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AdvisorNews - June 2013

Firms offer advice on Roth 401(k) transfers

By Andy Stonehouse
January 8, 2013 • Reprints

Almost a week after being offered as a welcome spin-off of the government's last-minute, temporary fix to the "fiscal cliff" fiasco, several firms are warning retirement advisors and plan sponsors to be careful when discussing in-plan Roth 401(k) transfers.

The new American Taxpayer Relief Act of 2012 does indeed remove the traditional stipulations which restricted making an in-plan jump from a traditional 401(k) to the pre-taxed Roth 401(k) - leaving a job, retiring, disability or reaching age 59 1/2 - but experts warn that the Act doesn't necessarily create a one-step solution for every 401(k) participant.

Most importantly, a transfer will now no longer be treated as having violated the rules of the plan types sourced for a Roth conversion - the 401(k), 403(b) and the 457(d).

Sungard/Relius's briefing on the change suggests that many of the rules applicable for in-plan Roth rollovers will apply to in-plan Roth transfers, though there will be differences as the rules cover transfers, not rollovers.

"What distinguishes the two provisions is the requirement that the amount converted to Roth contributions be distributable (hence the use of the phrase in-plan Roth rollover); In-plan Roth transfers have not such restrictions and therefore all amounts can be converted to Roth."
According to the brief, early inquiries have suggested the new Roth transfers were probably going to be more popular than rollovers, and questions were raised as to whether or not the IRS will permit safe harbor 401(k) plans to implement and allow in-plan Roth transfers this year, as existing safe harbor notice did not reflect the availability of this option.

Transamerica's Center for Retirement Studies issued a bulletin on the changes and pointed out that more than a few questions remain: Will amounts converted that are not currently eligible for distribution and rollover, continue to be subject to the distribution rules that applied pre-conversion?

While those details are nailed down, the Transamerica Center's general suggestions to plan administrators and recordkeepers is to consider establishing a tracking or recordkeeping mechanism to help differentiate between in-plan Roth conversions made from amounts not currently eligible for distribution and rollover, from those made from amounts that are eligible.

Some of the transfer rules do remain the same. Offering a Roth 401(k) transfer is up to a plan sponsor and isn't necessarily a given (or even a requirement), a technicality participants looking to take advantage of the change need to understand.

Participants who make a rollover conversion are subject to ordinary income tax on the amount covered, but are not subject to the 10 percent early distribution tax.

Conversions are not subject to mandatory or optional witholding. But as the conversion amount is subject to ordinary income tax, the participant should consider increasing their witholding or making estimated tax payments outside the plan to avoid any underpayment penalties.

As well, if the plan was subject to spousal consent requirements, spousal consent is not required for a transfer.

These are just some of the initial reactions to the Roth changes: The best advice, of course, is to consult with your plan administrator and see if there are more specific pieces of advice that can be passed along to participants who may be interested in making a transfer sooner than later.

 Third Party Fiduciaries – Myth and Reality

Jason Grantz, QPA, QKA, AIF®
Institutional Retirement Consultant
Unified Trust Company, N.A.
In previous publications, we have discussed the nuances between various types of fiduciaries that exist and have even gone over a few of the iterations available in the marketplace as services. Some of these fiduciary services are very good and others are less effective.

Over the last few years, we have seen phrases such as 3(38), 3(21), and Discretionary Investment Manager become commonly used industry jargon. On one hand, as a professional fiduciary, trustee and discretionary investment manager, that is very exciting to us. On the other hand, we see lesser services than those we provide being touted as equivalent or superior to hiring a Discretionary Trustee as a professional Named Fiduciary.

A recent trend we have encountered is the so-called “Third Party Fiduciary” service. These are embedded relationships between two different companies. One company acts in their historically normal fashion, as a non-fiduciary retirement plan service provider offering recordkeeping, investments and third party administration. Often this is an insurance company, an independent record keeper or a mutual fund provider.

The company then partners with an investment management firm, which operates as a third party to provide fiduciary advice or 3(38) Investment Manager services. These third party fiduciary services are typically very inexpensive at a few additional basis points or a low flat fee.

The well-known adage ‘You get what you pay for’ should serve as a caveat in these circumstances.

Practitioners selling these programs say “you can tack fiduciary protection onto their program”. This sounds eerily similar to the way Fiduciary Warrantees were marketed and sold in the past. Here is what we see as the most common iteration of third party fiduciary services, our view of its limitations and what you NEED to know that they do not tell you.

Case Study
Insurance Company provider markets a Third Party Investment Manager as part of the overall suite of services for a few basis points. The marketing materials state this provider will act as a 3(38) Investment Manager and be responsible for fund selection. This represents a good deal for the Insurance Company because they can sell fiduciary protection without necessarily becoming one (maybe, maybe not *). This is appealing to the Broker-Dealer because it gives their rep the ability to sell a retirement plan product without stepping into the investment advice space, enabling them to walk the fiduciary tightrope. The Insurance Company has a steeply narrowed list of investments available through their product; 400 total options - many of which are proprietary. This “small pond” is the boundaries in which the 3(38) must operate.

This is most problematic with group annuity contracts. Large providers might have less than 200 funds. The shallow option pool becomes most glaring with Target Date Funds, where they should arguably be devoting their greatest resources.

Questions should also arise on whether delegation to the 3(38) was prudent. If so, is there any documentation of a prudent process?

The Contract

Under the above fact pattern, this arrangement will be governed by the contract held between the 3(38) Investment Manager and Plan Sponsor. This contract is typically drafted with a narrow scope of services, responsibility and limitations. Upon scrutiny, these arrangements are not even necessarily 3(38) services, but rather advice marketed as discretionary authority.

Several such contracts we have reviewed state that the 3(38) will draft and provide an Investment Policy Statement for signature, then select the initial set of funds FOR APPROVAL (advice, not discretion) and finally provide ongoing reporting to the plan trustees on which they can base decisions.

Myth: The Plan Sponsor is sold on the idea that they are relieved from fiduciary risk under this arrangement because someone else is making investment decisions.
Reality: The arrangement is a disguised advice relationship better described under ERISA §3(21)(a)ii, not delegated discretion. The plan trustee still makes 100 percent of the decisions and thus is responsible for those decisions in totality.

Myth: The 3(38) is completely liable for the investments in the plan.
Reality: The contract narrowly defines the scope.
a. They are working within a “small pond” and thus are only responsible for advice specific to the pond’s inhabitants. The 3(38) is not responsible if all the investments are bad, only for advising the client on selecting the best of the bad.
b. They are only providing advice because the trustee must approve all investment decisions. That is not discretionary authority, but rather recommendations.

Myth: The plan sponsor and/or participants can sue the 3(38) if they select poor investments or make poor recommendations.
Reality: The contract will stipulate, specifically, that the 3(38) is NOT responsible for the quality of the investments available to them, the investment results of their recommendations, or any actions or behaviors of other fiduciaries to the plan. They are ONLY liable if found to be guilty of gross negligence.
For the non-lawyers reading this, Gross Negligence is different than mere negligence. In layman’s terms, negligence is failure to exercise a reasonable amount of care and can be applied to many circumstances. The word ‘Gross’ elevates the threshold to acting in a manner that is reckless or willfully disregards the safety of others. In other words, they can only be liable if they are found to be willfully harmful or intentionally harmful.

Having any advice is better than none even when dealing with limited choices. These arrangements are inexpensive and, in our opinion, fairly priced since they are not worth very much to the client. Unfortunately, they are being marketed and sold with an inflated value,
which lends a false sense of security to plan sponsors. It requires a keen advisor or client to vet the real details and limitations.
*Final thoughts: These arrangements are set up by companies that provide their own money management – typically Insurance Companies or Mutual fund companies. They do this because they want to offer a fiduciary service in their product that makes them more marketable. But they cannot and will not be acknowledged fiduciaries to the plan because they have so many conflicts of interest that they would invariably violate the Prohibited Transaction rules of ERISA for virtually every plan they serve.

This is what creates the need for the party rendering discretion or advice to be different from the product manufacturer. However, because they are wedded in these arrangements, even if no money passes directly between the two organizations, one can make an argument that both entities are acting in a fiduciary capacity and thus, have fiduciary status. Subsequently both should be subject to the prohibited transaction rules of ERISA.

They both benefit financially from the arrangement because both market and sell it and that would arguably be affecting their own compensation aka self-dealing. These arrangements will come under close scrutiny and most likely be the subject of future litigation and lawmaking. Ironically, by trying to avoid litigation and liability, they may actually be taking on additional risk and that could become a harmful arrangement for clients.

Four myths about small businesses and benefits

By Donato Monaco
January 22, 2013 • Reprints

Industry research shows there’s a big opportunity for benefits brokers and agents who work with small business owners.
I want to dispel four myths that might be keeping you from taking advantage of this opportunity.

Myth No. 1: Small business owners aren’t interested in offering benefits.
Small business owners treat their employees like family, according to The Hartford’s 2012 Small Business Success Study. Six out of 10 small business owners offer their employees some form of benefits. In fact, 6.5 percent of all small firms said they will add a benefit within the next two years, while another 8 percent “possibly” will add a benefit, according to LIMRA’s 2012 Small World Trends in the U.S. Small Business Market Report.

Myth No. 2: Small business owners plan to cut benefits in order to lower costs.
Small business owners are trying their best to protect their employees even in these challenging and uncertain economic times, according to The Hartford’s second annual study of small business owners. Only 17 percent of small business owners said they expect to reduce employee benefits.

Myth No. 3: A company that’s relatively new or “young” won’t provide benefits.
Interestingly enough, “younger” companies are more likely than older firms to add a benefit. LIMRA found 14 percent of small businesses that are one to nine years old anticipate adding benefits compared to 2 percent of firms that were more than 20 years old.

Myth No. 4: Small business owners have already discussed benefits with an agent/broker.
Think small business owners have already discussed benefits plans with an insurance professional? Think again. LIMRA research found only half of small business owners have been contacted by an agent or broker within in the past year.

Your opportunity
You can help small business owners protect their their employees from the impact of an unexpected illness or off-the-job injury.
LIMRA’s research shows there are opportunities with small businesses that are owned by women and minorities. Women own 24 percent of small businesses, and those numbers have been steadily growing. LIMRA’s small business report says this is an “under-penetrated market.” Another fast-growing segment of the marketplace is businesses owned by minorities, which are growing at twice the rate of all other businesses, according to LIMRA. Minority small business owners are also more likely to add group or retirement benefits in next two years, LIMRA’s research showed.

After you’ve decided which clients to reach out to, review their benefits packages so that you can identify any gaps in the coverage. You can also help determine what plan designs and benefit levels are most appropriate.

LIMRA’s report showed short- and long-term disability, as well as life insurance are among the top benefits that small business owners said they are thinking about adding to their benefits package.

When talking about coverage, it’s helpful to discuss what the average small business owner offers in order to attract and retain quality talent. You can also present funding options. For example, voluntary, or employee-paid benefits, can be a more affordable option for business owners to offer benefits without adding to their business expenses.

In fact, 77 percent of companies with 10 or more employees offer at least one voluntary product, according to the 2012 MarketVision™—The Employer Viewpoint after PPACA report by Eastbridge.

Hopefully with these myth-busters and action steps in mind, you can help build your business while helping your clients build theirs.

5 steps to building your advisor business in 2013

By Tim Minard
January 22, 2013 • Reprints

You’ve probably set your sales goals for 2013 by now. But what about your plan to achieve those goals? Do you know how you’ll overcome the kinds of challenges that face most financial professionals?

Consider, for example, these potential roadblocks, which are top of mind for most financial professionals I talk to around the country:
Staffing. Challenges include affording technical experts or those with expertise, having sufficient staff and hiring people who share your vision.

Pricing. Knowing how to price and transitioning to a fee-based model are common concerns.

Differentiating. What differentiates you from your competition? How do you articulate your value?

Balancing growth. How do you manage your business when it’s constantly changing? How do you find the “right” clients for your practice and manage revenue?

These are all tough challenges, but you can possibly overcome them with these five steps:

Review your service model and working relationships. You may have a goal to grow your business, but as you look at your service model, do you actually have the resources to service more plans? Take a good look at the value added services available from the providers with whom you work. Are you taking full advantage of what they can do to help you? You don’t have to have expertise in everything, after all. Find service providers who can be part of your team, offering resources to help fill in the gaps you may have in staffing. The lone ranger loses.
Define your value proposition and write it down. A good way to start is by evaluating your block of business to identify a common theme. Ask some of your clients, “How would you define what we do for you?” The responses and your own beliefs about your differentiators can help you create a unique value statement.

Create a written marketing plan for the year. As the saying goes, failing to plan is planning to fail. Yet many financial professionals don’t have a plan for getting their name out in the marketplace. Build your messaging around your value proposition. Check your firm’s social media guidelines and if possible be sure to include social media.

Feed and nurture your referral network. Start by identifying and ranking your centers of influence. Do you have a large enough network of current and potential referral sources? What could you do to improve existing relationships and add others? Develop an action plan outlining which centers of influence you want to strengthen this year and which gaps you want to fill.

Is your practice ready for retirement readiness? The industry has moved to focusing on outcomes—how well plans are preparing participants for retirement. As service providers add tools and resources, where do you fit in? The industry is focused on plan design and education to help improve the savings rate but what role do financial professionals play? Do you have a retirement income replacement rate strategy? Are you comfortable offering plan design suggestions? Do you have a participant education strategy? Do you have the tools and resources to start a retirement readiness conversation with your clients? Once again, check with those you team with, such as service providers and third party administrators. They may have the resources you need to conduct retirement program assessments and consult on plan design changes.

If you’d like to get more ideas on building and managing your business, consider joining an upcoming live Twitter conversation for financial professionals on practice management. #AdvisorTalk will be held Wednesday, January 30, at 3:00 p.m. central at

New regs leave 401(k) biz 'wide open' for advisers

Heightened scrutiny seen as a foot in the door; some drawbacks, too
By Darla Mercado
January 28, 2013 3:11 pm ET
When it comes to retirement plans, more-stringent regulations could turn out to be a blessing in disguise for financial advisers.
The Labor Department released tougher rules for fee disclosure last summer and is expected to release a re-proposed broader definition of “fiduciary” in the spring. While those two actions have plan sponsors asking advisers some tough questions — typically, about costs and standards of care — the new regs also present advisers a chance to win business, according to a recent white paper from Broadridge Financial Solutions Inc.

“The main point is that opportunity to the advisers is wide open,” said Cynthia B. Dash, chief operating officer at Matrix Financial Solutions Inc., a subsidiary of Broadridge. Matrix provides custody and trading services to banks, record keepers and registered investment advisers.
Indeed, increased focus from the Labor Department on fee disclosure and fiduciary duty has left plan sponsors searching for specialist advisers who can help them comprehend the rules and meet their obligations. More of those small-business owners are demanding that advisers act as fiduciaries, according to the report.

The Employee Retirement Income Security Act of 1974 outlines three different types of fiduciary: a 3(16) plan administrator who handles the day-to-day business of the plan, a 3(21) adviser who shares fiduciary duties with the plan sponsor, and a 3(38) investment manager who has the responsibility of selecting and monitoring the plan's investment options.

“From our standpoint, there is always an opportunity to come in, meet with the client and bring in the value-add of a conflict-free lineup and advice,” Ms. Dash said.

Such opportunities come with plenty of risks, however.

Taking on an additional fiduciary entails extra work, requiring an adviser to act in a participant's best interests, follow the plan document's terms, diversify investments and ensure that costs are reasonable, according to Broadridge's report.

The fiduciary tag also brings liabilities. A breach of those duties could require advisers to restore plan losses, return any ill-gotten gains and pay the costs related to fixing errors. Advisers seeking to be 401(k) fiduciaries also need to be bonded and should have sufficient insurance — via a rider on their errors-and-omissions policy — to cover the risk of a suit stemming from a fiduciary breach.

Further, an adviser can inadvertently assume fiduciary status due to certain actions, such as providing advice on which investments to add to a plan.

An adviser wading into 401(k) plans as a fiduciary likely will need to rethink their compensation. Fiduciaries can charge a fee for their service. As far as providing advice to participants, advisers also can receive level compensation, regardless of which investments workers choose, or they can use a computer model that's been vetted under Labor Department standards, according to the paper.

Still, there is room in the retirement space for insurance agents or registered reps who are otherwise not permitted to act as fiduciaries. Rather than provide fiduciary services — including financial advice or authority over the assets — they can work on educating plan participants about their investments and offer tools that can model investment scenarios based on employees' risk tolerance, according to the paper.

These reps can also help boost participant enrollment and aid with searches for new vendors.

Ms. Dash noted that even in that scenario, agents and brokers need to make fee transparency the prime feature of what they offer.
“If they focus on transparency and the lineup by offering educational services, then that will lead to greater retirement savings,” she said. “They'll be in the same wheelhouse as the financial adviser and not at a disadvantage.”