Category: Defined Contribution

A recent study of large versus small 401(k) plans shows that small plans perform as well – or better – than their larger peers. Judy Diamond Associates, a sister firm of BenefitsPro, culled data from about 52 million participants with $4 trillion in assets.

The study, about which more information is available here, compared plan size, industry, participate rates, levels of contributions, account balances, and returns.

BenefitsPro summarizes:

After aggregating the results for all industries, the smallest plans, with one to 10 participants, posted a score of 62, the highest among eight levels of plan size…. By comparison, the largest plans, with 5,000 or more participants, which accounted for 1,793 total plans, posted an average score of 57, the third highest among the eight segments.

Digging the in the details, the study uncovered the following nuggets, via BenefitsPro:

More than 178,000 plans fall into [the small] size group, more than all other segments. The average account balance was $75,735, and participation rates averaged 89 percent, both tops by plan size. Average employee and employer contributions–$4,850 and $1,979 respectively—were also more than all other size segments.

The average account balance for the largest plans was $54,513, and the average participation rate was 73 percent. Employee and employer contributions averaged $3,067 and $1,424, respectively.

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.

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.”

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.

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 …

The new fiduciary rule could trigger a slug-fest among consultants. A recent panel of broker dealers and registered investment advisors mused that the climatic changes of fiduciary responsibility could lead to the extinction of some of the less adaptable “generalist” advisors.

According to Investment News:

“We think there will be a lot of plans in play,” said J. Fielding Miller, chief executive of CAPTRUST Financial Advisors. “This is kind of like prime hunting season for our industry.”

As opposed to retirement “specialist” advisers, who derive most of their business from the defined-contribution-plan market, generalists, or “dabblers,” tend to derive most of their business through wealth management and may have only a handful of retirement plan business.

The Department of Labor’s new rule, which raises investment advice standard in retirement accounts, puts pressure on the dabblers to reconsider if they want to be in the retirement business, Mr. Miller said Tuesday morning at the National Association of Plan Advisors’ 15th annual 401(k) summit in Nashville.

INCREASED LITIGATION RISK. Several smaller firms will struggle to comply with the new rule, and the additional risk of private litigation action will “scare” some providers to turn away from the retirement business, according to Edward O’Connor, managing director of retirement strategy at Morgan Stanley.

Rolling Over the Rollover Shops

Additionally, Brokers that made lots of money on plan rollovers may be in for a rough ride.

From Investment News:

The panelists also discussed the impact of the rule on rollover business, saying there will likely be less rollovers as fewer brokers and advisers recommend rollovers, and more participants will keep their money in-plan as a result.

Retirement assets staying in plan will be a boon to plan providers, the panelists said.

“This is definitely a tailwind for them,” according to Mr. Chetney. “There will be less ‘shysters’ trying to take money out on an unreasonable basis.”

Those firms for which rollovers represent a primary part of their economic model will have to rethink that business model, according to Mr. O’Connor. “Rollovers will become a less important part of anyone’s business model,” he said.

Among the many, many, many aftershocks of the new fiduciary rules is the application of the new Best Interest Contract Exemption to fixed indexed annuities. The Department of Labor produces millions of pages of rulings and rules, but only just determined that fixed indexed annuities were complicated.

According to the Retirement Income Journal:

The DOL likened FIAs to variable annuities in their cost and complexity. “Given the risks and complexities of these investments, the Department has determined that indexed annuities are appropriately subject to the same protective conditions of the Best Interest Contract Exemption that apply to variable annuities,” the final BICE text said. FIAs have gotten even more complex in recent years, especially with the introduction of hard-to-value “hybrid” indices that allow issuers to offer supposedly “uncapped” gains even though the gains of FIAs are by design strictly limited. But it’s not clear if this trend influenced the DOL.… The DOL said that it put FIAs under BICE because they’re so complicated and hard to understand. “Retirement Investors are acutely dependent on sound advice that is untainted by the conflicts of interest posed by Advisers’ incentives to secure the annuity purchase, which can be quite substantial.

It may be a case that one man’s level playing field is another man’s valley of death. Says Retirement Income Journal:

In addition, the DOL said that it wanted to create a “level playing field” for FIAs and VAs, and to avoid “a regulatory incentive to preferentially recommend indexed annuities,” as the original proposal could have created. But, arguably, the DOL has chosen to provide a disincentive to recommend VAs and FIAs, and gives an implied encouragement to the sale of fixed deferred and fixed income annuities, including single premium immediate annuities, deferred income annuities, and qualified longevity annuity contracts.