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AdvisorNews - February, 2012

How to become a retirement plan governance resource

October 24, 2011 By Tim Minard Tags


Managing a retirement plan is a big job, and it's not without risks. That's why good management---or governance---of a retirement plan is so critical.

Governance goes beyond fiduciary duties and includes everything involved in the administration and management of the retirement plan. Basically, governance establishes the rules of the road for plan decisions. It's about making decisions---for all aspects of the plan throughout its life cycle---the right way.

While governance isn't a new concept, it rarely gets as much attention as fiduciary responsibility. That gives you a great opportunity to add more value for your clients and set yourself apart from other financial professionals.

A governance evaluation can help you demonstrate added value to your clients by:

  • Providing a greater depth of services
  • Positioning yourself as a trusted resource and strengthening relationships with your clients
  • Helping clients with their fiduciary and non-fiduciary duties
  • Helping clients make better decisions to help their participants save more

How to conduct a governance evaluation

Although there isn't a single, one-size-fits-all approach to good governance, there are steps you can take to help each client through the evaluation process.

Start by educating clients on the importance of good governance. For those who feel intimidated by the thought of documenting a process, explain that litigation is brought about by outcome---but is defended by process. And it's a lot harder for plan sponsors to defend the fact that they have a prudent process when that process isn't even documented.

Another advantage of good governance is simplified decision-making. Rather than discussing the same issues repeatedly with no decision-making process in place, good governance makes it easier to make effective decisions.

Governance can also help with the issue of accidental fiduciaries---employees who inadvertently overstep the boundaries of their roles. Good governance processes help reduce risk by putting proper processes in place for both fiduciaries and non-fiduciaries.

Once the client is on board with the need for a governance evaluation, start walking them through the process. A retirement plan governance white paper from The Principal, Retirement Plan Governance, What is it and why should you care?, will help.

The report offers four key questions to help plan sponsors define and strengthen retirement plan governance:

  1. Are the right people involved?
  2. Do these people know their roles and responsibilities?
  3. Are there formal processes and procedures in place for carrying out assigned tasks?
  4. Is there a process in place for monitoring the individuals who are performing plan-related functions?

Other governance resources available from The Principal are Good Governance: A Guide for Retirement Plan Sponsors and Starting the Conversation: The Financial Professional's Good Governance Guide.

Minimize your risks

Throughout any governance evaluation, keep these tips in mind to minimize your risks:

  • Ask questions, but don't advise or make suggestions as to what or how governance processes should be structured.
  • Gather facts. Don't make assumptions about what you think you know. Verify everything with the client.
  • Remember that the governance structure is flexible. Let your client there's no one right way to do something.
  • Play the project manager role by pulling all the pieces together.
  • Manage all the relationships involved in the process.
  • Always suggest the client bring in their legal counsel to assist with the process.
  • Follow up once the process is done to make sure they're doing what they're supposed to do.

Be among the first in the industry

Good governance is an often-overlooked issue---and one that few financial professionals are prepared to discuss. By educating yourself on this critically important process, you can demonstrate the depth of your expertise and carve out a potentially lucrative niche.

Boosting profitability in the small retirement plan market

Today, the needs of small business owners, workers and the American economy are converging to create a tremendous opportunity in the small plan marketplace. Small defined contribution plans are expected to experience significant growth

through 2015,1 as small business owners seek ways to attract and retain talent, rebuild and diversify personal assets, help employees secure retirement peace of mind and save for their own retirement as well. This creates an opportunity for financial professionals who can sell and service small retirement plans efficiently. Each small plan sold generates a steady stream of revenue, creates a wealth of cross-selling opportunities and offers access to highly-qualified prospects, including business owners and executives. This white paper will help readers understand:

  • Why financial professionals should pursue the small business retirement plan market
  • How the current environment amplifies the opportunity
  • How to work efficiently by employing the best practices of successful professionals in the field



DOL issues final rules on 401(k) investment advice

By Lee Barney

October 25, 2011

The Department of Labor on Monday issued final rules on investment advice in 401(k) plans, largely in line with its initial definition of advice.

Defined contribution plans may offer advice from a third-party as long as that entity receives level fees regardless of their recommendations, or through a certified computer model. In both cases, the advice must use generally accepted investment theories based on historical risks and performance of different asset classes over defined periods of time.

Also, in both methods, level fees and computer models, the entity providing advice must ask investors about and take into account their: age, life expectancy, retirement age, risk tolerance and investment preferences, current investments, other assets and sources of income. Additionally, the advice may take further factors into account, such as a participant's contribution rates and liquidity needs.

DOL reiterated that sponsors will continue to have a fiduciary duty in the selection and monitoring of an investment advisor, but are not liable for the advice provided to participants. DOL also said that IRA rollover recommendations do not constitute investment advice.

The agency estimates that before passage of the 2006 Pension Protection Act --- which set additional parameters for 401(k) plans, including advice --- only 40% of plans offered investment advice. Today, it estimates that between 63% and 69% of plans offer advice. It is the Department's hope that this additional guidance will result in more prevalent "quality advice" that will help investors properly diversify and more frequently rebalance their portfolios --- resulting in better preparation for retirement.

"Given the rise in participation in 401(k)-type plans and IRAs, the retirement security of millions of America's workers increasingly depends on their investment decisions," said DOL's Employee Benefits Security Administration Assistant Secretary Phyllis C. Borzi. "This rule will make high-quality fiduciary investment advice more accessible, while providing important safeguards to minimize potential conflicts of interest."

The rules are set to take effect in 60 days and are DOL's second attempt to clarify the definition of investment advice. DOL first issued the definition in January 2009, only to withdraw it that following November over concerns of self-dealing by investment or financial advisers. In March 2010, DOL issued another set of updated rules on investment advice and exemptions, which received 74 comment letters.

The new regulations come on the heels of last week's IRS announcement that the employee contribution limit for defined contribution retirement plans will be $17,000 for tax year 2012. That's $500 higher than the $16,500 limit this year, and marks the first increase since 2009.


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10 Questions the DOL Wants 401k Plan Sponsors to Ask Their Investment Consultant

By Christopher Carosa, CTFA | November 8, 2011

Are too many 401k investment consultants shrouding their true face? The Department of Labor (DOL) offers many tools to 401k Plan Sponsors. Their Fact Sheet appears to be very useful for the typical plan fiduciary. Unfortunately it appears to have a little problem. According to its opening paragraph, the material is based on a May 2005 report published by the Securities and Exchange Commission (SEC). This SEC report uncovered a major concern every 401k plan sponsor must address when it concluded: "the business alliances among pension consultants and money managers can give rise to serious potential conflicts of interest under the Advisers Act that need to be monitored and disclosed to plan fiduciaries."

As a result of this SEC revelation, the DOL put together a list of 10 questions to help the plan fiduciary determine if a conflict-of-interest may exist. We'll review these questions here and add any additional update that might have changed the nature and importance in the six-and-a-half years since the DOL first published them.

Are you registered with the SEC or a state securities regulator as an investment adviser? If so, have you provided me with all the disclosures required under those laws (including Part II of Form ADV)?
This is now a moving target, this has changed dramatically in the last year alone. While you can go to the SEC site to find disclosures about Registered Investment Advisers (RIAs), those permitted to register with the SEC have been reduced. Currently, investment advisers with 50 million in assets can register with the SEC, but next year that asset threshold increases to 100 million. All those beneath that target will have to register at the state level. On the up side, today, you can look up both Part I and Part 2 of ADV on the SEC site.

Do you or a related company have relationships with money managers that you recommend, consider for recommendation, or otherwise mention to the plan? If so, describe those relationships.
This is the key question and it gets more problematic starting next year with mandated fee disclosures. A plan sponsor will have to know, understand and potentially share this fee data with participants. Some bundled providers do not willingly share this information without being asked.

Do you or a related company receive any payments from money managers you recommend, consider for recommendation, or otherwise mention to the plan for our consideration? If so, what is the extent of these payments in relation to your other income (revenue)?
This question defines conflict-of-interests. While it's not clear what impact the DOL's new fiduciary rule (expecting in the first quarter of 2012) will have on the current exemption of certain conflicts-of-interest, we do know the new Advice Rule seeks to eliminate this specific conflict of interest. Let's repeat this since it's potentially confusing: Right now, plan consultants are allowed to engage in certain conflicts-of-interest while participant advisers cannot.

Do you have any policies or procedures to address conflicts of interest or to prevent these payments or relationships from being a factor when you provide advice to your clients?
This is a disclosure question. 401k plan sponsors will need to first answer this question themselves: is it appropriate to allow a conflict-of-interest just because a vendor admits to having one?

If you allow plans to pay your consulting fees using the plan's brokerage commissions, do you monitor the amount of commissions paid and alert plans when consulting fees have been paid in full? If not, how can a plan make sure it does not over-pay its consulting fees?
This question has faded to near-irrelevancy as soft-dollar commissions have been rigorously regulated (if not eliminated) over the past several years. In addition, these hidden fees will be exposed with the new fee disclosure mandate.

If you allow plans to pay your consulting fees using the plan's brokerage commissions, what steps do you take to ensure that the plan receives best execution for its securities trades?
Again, this question comes from an era with 401k plans where managed like traditional profit sharing and pension plans and in an era when soft dollars were considered an acceptable business practice. Today, most 401k plans use mutual funds, obviating the need to ask this question.

Do you have any arrangements with broker-dealers under which you or a related company will benefit if money managers place trades for their clients with such broker-dealers?
Although SEC regulations make it more difficult for mutual funds to engage in soft dollar practices, some funds may still employ this archaic method. It therefore makes sense to ask this question. By the way, this is a standard question the SEC poses to an investment adviser during an SEC audit. The SEC expects the adviser to always say brokers are chose for best execution (see the above question).

If you are hired, will you acknowledge in writing that you have a fiduciary obligation as an investment adviser to the plan while providing the consulting services we are seeking?
Don't ask, demand. While the DOL still permits a fiduciary to engage in certain prohibited transactions, if it ever changes its tune, the 401k plan sponsor will want to have the investment adviser follow suit.

Do you consider yourself a fiduciary under ERISA with respect to the recommendations you provide the plan?
Again, the answer should be "yes." Otherwise, move on to the next candidate. Why is this question so critical? As stated above, a fiduciary has a higher standard - a duty to the client - that currently requires, at a bare minimum, at least disclosure of any conflicts of interest.

What percentage of your plan clients utilize money managers, investment funds, brokerage services or other service providers from whom you receive fees?
In the end, the consultant can answer all the right answers above, but if most of their revenues derive from non-fiduciary products, that might tell the 401k plan sponsor much more than any other answer.



7 areas of 'relief' for advisors in DOL's reproposed fiduciary rule

By Melanie Waddell, AdvisorOne

November 22, 2011

Fred Reish, well-known among advisors as the ERISA guru, recently predicted areas of "relief" that the Department of Labor's Employee Benefits Security Administration will provide when it reproposes its rule amending the definition of fiduciary early next year.

Phyllis Borzi, assistant secretary for EBSA, announced Oct. 25 that the administration would repropose its controversial rule amending the definition of fiduciary under ERISA "shortly after the first of the year."

Reish, partner and chair of the Financial Services ERISA Team at Drinker Biddle & Reath in Los Angeles, says the decision to repropose the rule is a "victory for the private sector and particularly for insurance companies and broker-dealers who objected to a number of provisions in the initial proposal." However, he says, "the victory may be limited" as DOL will likely provide relief "on certain issues, but not on others."

As Borzi noted on Oct. 25, the basic structure of the proposal will remain in place. As Reish notes, while "a broad revision of the regulation" is unlikely, "there will be 'adjustments' to deal with specific issues."

While this news "may be of welcome relief to the financial services industry," Reish says, "it will probably not be helpful to those who are concerned about fiduciary status for ongoing services and recommendations to qualified retirement plans, such as 401(k) plans."

In those cases, Reish continues, "specific recommendations are made and the services are ongoing. As a result, it is likely that the changes in the re-proposal will continue to be expansive in terms of broadening the definition of fiduciary advice---particularly for small- and mid-sized plans."

Following are Reish's seven "best guesses" on the areas in which DOL will provide relief:

  1. Individual retirement accounts: It is likely the DOL will extend the exemptions of Prohibited Transaction Class Exemption 86-128 to virtually all advice given to the owners of IRAs. In other words, it is likely that both broker-dealers and RIAs will be able to give individualized advice to IRA owners and receive compensation that is not level, that is, the compensation may vary based on the recommendations, which would be more consistent with a broker-dealer business model than with an RIA business model. It will be interesting to see if the DOL imposes any limitations on that exemption, for example, disclosures concerning any variable compensation.
  2. Commissions: Many of the people who criticized the proposed regulation asserted that it precluded commissions as compensation. That is because, where advice is given and compensation is variable, it can result in prohibited transactions. On the other hand, level compensation, regardless of whether it is a fee or a commission, would not result in a prohibited transaction. It seems likely that, in response to the criticism, the DOL will clarify that, commissions are not per se precluded as a form of compensation for fiduciary advice, so long as they are level.
  3. Insurance: In certain cases (for example, insurance agents), the agent represents the provider (i.e., the insurance company) and not the customer (e.g., the plan). The proposed regulation created an exemption for those cases, so long as, among other things, the agent made it clear to the customer that the agent's interests were "adverse" to the customer's. Needless to say, there were strong objections to the use of the word "adverse," with the argument being that the agent could be looking out for the best interests of the customer and at the same time recommending a product offered by an affiliate. It is likely that the DOL will offer a "softer" version of that exemption that will be more acceptable to the private sector and more consistent with common understandings.
  4. Appraisals: The proposed regulations would have classified appraisers as fiduciaries in a variety of cases. It is likely that the range of cases will be limited, because of objections to the general nature of the rule---and since the primary focus of the change was for appraisers of closely held stock in ESOPs. It is also possible that there will be some clarification of the responsibilities of the appraiser. For example, the preamble or the regulation should specify that the appraiser is a fiduciary for purposes of determining the most accurate valuation and not for the purposes of determining a valuation most favorable to the participants.
  5. Commercial transactions: A number of commercial transactions, such as swaps, could have been covered by the literal wording of the proposed regulation. The DOL has stated that it will clarify those issues and permit the continuation of transactions that are clearly commercial in nature and that are arm's-length.
  6. Exemptions and opinions: The DOL has also stated that the reproposed guidance will provide for the continuation of existing exemptions, advisory opinions and other guidance related to fiduciary transactions.
  7. "Individualized" advice: Under the proposed regulation, in a number of circumstances the provision of investment recommendations, whether individualized or not, would have resulted in fiduciary status. The DOL has suggested that it will limit the regulation to circumstances in which individualized advice is provided and is directed to specific parties.



Small business retirement plan market largely untapped

By Paula Aven Gladych

December 2, 2011

With only 20 percent of small businesses offering retirement plans, financial advisors are missing out on a lucrative opportunity.

"Any universe where you have 80 percent that don't have a plan and 20 percent that do, I believe that 80 percent is a great target market and a great opportunity. Don't ignore it," said Tom Donnelly, regional vice president of sales at The Principal Financial Group. "A well engaged, thoughtful, sincere advisor will dominate that other 20 percent. If an advisor knows what he wants, knows what he is looking for, knows what he is willing to offer, there is a ton of opportunity to talk to and the hit ratio is pretty darn good."

He recommends advisors go after the businesses that don't have plans and help build them. He also believes good financial advisors can "improve the plans of the 20 percent that have them."

Once you get your foot in the door with a retirement plan or 401(k), the next step is to cross-sell other benefits.

"The business owner, for all his personal wealth, also is a plan sponsor, probably a plan sponsor of health and welfare plans and individual participant needs. A 401(k) gives advisors access to sit down and visit and be a resource to participants," Donnelly said. They also can be a 'resource for a participant's family in consolidation of retirement assets and wealth.'"

The Principal recently released a report called "Boosting profitability in the small retirement plan market" to help its client advisors take advantage of the small retirement plan market. According to the report, small defined contribution plans are expected to experience significant growth through 2015, as small business owners seek ways to attract and retain talent, rebuild and diversify personal assets and help employees save for retirement.

"This creates an opportunity for financial professionals who can sell and service small retirement plans efficiently. Each small plan sold generates a steady stream of revenue, creates a wealth of cross-selling opportunities and offers access to highly-qualified prospects, including business owners and executives," Donnelly said.

According to the U.S. Small Business Administration, there are about 28 million small businesses in the United States. These companies represent 99.7 percent of all businesses in the U.S., employ more than one-half of private sector workers, comprise about 44 percent of the total private-sector payroll and were the primary drivers behind new job growth in the U.S. in 2010, adding almost 500,000 net new jobs.

Only 28 percent of companies with 10 to 49 employees offer a 401(k) plan, compared to 79 percent of companies with 200 to 499 employees, according to The Principal report. These companies offer 401(k)s, profit sharing plans, Savings Incentive Match Plan for Employees of Small Employers (SIMPLEs) and Simplified Employee Pension plans or SEPs.

According to The Principal Financial Group report, "Business Owner Market Study: A Balancing Act---Priorities vs. Plans," 10 percent of small business owners plan to add a retirement plan in the next 12 months and over 48,000 small retirement plans are expected to change service providers.

"Since the majority of small business owners rely on financial professionals and consultants for assistance with retirement plans, those who understand and efficiently serve this market will be well positioned to reap benefits," the report said.

Only 10 percent of the more than 330,000 financial professionals in the U.S. focus their businesses on retirement plans and "research shows that the number one reason a plan sponsor selects a service provider is financial professional recommendation, showing the important role financial professionals play with business owners," according to the "Boosting profitability" report.

There is a huge divide between perception and reality in the small retirement plan market. The perception is that most small businesses already have retirement plans, when the reality is that 72 percent of employees working for small businesses do not have access to a retirement plan. Another perception is that employees don't contribute to plans, when 86 percent of employees with access to a plan do contribute, the report said.

"A financial professional who knows how to work with plan service providers and third party administrators to navigate volatile markets and a shifting regulatory environment has the potential to generate a significant stream of revenue from retirement plan assets," The Principal found. It estimated that a typical small business retirement plan could generate $1,500 to $16,000 in revenue a year.

Financial professionals can grow that revenue by cross-selling other services, like supplemental retirement plans, individual financial services, business protection plans and employee benefits plans, like wellness programs and group health, life, disability, dental and vision insurance.

Companies with fewer than 100 employees usually don't have robust HR departments or a general counsel, so most of the decisions fall on the shoulders of the small business owners, Donnelly said. "They need a trusted advisor, so they can outsource, depend or rely on that trusted advisor for everything….Retirement is the universal entrée into small business."