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AdvisorNews - August 2014

401(k) Investment Committee Topics

Employee Benefits Insider
November 19, 2013

Headline-grabbing lawsuits, large settlements, and proposed guidance offer insights as to the issues your 401(k) investment committee should be tackling. Below are four topics we recommend considering for your next 401(k) investment committee meeting agenda:

Fees are still the main topic.

Lawsuits against 401(k) plan fiduciaries continue to raise important questions to consider, such as:

  • Does the plan have sufficient assets to qualify for lower-fee share classes?
  • Should the plan consider offering funds that are not mutual funds, such as commingled funds that would have lower fees?
  • What is the appropriate number of funds to offer?
  • Should the plan offer both passive and actively-managed funds?

The recent $30 million settlement of a 401(k) fees case against International Paper illuminates some additional issues to consider. The reported changes being made to the International Paper 401(k) plan as a result of the settlement include:

  • allowing participants to transfer their assets out of company stock;
  • eliminating retail mutual funds, which tend to carry higher fees;
  • competitive bidding for recordkeeping services; and
  • inclusion of a passively managed (index) large-cap fund

Fund selection is important too.

Fund selection is more complex than a cost analysis. Fund management and stability matter as well. The number of funds matters, too. Too few funds means participants do not have sufficient opportunities to invest in a variety of asset classes. Too many funds means that participants might be overwhelmed or confused. Also, multiple funds in an asset class might result in the Plan’s assets being so dispersed that lower-fee share classes are not available. This “dispersal” claim is a new twist on the many fee-based claims brought against 401(k) plan fiduciaries. For example, one recent complaint notes that the plan offered 36 large cap equity funds, “a bewildering array of overlapping and redundant investment choices.”

Reconsider the plan’s “safe” option.

Of course, no investments are completely risk-free. 401(k) plans often include a money market or stable value fund as the most conservative option. Recent events raise questions about both.

Money Market Funds
Money market funds are under pressure now for two reasons. First, the Securities & Exchange Commission has proposed new regulations related to money market funds that might make them more cumbersome for plans to offer. The SEC regulations would require most non-governmental money market funds to institute a “floating” net asset value (NAV), rounded to the fourth decimal place or to impose a 2% liquidity fee or a temporary suspension of redemptions (a “gate”) if the money market fund falls below 15% liquidity. The SEC’s proposal has generated concern that non-governmental money market funds may become less workable as 401(k) plan options. The obvious alternative – offer a governmental money market fund instead – may be less attractive in the current political climate. This is the second reason money market funds are under pressure. In mid-October, with the threat of default looming, some money market fund managers (such as Fidelity and JP Morgan) sold their short-term government bonds. The limited increase in the federal debt ceiling in October may prompt similar actions again in only a few months.

Stable Value Funds

Stable value funds have been under pressure since the economic downturn of 2008. Many insurers have exited, so there are fewer wrap providers and fewer stable value funds overall. And the stable value funds that remain have gotten more expensive. Still, they seem to provide returns that are modest but greater than zero, in contrast with money market funds, which have provided little if any return over the past few years.

Focus on Target Retirement Date funds.

Target Retirement Date funds (TRDs) continue to increase in popularity as a 401(k) plan investment option. TRDs offer participants a “one-stop shopping” approach to diversification and asset allocation. The asset allocation rebalances over time, with more fixed income and less equity as the target retirement date gets closer. This is known as the glide path. Some fund families offer a static allocation at the target retirement date, and some fund families continue the glide path past the target retirement date. These aspects of the TRDs may change over time; for example, Fidelity recently announced that it would increase the equity exposure in its TRD fund family. Some questions to consider regarding TRDs:

  • Does the asset class exposure and glide path make sense for the Plan population? This is important to ask at regular intervals, because a TRD fund family that made sense 5 years ago might not be the best fit today due to changes in plan participant demographics, or the TRD strategy itself may have changed.
  • How are the TRDs being monitored and evaluated? The benchmark and peer group analysis for TRDs remains challenging. Most TRDs have their own custom benchmarks, and the peer group comparison is difficult because TRDS have such distinct strategies. Your committee’s evaluation of TRD performance should focus not only on overall fund performance, but also the performance of the TRD’s individual component funds. One criticism of TRDs is the potential that fund companies could use them to package together underperforming funds that would otherwise have difficulty attracting assets. Recent informal guidance from the DOL encourages plan fiduciaries to consider the growing number of TRD vendors that offer custom or non-proprietary TRDs that allow plans flexibility in selecting component funds.
  • Does the disclosure regarding the TRDs provide participants with clear, useful information? Disclosures include the annual participant fee disclosure notice and the annual QDIA notice (assuming the TRDs constitute the plan’s QDIA). Proposed DOL regulations on TRDs include some guidance on the information that should be included in these participant disclosures, including language stating that investments in TRDs may lose money both before and after the target retirement date is reached.

Survey Shows Large Opportunity in Small Plan 401k Market

NEW YORK, NY, July 8, 2013 -- Financial professionals looking to expand their business see a large opportunity in the micro- to small-plan retirement market, according to a series of surveys conducted at Guardian Retirement Solutions™ 401k G2 Summits: Gain and Grow. The national series of interactive educational events for financial professionals was attended by nearly 270 financial professionals in eight major markets across the country over the past 60 days.

At the conclusion of each of the eight G2 Summits, 100% of respondents said they were likely to take on more retirement business after learning how the right support partners can help them effectively manage this business. Each of the events featured presentations from investment management firms, recordkeepers, DCIOs, TPAs, fiduciary support providers and financial behavioral experts.

Nearly 65% of survey participants believe there is a large opportunity in the micro-small plan 401k market. More than 50 million Americans now participate in employer-sponsored 401k plans with assets totaling roughly $3 trillion. Ninety percent of all 401k plans are small businesses with less than $10 million in total plan assets and 80% of all 401k plans are in the micro market, holding less than $2.5 million in assets.*

Over half of survey respondents at the G2 Summits (51%) view time management as a key challenge to doing business in the retirement plan market followed by resource management (39%). To lesser degrees, fiduciary responsibilities (27%) and government regulations (23%) were cited as challenges.

"The message received from the G2 Summits is clear -- financial professionals don't have to go it alone in the micro- to small-plan market. With 401k assets expected to reach $4 trillion by 2015* the potential for financial professionals in this market is huge. Our post-event surveys revealed unanimous agreement among our financial professional audience that with the support of the right service providers, they can seize this opportunity to grow their business," said Steve Davis, National Sales Manager, Guardian Retirement Solutions™.
For those financial professionals unable to attend the G2 Summits in person, Guardian Retirement Solutions™ and Pension Resource Institute have issued a new white paper titled Leveraging Service Providers: Making 401k Business Scalable and Profitable. The white paper provides actionable strategies for successfully navigating time and resource management challenges and outlines many of the techniques discussed by the retirement experts at the event.

A copy of the white paper is available by contacting the Guardian Retirement Solutions™ sales team at 866.390.7268 (option #2) or at This email address is being protected from spambots. You need JavaScript enabled to view it..

5 Critical Components of a Plan Diagnostic Test

Conducting a period plan diagnostic test is often seen as an easy way for the typical 401k fiduciary to reduce fiduciary liability. An ERISA plan trustee or fiduciary will usually hire an independent fiduciary consultant to conduct a comprehensive plan fiduciary diagnostic test. A plan fiduciary diagnostic test, to effectively reduce fiduciary liability, must thoroughly examine each of these five critical components of fiduciary liability:

#1) State & Federal Regulatory Compliance – 401k plans fall under the Employee Retirement Income Security Act (ERISA) as maintained by United States Department of Labor (DOL). In addition, certain state may add further regulatory burdens (or opportunities) to the plan for the fiduciary to meet. It’s good to obtain a comprehensive regulatory compliance checklist from your plan’s employee benefits attorney prior to conducting your plan fiduciary diagnostic test.

#2) Service Vendor Fees & Conflicts of Interest
– State and federal fiduciary laws generally state the fiduciary must act solely for the benefit of beneficiaries. The fiduciary, therefore, has an obligation to seek the most favorable fee arrangements. In addition, the fiduciary has the duty to insure personal and vendor conflicts of interest do not interfere with what’s best for beneficiaries. Unfortunately, many vendor conflicts of interest lay hidden in complex packages. In general, the DOL expects the 401k fiduciary to: Review the service providers’ performance; Read any reports they provide; Check actual fees charged; Ask about policies and practices, such as trading, investment turnover, and proxy voting; and, Follow up on participant complaints.

#3) Integrated Investment Policy Statement – While the DOL does not require a plan to have a written investment policy statement, the DOL does state “The maintenance by an employee benefit plan of a statement of investment policy designed to further the purposes of the plan and its funding policy is consistent with the fiduciary obligations set forth in ERISA section 404(a)(1)(A) and (B).” Once plan trustees adopt an investment policy statement, it becomes a legal guideline for the plan. Therefore, it is critical the investment policy statement be drafted in a manner that integrates it fully into the existing documentation of the plan. Too often, the plan adopts an off-the-shelf investment policy statement provided by a vendor. Ironically, adopting such investment policy statements may actually increase fiduciary liability.

#4) Investment Due Diligence – Even if a 401k plan satisfies the diversification requirements of 404(c), the DOL still hold the plan fiduciary responsible for monitoring and selecting those investments. If one exists, the investment policy statement provides a clear roadmap for the 401k fiduciary to follow regarding the selection and monitoring of investments. In addition, regular due diligence reports must be consistent with this roadmap. With a clearly written roadmap, the 401k fiduciary can reduce fiduciary liability. Without a clearly written roadmap, it may be difficult for the ERISA fiduciary to successfully defend investment due diligence actions during a DOL audit.

#5) Trustee & Employee Education – Section 404(c) does not require employers to offer employee education. According to the DOL, if an employer or vendor merely provides general financial and investment education, then it is not acting as a fiduciary. On the other hand, if the employer hires a professional investment adviser to provide individual advice to employees, both the selection of that vendor and the vendor itself takes on fiduciary liability. This vendor selection falls under the same issues as #2 above, especially the conflicts of issues concerns.
This short article can come nowhere near the comprehensiveness required for an effective plan fiduciary diagnostic test. This kind of test goes far beyond the independent audit requirements of larger plans. The 401k fiduciary can delegate this testing to a competent independent fiduciary consultant.

Am I an ERISA/401k Fiduciary?

You may be an ERISA/401k fiduciary and not know it. You don’t have to be a named trustee or even a high level executive to be deemed a fiduciary. What’s more, you might think merely hiring an outside service provider might remove that “fiduciary" and its inherent liability. Unfortunately, the U.S. Department of Labor (DOL) says this just ain’t so.

According to the DOL in its on-line fiduciary education resource (elaws – ERISA Fiduciary Advisor – Introduction), “Fiduciaries are those individuals and/or entities who manage an employee benefit plan and its assets. Employers often hire outside professionals, sometimes called third-party service providers, or use an internal administrative committee or human resources department to manage some or all of a plan’s day-to-day operations. Employers who have hired outside professionals or who use internal committees/resources still have fiduciary responsibilities.”

Furthermore, ERISA Section 3(21)(A) states:

Except as otherwise provided in subparagraph (B), a person is a fiduciary with respect to a plan to the extent

(i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets,

(ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or

(iii) he has any discretionary authority or discretionary responsibility in the administration of such plan. Such term includes any person designated under section 1105 (c)(1)(B) of this title.

Subparagraph (B) merely states a mutual fund (and its associated parties) does not become a fiduciary just because a plan invests in it.

So, while a plan may have a named fiduciary or trustee, other employees, officers and directors may also take on the capacity of a fiduciary. Any individual, irrespective of title, becomes an ERISA/401k fiduciary immediately upon exercising any type of discretion or control over plan administration or plan assets. This includes the so-called “chain of command” (see the March 26, 2009 MarketWatch article “Who’s minding your retirement plan?” for more on this term), which may extend the definition of fiduciary all the way up to the board of directors.

So, the first step to reducing your personal fiduciary liability it to fully understand under what conditions you may be acting as a fiduciary.

46% of financial planners have no retirement plan

When it comes to taking care of their own finances, it turns out that financial advisers aren’t much better than their clients.

Almost half (46%) of all the nearly 2,400 planners who participated in a new Financial Planning Association study this year say they have no retirement plan. Another half say they have not written a business plan for themselves, while 75% have no succession plan for their firm.

The findings are part of the inaugural study of the FPA Research and Practice Institute, which seeks to provide deep, tactical findings for practitioners, says Julie Littlechild, founder of Advisor Impact, the New York-based research firm that conducted the study in partnership with the FPA.

Finding the gaps
“We just asked a very broad range of questions of advisers,” Littlechild says. “We dug in to ask, ‘Where are the gaps?’ [The answers] will form the basis of some more quarterly studies on an ongoing basis” from the institute.

Even among those advisers age 65 or older, only 41% said they have a succession plan, the survey found.

Lauren Schadle, the FPA’s executive director and chief executive, suggested that the shortfalls might be due simply to a lack of time. “In any business, your chief priority is to serve your clients and customers. Unfortunately, that often means sacrificing your own well-being,” she said in a statement. “What is encouraging is that our study revealed that younger advisers (those under age 40) are more likely to have a written business plan (61%) than older advisers.” Larger firms are also more likely to have a plan in place than their smaller peers, the study found.

Branding shift
The survey also found more planners shifting toward calling themselves wealth managers. For the purposes of this study, the FPA defined wealth managers as those planners who specialize in comprehensive wealth management and transfer issues, including stock-option planning, executive compensation, complex trust and estate planning and charitable giving. The definition is the same one used in Cerulli Associates studies, according to Littlechild.

The study found that:

  • 76% of money managers indicated they plan to change their practices, with 44% of those saying they will transition to wealth managers.
  • 72% of investment planners indicated they will change their practices, with 46% planning to become wealth managers.
  • 53% of financial planners indicate they will change their practices, with 62% planning to become wealth managers.

Participants in the study included financial advisers, junior-level advisers, support staff and non-adviser management, according to the FPA.

Business challenges

While advisers want to expand by identifying prospects who are good candidates for their services, the FPA says, the study found advisers aren’t even defining who they serve. Only 25% of planners have a formal definition of their ideal client, and only 38% of those say that three-quarters of current clients fit that definition. Fewer than half (43%), meanwhile, had set an asset minimum.

It's imperative for advisers to plan more broadly for themselves and for their businesses, Littlechild says, asking questions like "What do I want for my life? What size of business do I need? ... What is my exit plan?"

Those answers can shape a planner's business, she says: "Your business goals drive your business model. Those should help define the ideal client."