Friday, November 2, 2012
Impact of Fee Disclosure Regulation on 403(b) Sponsors and Participants - Plan Sponsor Council of America (PSCA)
The Plan Sponsor Council of America (PSCA) completed a national survey of 403(b) plan sponsors in October, 2012 on the impact of recent fee disclosure regulations on plan sponsors and participants. The PSCA (www.PSCA.org) is a national organization whose members include companies and non-profit organizations.
Plan Sponsors can view the results of the survey here
Wednesday, July 18, 2012
Plans Sponsored by Governments, Churches and Other Tax Exempt Organizations
Presented at the Western Pension and Benefits Council Conference
in Seattle, WA
Providing employees of governments, churches and
other tax exempt organizations the best opportunity to save for retirement.
This workshop will cover: what qualifies as a governmental plan, church plan,
or plan sponsored by a tax exempt organization, respectively; what types of
qualified and non-qualified plans can such organizations offer; eligible
investments; how such plans differ from qualified plans maintained by
for-profit employers; what are the unique challenges of such plans and
practical issues involved in maintaining and administering such plans.
Presented by:
Scott Ann Selzer
Polycomp Administrative Services
Mary Ellen Mullen, CFA
Principal
Bridgebay Consulting, LLC
Scott E. Galbreath
Chang Ruthenburg & Long PC
Friday, April 13, 2012
Simplify the Defined Contribution Fund Menu
Investment Consultant
Bridgebay Financial, Inc.
Fiduciary committees of most 401(k) and 403(b)
plans agonize over the selection and monitoring of the best in class investment
options for their retirement plans yet ultimately the investment decision to
incorporate those funds in an appropriate asset allocation is in the hands of
the individual participant. In many
cases participants have neither the knowledge nor skill to build optimized,
diversified portfolios. Plan sponsors have
wrestled with the problem of providing enough investment options to allow
participants to achieve this goal, yet the sheer number of investments often
times overwhelms and confuses plan participants. Striking the proper balance between too many
and too few choices while at the same time walking the tight rope of fiduciary
liability can be vexing for plan sponsors.
In many cases offering too many funds is just as bad as offering too
few.
Growth of the Fund Menu
Proper diversification is the goal of any optimal
portfolio, particularly for retirement assets which must endure the volatility
of a long investment time horizon. With
that in mind, plan sponsors have diligently added numerous market-cap and style
specific equity funds causing the average number of funds in an investment
line-up to rise dramatically. Today, the
average 401(k) plan has more than 18 different investment options. In the case of 403(b) plans, the average is
more than 30 investment options. Many
participants may invest in one or two funds at most and therefore miss out on
the benefits of diversification afforded them by the full fund menu. Despite having access to a diverse fund menu,
many participants still have concentration risk.
When a participant is overwhelmed with investment
options they may react in several different yet equally inefficient ways. They may invest all of their retirement
savings in a single fund and be exposed to concentration risk. A participant may simply evenly distribute
their savings among all of the funds, resulting in overlap and inadvertently
large exposures to volatile asset classes like emerging markets and small cap
equity. This confusion results in either
under-diversified or over-diversified portfolios, neither of which are suitable
to achieving the participant's retirement goals.
Allocation Funds
Many plan sponsors have sought to help participants
invest in optimized portfolios by adding target-date or risk-based allocation
funds. While good in theory, a poor
communication and education program has often caused participants to
fundamentally misunderstand how these types of vehicles are intended to
work. This is evidenced by those
participants who contribute money to multiple target-date funds, thus negating
the effect of the glide path and resulting in duplication of sectors and
holdings. Most target-date funds are
engineered to be the sole and primary retirement savings vehicle and are asset
allocated with that assumption in mind.
An ill-informed participant who invests in several target-date funds
alters their individual risk profile in ways they may not expect or intend.
Over the years, participant behavioral research has
shown that the vast majority of participants do not have the time,
understanding or interest in learning proper investment techniques, and nor
should we expect them to become experts.
Virtues of Simplicity
The best solution to the information overload
experienced by many participants lies in the hands of the plan sponsor. Through a methodical and comprehensive
selection process, the plan sponsor should develop a fund line-up that includes
an array of well diversified investment options managed by investment managers
that are best-in-breed among their peers.
Many sponsors have found it useful to segment the plan investments based
on the type of investor. While all
options are available to all participants, this segmentation creates a
framework for the participants based on their level of sophistication and
involvement.
Typically, asset allocation funds such as
target-date or target-risk funds are intended for participants who want a one-stop
solution. These structures offer
diversification across multiple asset classes and are managed by professional
asset managers. Target-date funds are
professionally allocated and slowly reduce exposures to volatile asset classes
in favor of less volatile asset classes as the participant approaches
retirement age. Over time, the intended
risk profile gradually declines as the fund approaches the target retirement
date.
The second group of investments represents the core
funds and is intended for the do-it-yourself investors who want more control
over their individual risk profile. The core funds are broadly diversified
funds investing in specific and defined market capitalizations and styles. Plan sponsors can employ multi-manager or
diversified single manager strategies to provide exposure to a wide range of
asset classes including domestic equity, global equity and fixed-income. Communicating the intended investment strategies
and goals of each fund to participants is the plan sponsor's primary concern,
in order to ensure that participants can make informed allocation
decisions. Sponsors can utilize
best-in-class managers for each asset class and retain the flexibility to
replace underperforming managers.
Some sponsors may offer a third group of
investments beyond the traditional equity and fixed income asset classes. This typically includes a brokerage window
and/or professionally managed accounts.
The brokerage window gives sophisticated investors access to a wide
range of funds, stocks or ETFs.
Brokerage windows may provide exposure to specialist and esoteric
investment strategies that may not be appropriate for all investors. Participants with substantial balances and a
higher level of sophistication tend to use this feature. The segmented framework allows participants
to navigate the plan more easily and select the solution that is most
appropriate for them.
Conclusion
With the average number of funds in the plan lineup
swelling over the last 5 to 10 years, today's participants are bombarded by a
cacophony of investment options that many find simply overwhelming. The freedom to choose has instead been
transformed into confusion and inaction.
Changing participant behavior is much more difficult than simply
optimizing the plan fund line-up to accommodate plan participants' natural
inclinations. Though many other factors
will influence plan participation, providing a clear, organized and simplified
fund lineup will result in one less hurdle for your plan participants and move
them one step closer to achieving their retirement goals.
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Wednesday, February 1, 2012
Open Architecture
Investment Consultant
Bridgebay Financial, Inc.
As fiduciaries, plan sponsors must act for the sole
benefit of their plan's participants. Decisions born of the need for corporate
convenience may lead to less-than ideal arrangements or investment options for
plan participants. Sponsors need to evaluate whether the convenience of
one-stop shopping is worth the potential fiduciary risk of foregoing open
architecture.
The conventional wisdom regarding bundled service
providers is that the convenience offered by an all-in-one solution is
particularly attractive to smaller 401k plan sponsors who might not have the
scale or staffing necessary to administer the plan in-house. These types of
companies are typically spread thin already, with many individuals wearing many
hats. Tight resources tend to push plan sponsors to make the easy choice of
working with bundled service solutions. These service providers come in several
forms. They can be a broker, a mutual fund firm, a payroll processor or an
insurance company.
Truly open architecture goes well beyond the simple
ability to add non-proprietary funds to a plan's line-up. In a open
architecture, all of the service providers are either unbundled or entirely
separate entities. The goal of open architecture is to have the flexibility to
monitor and trade out each individual component, independent of the other
services with a minimal amount of disruption to the plan. The primary service
providers to a typical DC plan include the recordkeeper, investment or fund
managers, custodian or trustee, plan investment consultant, managed account
provider, and the education/communications provider. Ideally, each of these
service providers is a separate, unaffiliated entity without any vested
interest in the actions of any of the other providers.
The key is to then take a "best-of-breed"
approach and select only the best recordkeeper, TPA, mutual funds and
investment consultant. A recent study which compiled the characteristics of an
ideal 401k plan supported this approach and demonstrated that such plans do not
use bundled providers. By managing each component individually, the sponsor
maintains the flexibility to replace any element that may suffer from poorer or
declining quality service without disturbing any of the other services. The
modular nature and the ability to use best-in-class providers are the major
strengths of open architecture.
In contrast, bundled service providers typically
rely on investment products to drive revenues, making other peripheral services
an afterthought and generally a loss leader. Ancillary services such as plan
administration and recordkeeping tend to suffer when pushing investment
products is the primary source of revenue.
Additionally, by obscuring the actual cost for each
service in the bundled fee, such providers make it difficult to accurately
benchmark total plan fees. Independent providers bring with them a built-in
check-and-balance mechanism regarding the quality and fees of other service
providers. Though many bundled providers may tout the benefits of the
"economies-of-scale" that come with their arrangements, the inherent
conflicts of interest may actually result in higher fees than a truly open architecture
solution.
In recent years we have seen numerous lawsuits
brought against plan sponsors for various breaches of fiduciary duty. In 2011
we witnessed the result of the high-profile class action suit against Walmart
for breach of duty regarding the investment choices in the 401k plan. The
plaintiffs discovered that het plan's bundled service provider had placed
high-fee funds into the plan and the broker was receiving trailing commissions
for having placed those funds in the plan.
The mere fact that it took plan participants so
long to discover the breach of fiduciary duty indicates how well high fees can
be hidden within the bundled arrangement. 2012 promises to be a year of greater
disclosure and transparency on behalf of bundled service providers. The new fee
disclosure requirements outlined under sections 408(b)(2) for provider to plan
sponsor disclosures and 404(a) of the Employee Retirement Income Security Act
(ERISA) offer to shed light on the bundled service provider. This has the
potential to reshape the bundled provider industry and reinvigorate plan
sponsors' interest in pursuing open architecture.
While a bundled solution may work for plans of a
relatively small size, the modular and best-in-class approach afforded plan
sponsors by using open architecture and the potential for lower, more
competitive fees must not be ignored.
Friday, January 13, 2012
Selecting and Monitoring Fiduciary Advisors
Nicholas Zaiko
Investment Consultant
Bridgebay Financial, Inc.
Effective December 27, 2011, the Department of
Labor's Employee Benefits Security Administration (EBSA) issued its final rule
regarding the provision of investment advice to participants in individual
account plans, such as 401(k) and 403(b) plans, and beneficiaries of individual
retirement accounts. The final rule affects plan sponsors, fiduciaries,
participants, and beneficiaries of participant-directed retirement plans. Essentially,
the rule enables providers of investment advice acting as fiduciary advisers to
offer investment guidance to participants provided certain conditions set forth
in the regulations are satisfied.
The Need for Advice
Recent studies have indicated that participants who
receive professional investment advice consistently outperform those who go it
alone. Constructing a proper asset allocation is key to the long-term success
of any retirement strategy and most participants are ill-equipped to make such a
potentially life-altering decision on their own. The DOL's new participant
investment advice regulation attempts to offer participants another means of
achieving their retirement goals.
Not all investment advice that has been provided in
the past has been impartial or in the participant’s best interest. Sometimes
there have been conflicts of interest unknown to the plan sponsor. In selecting
a fiduciary advisor the plan sponsor still retains fiduciary responsibility in
selecting the form of investment advice they offer to their participants.
Best Fit
There are numerous factors to consider when
selecting a fiduciary adviser to a plan. The last few years have seen dramatic
growth in the independent investment consulting industry and with the passage
of the new regulation, more solutions are sure to follow. The first step is to
determine what type of investment advisory service is the best fit for the plan
participants. Traditionally, plans have relied on an eligible investment advice
arrangement ("EIAA") through a fiduciary adviser to help employees
make informed investment decisions, but this is no longer the only available
option.
Third-Party Advice
Web-based investment guidance services and managed
accounts offered through an independent, third party are increasingly popular
options. These firms are unaffiliated with any of the plan’s fund providers or
managers. According to the new regulation, their methodology for building an
asset allocation must not be in any way impacted by the funds selected. In
other words, they must not have a vested interest in or receive any additional
financial benefit from using one fund over another. The methodology must be
fund and share class neutral. In order to determine the best option for their
participants, plan sponsors should conduct a thorough analysis based on their
company's demographics and plan objectives.
Identifying Fiduciaries
Another important factor which is often overlooked
in selecting a fiduciary adviser is determining exactly who can act as a
fiduciary adviser. Many brokers may offer investment advice to participants but
most are protected by regulations from taking on fiduciary liability. In many
cases, if the adviser is not receiving compensation directly from the act of
offering advice, they are not considered a fiduciary under the current law. Eligible
fiduciaries generally come in four categories: a registered investment adviser
(RIA), an advisor for a bank providing services through the trust department,
an insurance company representative and a representative of a registered
broker-dealer. Plan sponsors should check with the fiduciary adviser to confirm
their status as an eligible fiduciary to the plan and receive confirmation in
writing that they are acting as a fiduciary.
Establish Evaluation Criteria
The next step in selecting a fiduciary advisor is
for the plan sponsor to establish objective criteria for evaluating an adviser
that fits the needs of its participants. The retirement plan committee is
responsible for creating a documented checklist that can then be used to
evaluate fiduciary advisers. Some general criteria should focus on identifying
any potential conflicts of interest, fee and compensation arrangements that may
cause the adviser to pressure participants into less appropriate products. The
firm’s experience and depth of services in providing fiduciary advice and
specifically the qualifications of the professionals providing the advice are
important. Checking for any disciplinary actions against the fiduciary adviser
or the firm should be conducted at the onset and on an annual basis for any
potential change in status.
The fiduciary adviser’s professional credentials
and investment experience are critical. Many large firms may be impressive
marquee names yet the individuals providing the advice may be junior, less
skilled advisers than small boutique firms whose advisers may be highly
experienced professionals providing high caliber advice.
Ongoing Monitoring
Once a suitable fiduciary adviser has been
selected, it is important that the sponsor establish a process for ongoing
monitoring of the adviser. Best practices dictate that a plan sponsor review
their plan's fiduciary adviser at least once a year. There are a multitude of
factors to consider, but a prudent approach would include a deep dive of the
adviser and documenting their process. This would include confirming that all
required documentation and notifications were provided. Another factor to
consider would be determining whether the adviser is actually complying with
the new participant investment advice regulation.
Revisiting the relative cost of the investment
advice program in relation to participant adoption and utilization is a prudent
way to quantify the value added by the fiduciary adviser. If participant
adoption is relatively low compared to the cost, perhaps more education is
required or the plan sponsor may want to scale back on the services offered . A
thorough review should also include inquiring into and following up with
participant comments and feedback. Any participant complaints should be
addressed immediately. Participant feedback, whether positive or negative is a
good way to stay ahead of any potential fiduciary liability issues. Fine-tuning
the plan based on participant comments may lead to increased participation
rates, if done in a prudent way. Updating the firm’s and fiduciary adviser’s
status for any disciplinary actions should be part of the annual evaluation.
The most important fiduciary benefit of conducting
this due diligence review is documenting the decision making process and the
results. Comprehensive documentation of the information collected to render
decisions that impact the plan is the best way to protect the plan sponsor from
fiduciary liability. While investment returns may go up and down, a detailed
accounting of the due diligence process is the plan sponsors' greatest asset.
An annual review of the plan's fiduciary adviser will go a long way to
fulfilling a plan sponsor's fiduciary duty.
Conclusion
Most participants lack the skill, training or time
to construct a disciplined, asset allocated, long-term investment strategy.
Short-term trends often lead them to make mistakes and risk their long-term
success. Individual investors are driven by emotion, causing them to make the
same investment mistakes over and over. The DOL's new participant investment
advice regulation attempts to offer participants another means of achieving
their retirement goals. Plan fiduciaries are responsible for evaluating and
understanding the advice options they offer to their participants. Realizing
the plan sponsor's role in delivering this essential service is an important
fiduciary duty. Establishing a defined strategy for implementing participant
investment advice is key to fulfilling a plan sponsor's fiduciary obligations.
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