Sunday, July 19, 2015

RFP Process for Bundled Service Provider

Nicholas Zaiko, CIMA®
Investment Consultant
Bridgebay Financial, Inc.

It is a good fiduciary practice to conduct a periodic review of the DC plan service provider to ensure that the participant assets are well-protected and tracked accurately.  This should include a review of financials and SSAE 16 (internal control audits) annually.  If the plan service provider has not been reviewed in a long period of time, or the plan has grown or changed dramatically in the number of participants, need for additional services and asset size, it is a good fiduciary practice to conduct a due diligence review which may best be performed through a request for proposal (RFP) for plan services. 

Define the Objectives of the RFP
The detail and customization of the RFP will be determined by the key objectives of the RFP.  Some typical reasons for sending out a RFP include:
1)   Benchmarking to compare the current provider's fees and services in response to ERISA 408(b)(2)
2)   Improving plan efficiency and delivery of services to the plan and its participants
3)   Streamlining the administration of the plan through improved technology and automation
4)   Expanding or enhancing the investment choices, advice, asset allocation solutions
5)   Improving participant communications, education and participation rates
6)   Seeking a change in provider's relationship team, response time and expertise

Establish Criteria
The plan sponsor should establish specific metrics to evaluate the providers to ensure that the key issues are addressed.  Any specific restrictions or contract stipulations that are non-starters should be identified at the onset.  When crafting the RFP, it is important for a plan sponsor to identify their organization's unique priorities, objectives and preferences.  Some criteria may include conversion timeline, minimum performance standards, fees, call center and on-line participant access, investment options and organizational flexibility.  A client service-oriented provider will be willing  and able to tailor its services to the plan sponsor's specific needs.

Plan Information
Make the responses specific and relevant to your plan by providing sufficient information and data about the plan features, asset mix, cash flows, employee demographics, and current investment line-up.  Include any new services desired and their importance to the overall decision.

Evaluate the RFP Responses
Quantitative criteria include sponsor and participant service measures, plan use data, fund performance, expenses and timing.  These tend to be easy to compare and understand, though they tell only a fraction of the provider’s full story.  Financial stability in the wake of the financial crisis is critical to continuously offering high quality plan services.  Financial strength ensures high quality personnel, up-to-date enhancements to systems and improvements in compliance and delivery of participant services.

The Committee should be clear on what aspects of the RFP are critical to the selection of a qualified service provider based on the criteria established prior to issuing the RFP.  Developing a scorecard is a helpful tool when evaluating RFP responses and will streamline the process.  The evaluation should be presented to the committee and finalists selected based on the results.

Education should be accessible through multiple channels such as paper, webinar, in-person, on-demand information, and live representatives.  Call centers need qualified, expert representative that are responsive to participant requests.  There should be a broad menu of education media including user-friendly on-line tools, retirement calculators, retirement income education, publications, newsletters, investment information, on-demand educational tools and in-person seminars.  Beware of marketing material masquerading as investment education.

Compliance expertise has taken a central role in this time of increased regulations. Providers should demonstrate specific cases where they provided solutions to plan sponsors to meet new regulatory requirements.  Strong providers will have updated technological tools, operational procedures and legal expertise that ensure the plan is compliant with the changing regulatory landscape.  Plan design recommendations from providers are also very useful in a rapidly evolving regulatory environment.  Plan sponsors should understand the provider's compliance resolution process and how proactive they are in ensuring the plan remains in compliance.

Finals Presentations
Once the finalists have been determined, they should be notified and sent an agenda for the presenters to follow.  The absence of a detailed agenda will allow the provider with the best showmanship, and not necessarily the best product, to win the business. The key client service and relationship personnel that will actually be handling the account on a day-to-day basis should be present at the finals presentation. The finalist in-person presentations should highlight the relationship services. Using a common agenda with each finalist will also make is easier to make truly apples-to-apples comparisons.  The way some firms answer certain questions may actually point out deficiencies in other firms.  A knowledgeable and experienced retirement plan consultant can highlight these differences and explain their implications on the plan sponsor's plan.

Friday, July 10, 2015

Economic Review 2Q 2015

Nicholas Zaiko, CIMA®
Senior Consultant
Bridgebay Financial, Inc.
The outlook for 2015 is for good economic growth ranging from 2.5% - 3.0%, low inflation at 1.5%, and for the unemployment rate to be less than 5.5%.  However, there are some indications at quarter end that the economic recovery might be losing some momentum.  The Fed is expected to raise its target range for the federal funds rate in 2015 even if inflation remains below its 2% target.  

Inflation appears to be low and may give the FOMC reason to be slow in raising rates.  The Fed is expected to be slower in the pace and size of rate hikes than in previous periods such as the 2005-2007 hiking period.  The final rate is also expected to be lower than historically. 

Federal Reserve
US growth will maintain a modest, but above-trend, pace of growth for the remainder of 2015.  Inflation should begin to rise gradually towards the Fed’s target of 2%, though potential currency and commodity influences will be closely monitored.  The Fed is anxious to begin the process of unwinding its massive accommodation program but as of now, only one Fed rate hike is likely in 2015. 

Christine Lagarde, IMF chief, made statements during the quarter that it would be best for the US Fed to postpone raising interest rates this year.  Although the Fed responded that they were independent, it appears that the most recent dovish FOMC comments did recognize a concern for international financial events. 

The Fed has now indicated that international considerations will also be an important factor in determining the timing, frequency and scale of its rate hikes.  The Fed has now begun to focus on the recent Greek financial distress, China’s slower growth, and their potential impact on market volatility.

Trade also continues to be a primary focus for the Fed. Concern about economic growth, the strength of the USD and the effects of lower energy prices were prominently mentioned in the Fed minutes.
The Fed is positive about the underlying consumer spending over the medium-term, improvement in jobs, the wealth effect from improved housing and stock valuations, stronger consumer balance sheets, lower energy prices and higher consumer confidence.  The Fed is tracking payroll gains and labor market slack with less emphasis on wage growth.  The recent economic data indicates that the economic recovery is starting to lose momentum.

Interest Rate Hikes
The FOMC lowered their interest rate forecast by 50 bps in 2015.  FOMC continues to be dovish, now signaling a September rate hike to be unlikely.  Most market participants expect one modest rate hike by year-end 2015.  The continued global disinflationary trend and the limited supply of conservative bonds will help keep interest rates low.
The lack of inflationary pressures in the US will keep long-term rates low, however the longer the Fed delays raising short-term rates the greater the chance of rising inflation expectations. 

Fixed Income Markets
Two-year Treasury yields ended June 9 basis points higher quarter over quarter at 0.65% after hitting a high of 0.73% in mid-June.  The impasse between Greece and its European creditors led to a flight to quality as Treasury yields partially reversed their rise over the quarter. Yields ended the month 3-14 basis points higher across 2 year to 5 year maturities as the curve steepened by 12 basis points.

Yields climbed higher during the quarter, and the yield curve steepened. The US economy continues to improve, with the employment situation improving at a healthy pace.  This is beginning to shorten investors’ expectations for the first Federal Reserve rate hike.

Credit spreads widened as market participants dealt with heavy new issue supply in the face of growing concerns over the liquidity available in the corporate bond market.  Lower quality and off-the-run securities experienced the most spread widening.

Corporate yield spreads were wider in June as record issuance year to date, lower liquidity and ongoing developments in Greece are pressuring secondary markets. Demand for new issues remains robust. Short duration corporate yield spreads are back to the wide levels of early 2015.

Despite the higher yields and wider spreads, investment grade corporate bonds managed to generate a meager positive return for the quarter due to the higher coupon income offered over Treasury and agency securities.

Leverage continues to rise in industrials. Idiosyncratic risk is rising due to ongoing M&A activity and shareholder activism. Financial balance sheets are strong as asset quality continues to improve and capital levels and liquidity remain solid.  New issue supply will be driven by M&A activity and banks issuing to reach required capital levels.

The cost of liquidity has risen with wider bid-offer spreads due to the lack of dealers willing to be market-makers.  The amount of time needed to transact increases as traders seek liquidity sources. Investors can expect longer holding periods and less trading of their investment positions. Declining liquidity may also increase volatility. Smaller dealer balance sheets, an overall risk averse tone to the market and robust new issue supply all contributed to weak liquidity in the market during the quarter.

Bank Credit Ratings
Moody’s concluded their review of global investment banks with results better than expected.  S&P results are still pending.

Moody’s updated bank rating methodology incorporates several solvency and liquidity factors.  Their intent is to predict bank failures and determine how each creditor class may be treated when a bank fails.  The new approach is based on their experience from the global financial crisis and changes in banking regulation.

Greece, Puerto Rico and China
Developments in Greece and Puerto Rico heightened the potential for event risk and volatility during the quarter.  China’s domestic equity dramatic sell-off raised concerns. 

All three areas were distractions to the markets during the quarter contributing to increased market volatility.

Greece and the Euro
The likelihood of Greece exiting the Eurozone increased dramatically as Greece missed a €1.6 billion payment to the IMF, stopped negotiations to call a national referendum on a bailout proposal, and imposed capital controls when the ECB halted expansion of Emergency Liquidity Assistance (ELA) funding for Greek banks. Greek voters rejected the bailout proposal which caused the crisis to worsen immediately. The Greek crisis has settled down with the recent 3-year bail-out agreements being hammered out. 

A Greek exit might have triggered unexpected systemic risks and impacted Europe’s economic recovery which has been responding well to the ECB’s aggressive stimulus program. 

Puerto Rico and the US Municipal Market
The market is now awaiting further news as to the fiscal situation in Puerto Rico which has adversely impacted some sectors of the municipal bond market.  A study published in June recommended debt relief as part of a comprehensive package of economic and fiscal reforms for Puerto Rico.   Governor Padilla later announced that Puerto Rico’s level of debt was unsustainable.  This raised serious concerns about the Commonwealth’s ability to pay its debt.   A default event could trigger wide volatility in US bond markets, specifically the municipal market.

China and China-A Shares
The coordinated aggressive Chinese banking, brokerage and government stimulus program now appears to be taking effect by stabilizing the domestic Chinese equity market’s dramatic sell-off.  Fortunately, the sell-off was limited to Chinese domestic retail investors and did not impact foreign and US markets.