and review process. Include documentation of how individual investment decisions were reached.

If you are interested in reading the entire DOL article, it can be accessed at http://www.dol.gov/ebsa/newsroom/fsTDF.html.





Sole Proprietor 401(k) — Still A Great Plan Design
Rev. 02/21/03, E-mail Alert 2003-3; Rev. 11/11/08; Rev. 07/23/09, Email-Alert 2009-11; Rev. 03/27/13, E-Mail Alert 2013-4

Prior to the enactment of EGTRRA, a 401(k) plan held no benefit for an owner-only business with no common-law-employees. Why?

Because elective deferrals were included as part of the 25% deduction limit. There was no incentive to add the complexity of elective deferrals when the maximum 25% deduction could be achieved using a combination of a Profit Sharing and Money Purchase Plan instead. In fact, because the deductible amount was based on compensation that was “net” of deferrals, the overall deduction limit was effectively lowered!

Since 2002, elective deferrals have not been included as part of the 25% deduction limit, thus, the business owner can make greater tax-deductible contributions by adding elective deferrals to a profit sharing plan design. This is especially true at income levels significantly below the $255,000 limit.

The 401(k) advantage for the sole proprietor (or one person plan) is enhanced by EGTRRA’s increase in the 415 annual allocation limitation from 25% of compensation (maximum annual additions of $35,000) to 100% of compensation up to a maximum of $40,000 as increased by COLA, which for 2013 is $51,000. By adding elective deferrals, the sole proprietor can defer the maximum elective deferral amount ($17,500 for 2013) up to 100% of compensation (provided his or her income exceeds the deferral limit). Then, the sole proprietor can put away a deductible amount of up to 25% of compensation to attain the $51,000 limit. If the sole proprietor is age 50 or over, a catch-up contribution of $5,500 for 2013 may be contributed, as catch-up contributions are not included in the 415 limit. Thus, the sole proprietor can exceed the $51,000 Section 415 limit by $5,500 for a total of contribution $56,500, all tax deductible for 2013.

Following is an example of the drastic difference in the maximum contribution that a sole proprietor as sole employee who is age 50 or older could make in 2013 compared to 2001. To permit a concise illustration of the advantages, our example treats "as a given" the fact that the compensation shown was already reduced by half the self-employment taxes, etc. as is required for a sole proprietor and that the calculation of net profits into earned income has already been handled (for examples 25% to 20% or 15% to 13.043%).

PRE-EGTRRA: 2001 Tax YearPOST-EGTRRA:2013 Tax Year:
Compensation (limit $170,000)$134,000Compensation (limit $255,000)$134,000;
401(k) Deferrals$10,500
401(k) Deferrals
$17,500
Catch-up Contribution
0
Catch-up Contribution
$5,500
Deductible Compensation
$123,500
Deductible Compensation
$134,000
Maximum Deduction Limit @15%
$18,525
Maximum Deduction Limit @25%
33,500
Less 401(k) deferrals
-10,500
No Reduction for 401(k)

Available Employer Contribution
8,025
Available Employer Contribution
$51,000
Plus Catch-up
0
Plus Catch-up
5,500
Total Benefits
18,525
Total Benefits
56,500




 
                      
Difference    37,975             


Below is the original article from the year we first started our E-mail Alerts, i.e. 2003. It illustrates what a significant benefit EGTRRA introduced. It also reflects just how much the COLA increases have enhanced the benefit for the sole proprietor over the years. Note that in the example above, we built in an increase in compensation from $112,000 to $134,000 which is not unrealistic for the period between 2003 and 2013.

Have Your 401(k)ake and Eat It Too

Sole Proprietor 401(k) — The Plan of 2003

February 21, 2003
Prior to the enactment of EGTRRA, a 401(k) plan held no benefit for an owner-only business with no common-law-employees. Why? Because of elective deferrals inclusion as part of the 25% deduction limit. There was no incentive to add the complexity of elective deferrals when the maximum deduction could be achieved using a combination of a Profit Sharing and Money Purchase Plan instead. In fact, because the deductible amount was based on compensation that was “net” of deferrals, the overall deduction limit was effectively lowered!
Now that elective deferrals are no longer included as part of the 25% deduction limit, the business owner can make greater tax-deductible contributions by adding elective deferrals to a profit sharing plan design. This is especially true at income levels significantly below the $200,000 limit.

The 401(k) advantage for the sole proprietor is enhanced by EGTRRA’s increase in the 415 annual allocation limitation from 25% of compensation (maximum annual additions of $35,000) to 100% of compensation (maximum annual additions of $40,000). By adding elective deferrals, the sole proprietor can defer the maximum elective deferral amount ($12,000 for 2003) up to 100% of compensation (provided his or her income exceeds the deferral limit). Then, the sole proprietor can put away a deductible amount of up to 25% of compensation to attain the $40,000 limit. If the sole proprietor is age 50 or over, a catch-up contribution may be made because catch-up contributions are not included in the 415 limit. Thus, the sole proprietor can exceed the $40,000 limit by the amount of the catch-up contribution for a $42,000 tax deductible contribution in 2003.

The following is an example of the drastic difference in the maximum contribution that a sole proprietor as sole employee who is age 50 or older could make in 2003 compared to 2001. To permit a concise illustration of the advantages, it is a given that the compensation shown was already reduced by half the self-employment taxes as is required for a sole proprietor and that the calculation to back into earned income (i.e. 25% to 20% and 15% to 13.043%) was already done.
 
PRE-EGTRRA2001 Tax YearPOST-EGTRRA 2003 Tax Year
Compensation (limit $170,000)
$112,000
Compensation (limit $200,000)
$112,000
401(k) deferrals
10,500
401(k) deferrals
12,000
Catch-up Contribution
0
Catch-up contribution
2,000
Deductible Compensation
101,500
Deductible Compensation
$112,000
Maximum Deduction @ 15%
15,225
Maximum Deduction @ 25%
28,000
Less 401(k) deferrals
-10,500
No reduction for 401(k)

Available Employer Contribution
4,725
Available Employer Contribution
40,000
Plus Catch-up
0
Plus Catch-up
2,000
Total benefits
15,225Total Benefits
42,000




    
     
                      
Difference    26,775