Author: Ted Ballantine

Fiduciary Rule and 403(b): Summary of a Summary of a Summary

The rule that launched a thousand memos – the DOL fiduciary rule – is the subject of an excellent cheat sheet published by PlanSponsor. Read the whole thing here.

Among some of the helpful highlights:

– The rule redefines the term “fiduciary” as it applies to “investment advice” from advisers and retirement service providers. As a result, many service providers, particularly those who service participants, will become fiduciaries for either the first time or with respect to more of their activities. Under the old rules, some advisers (and service providers) were not subject to the fiduciary duties imposed by ERISA, the law governing retirement plans, or similar rules applicable to IRAs. Under the final rule, any individual receiving compensation for making investment recommendations that are individualized or specifically directed to a particular plan sponsor or fiduciary running a retirement plan (e.g., an employer with a retirement plan), plan participant, or IRA owner for consideration in making a retirement investment decision could be a fiduciary subject to the new rules (unless they satisfy certain exceptions from the rules).

– Many of the educational activities we currently have today will still be permitted, so that plan fiduciaries, sponsors and the entities who work with them will not risk becoming subject to the new fiduciary standard for advisers merely due to the fact that such education is provided. There was some concern that certain types of education that had previously been permitted—naming specific investment options in asset allocation models, for example—would no longer be permitted, but the final rule dropped such restrictions for plans (but not IRAs)—but there are certain requirements that apply.

– As for its effect on retirement plan fiduciaries and sponsors, there will be little direct effect, but those who advise retirement plan participants, and the firms who employ such individuals, are likely to be affected. Further, if you deal with more complex investments (if you are a larger plan), some of your investment structures could be impacted. For example, if your recordkeeper employs individuals who provide advisory services to participants, those recordkeepers could be affected.

As for 403(b) plans:

403(b) plans that are not subject to ERISA (i.e. governmental plans, church plans, and elective deferral-only plans utilizing the 29 CFR 2510.3-2(f) safe harbor) are not subject to the final fiduciary rule at all. However, rollover IRAs from these plans could be caught in these rules.

Pensions Across Globe Increase Alternatives, Green Bonds

Globally, pension funds have increased allocations to alternative investment vehicles and green bonds, according to a recent survey from the Organisation for Economic Co‑operation and Development (OECD).

Additionally, pensions funds have a growing interest in infrastructure – but levels of investment remain low.

From Investments & Pensions Europe:

Large pension funds’ allocation to alternatives, which includes infrastructure, increased on average from 14.3% of total assets in 2010 to 15.3% in 2014, according to the survey report.

“The trend in alternatives is even stronger among PPRFs,” it said.

On average, at the 19 funds that submitted data over the past four years, average allocations to alternatives increased from 11.2% in 2011 to 13.5% in 2014.

[…]

Infrastructure, meanwhile, is drawing growing interest from pension fund managers, but the survey results show a low level of investment on average, according to the OECD.

For the 77 funds that returned questionnaires, infrastructure investment in the form of unlisted equity and debt was $85.6bn in 2014, representing 1.1% of the total assets under management.

The pace of the increase in infrastructure allocation has slowed over the past few years at 23 funds that reported their allocation over the 2010-14 period, according to the survey report, “indicating that funds have not been able to grow their infrastructure allocations”.

[…]

Direct investment remains the most common method for funds to gain exposure to infrastructure, according to the report.

Another noteworthy trend, according to the OECD, is that, among the funds that reported green investments, there was “a general increase” in the amount of pension funds that invest in green bonds, as well as in the relative size of their allocations.

The report can be viewed here.

Chart: When Governments Go Bankrupt, Do Pensioners Or Bondholders Bear More Cost?

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When municipalities and cities go bankrupt, who takes priority: bondholders or pensioners?

The chart above, put together by Bloomberg this week, shows the recovery rates of bondholders vs. pensioners in six instances of municipal bankruptcy.

There’s a reason the chart looks the way it does: pensions are typically protected by law in more than one way. Investors, on the other hand, are guaranteed nothing; and investing in a cash-strapped municipality comes with risks.

Pensioners typically come out unscathed, although not always: they took a big hit when Central Falls ran out of cash.

Bondholders, on the other hand, usually bear the brunt of the pain. When San Bernardino went bankrupt in 2014, bondholders recovered a mere 20 percent of their money on average. Some recovered nothing.

Credit: Bloomberg

World’s Largest Pension Will Stand Pat on Asset Allocation

Japan’s Government Pension Investment Fund (GPIF) will not be altering its asset allocation in the near future, according to the fund’s new chief.

The pension fund is two years into implementing a major allocation shift that saw it dramatically increase its equity holdings.

More from Reuters:

The country’s trillion-dollar public pension fund targets keeping 35 percent of its total assets in JGBs and 25 percent each in domestic and foreign stocks.

The GPIF needs to hedge against foreign currency moves to protect its assets from volatile market movements, Norihiro Takahashi told Reuters in an interview on Tuesday.

“The Bank of Japan introduced the negative interest rate policy in order to boost the economy and prices. Interest rates will rise if the policy works, which is why we do not see the need to change our basic asset allocation,” Takahashi said.

[…]

GPIF, which is already prepared to hedge against the risk of fluctuations in the dollar and euro, plans to broaden its approach for hedging, Takahashi said.

It will hedge against drastic moves of not just dollar and euros but other currencies, he said, adding the fund will also hedge against both a strengthening and weakening yen.

“We need to show Japanese people that we take measures to minimize currency risks,” said Takahashi. “It is an ideal that we can hedge not only just the dollar and yen but currencies for the third countries against the risk of fluctuations”

GPIF oversees the management of a $1.1 trillion portfolio.

Pension Fund Boards Lack Knowledge on Risk, Says Survey

A new State Street survey finds that a third of pension professionals think their fund should increase risk-taking to boost returns.

But less than half of those professionals thought their boards had sophisticated knowledge of investment risk.

From ai-cio.com:

More than a third (36%) of 400 pension professionals from around the world surveyed by the investor services giant said their funds had funding issues requiring greater risk-taking. However, of those people, less than half (43%) said their boards had a “high level of understanding of risks” to their funds. Just 29% of those whose funds were seeking to lower risk said their boards had sophisticated expertise.

“We examined pension funds’ capabilities across four distinct types of risk: investment, liquidity, longevity, and operational risk,” State Street wrote. “For each of these areas, only one-fifth of funds at most consider their risk management to be very effective.”

Large funds were generally better at risk management than small funds, the survey found, while public funds were better than their private sector counterparts.

[…]

A significant proportion of respondents said their employers planned to change the process for recruiting new board members in order to improve their expertise. More than half (53%) of those funds seeking to increase portfolio risk said this was the case.

Kansas May Delay $99 Million Pension Contribution

Kansas is facing a $290 million budget hole, and state Gov. Sam Brownback has proposed three ways to pay it down.

One proposed option included delaying the state’s next $99 million payment to its pension system – a move considered irresponsible by numerous experts briefed on the matter.

More from the Kansas City Star:

Gov. Sam Brownback’s recommended fixes for the latest shortfall center on budget maneuvers and spending cuts, and all have drawn controversy.

[…]

The first option was to sell a portion of the state’s future payments from a national tobacco settlement, which Kansas dedicates to early childhood education programs, to bondholders for a one-time infusion of $158 million. It’s a contentious idea.

A second option would delay a $99 million state payment to the Kansas Public Employees Retirement System until fiscal year 2018. Current retirees’ benefits wouldn’t be affected by the delay, he said.

A third option would make 3 to 5 percent cuts to most state agencies, including funding to K-12 public schools and state universities. A 3 percent reduction to K-12 schools would be about $57 million.

[…]

Putting off a payment to the state pension system is troubling, he said. Even if the state makes up the payment with 8 percent interest in fiscal year 2018 as planned, that just puts stress on a future budget, said [Dave Trabert, president of the conservative-leaning Kansas Policy Institute.]

The option of delaying a $99 million payment to the state’s pension system is irresponsible, said [Annie McKay, executive director of the Kansas Center for Economic Growth].

Brownback said he is not willing to roll back the tax cuts he enacted in 2012 and 2013.

Canada Federal Lawmakers Consider Teaming With Pensions on Infrastructure

A line Canada’s federal budget reveals that lawmakers are considering selling and leasing stakes in the country’s infrastructure to public pension funds as a mechanism for infrastructure improvements, according to the Canadian Press.

Pension360 previously wrote that several of the country’s largest public pension funds – which are, not coincidentally, some of the largest infrastructure investors in the world, had an appetite for such an arrangement.

More from the Canadian Press:

A line tucked into last month’s federal budget reveals the Liberals are considering making public assets available to non-government investors, like public pension funds.

The sentence mentions “asset recycling,” a system designed to raise money to help governments bankroll improvements to existing public infrastructure and, possibly, to build new projects.

“Where it is in the public interest, engage public pension plans and other innovative sources of funding — such as demand management initiatives and asset recycling — to increase the long-term affordability and sustainability of infrastructure in Canada,” reads the sentence in the new Liberal government’s first budget.

[…]

Australia’s asset recycling model has been praised by influential Canadians such as Mark Wiseman, president and CEO of the Canada Pension Plan Investment Board.

“With growing infrastructure deficits worldwide … we often reference this model with our own government and others as one to follow to incent and attract long-term capital,” Wiseman said in prepared remarks of a September speech in Sydney to the Canadian Australian Chamber of Commerce.

Infrastructure investments are a strong fit for public pension funds because they are long-term and offer reliable, steady returns.

Don’t Cut Your Own Hair, and Don’t Manage Your Own Plan: Judge Slams Banking Company for In-House Retirement Plan Management

A federal judge recently slapped down City National Corporation for ERISA violations that allegedly arose from overcharges from in-house plan management.

When City National Corporation administered its employee retirement plan, it took fees from the plan and lumps from the court.

From PlanSponsor:

U.S. District Court Senior Judge Terry J. Hatter, Jr. found that City National and its subsidiaries violated ERISA by engaging in years of self-dealing. The court ordered the company to retain an independent, third-party fiduciary to assist in accounting for all compensation it received from the plan, in the form of mutual fund revenue from 2006 through 2012, plus lost opportunity costs, to correct its numerous ERISA violations. The department estimates this amount to exceed $6 million.

In its findings, the court agreed with the DOL City National failed to meet its duties as a plan fiduciary by accepting fees from the plan without any review or independent investigation into whether fees were reasonable; not reimbursing the plan upon discovering that it was charging unreasonably high fees; and not tracking any direct expenses for the plan.

A bit of background on the suit, from a 2015 PlanSponsor piece:

The Department of Labor (DOL) says the fiduciaries of the City National Corp. Profit Sharing Plan caused the plan to lose more than $4 million by engaging in self-dealing and conflicted transactions that enriched themselves and their employer. According to a complaint filed in the U.S. District Court for the Central District of California Western Division, the self-dealing and conflicted transactions involving plan assets resulted in excessive fees going to City National Bank and its affiliates.

“All of this could have been avoided if the fiduciaries had simply reimbursed themselves in accordance with the law,” she [Crisanta Johnson, the Los Angeles regional director for the DOL’s Employee Benefits Security Administration (EBSA)] notes. “Instead, they created a payment scheme that drained plan assets.”

Employee Savers Say Don’t Worry, Be Happy

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According to a recent poll by Gallup and Wells Fargo, most investors with a 401(k) plan are upbeat about their plan and their savings. Over 90 percent of investors, according to the study, are satisfied with the 401(k) plan for their retirement. Vladimir Putin couldn’t even stuff a ballot box that would generate this level of satisfaction.

Gallup announced the results of the survey, conducted with Wells Fargo, stating:

These findings are from the latest Wells Fargo/Gallup Investor and Retirement Optimism Index survey, conducted Jan. 29-Feb. 7, 2016, among 1,012 U.S. investors. Approximately 40% of U.S. adults meet the survey’s criteria as investors; these criteria involve having $10,000 or more invested in stocks, bonds or mutual funds, either in an investment or retirement account. Seven in 10 employed investors say their current employer offers a 401(k) — and of these, 88% say they participate.

Some generational differences among attitudes included the following:

…age-related differences in preference for receiving allocation advice underscore generational gaps in the use of digital versus traditional resources:

– A majority of investors younger than 50 (58%) versus a third of those aged 50 and older (35%) use online investment calculators.

– Older investors are twice as likely as those aged 18 to 49 to consult a financial call center (21% vs. 10%, respectively).

– Younger investors (50%) are also much more likely than older investors (30%) to turn to family or friends for allocation advice.

Looks like a kind of two parallel universes – some surveys saying that investors are terrified of poverty in retirement, but this one showing that the future is so bright they need sunglasses.

For Every Democratic Action There is a Republic Reaction: New Senate Action Against the Fiduciary Rule

Well, that didn’t take long.

Within days after the new DOL fiduciary rule, Republic leaders in the Senate launched a resolution attempting to block the rules. Three GOP senators announced that the new rules would raise the bar for providing advice so high that small account holders would be left behind.

From 401k Specialist:

[U.S. Senators] Isakson, Alexander and Enzi today filed a resolution of disapproval under the Congressional Review Act to reject the administration’s new so-called “Retirement Advice Gag Rule.”

“I have worked to fight the implementation of this harmful rule since it was first proposed and promised to do all I could to overturn it before it can harm Georgia families. The introduction of this resolution is the next step in the battle,” Isakson, who is chairman of the Senate Health, Education, Labor and Pensions Subcommittee on Employment and Workplace Safety, said in a statement. “Like so many of this administration’s decisions, their new fiduciary rule harms the very individuals it seeks to protect and prevents those hardworking Americans who are trying to plan for retirement from having the opportunity to access retirement advice.

Georgia Senator Johnny Isakson is the chairman of the committee responsible for pensions and labor. He has already launched a salvo of proposed laws, including sponsoring or co-sponsoring the following, as recorded by 401k Specialist:

  • …the Affordable Retirement Advice Protection Act, which would require a vote by Congress before any final rule by the administration went into effect;

  • …the Retail Investor Protection Act, which would prohibit the Department of Labor from issuing its rule until the U.S. Securities and Exchange Commission has issued a final rule relating to standards of conduct for brokers and dealers and has satisfied additional reporting requirements; and

  • …the Strengthening Access to Valuable Education and Retirement Support (SAVERS) Act, which seeks to block the Department of Labor’s “harmful” fiduciary rule and provide a viable alternative …


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