Category Archives: Uncategorized

Brotherston V. Putnam Investments…Practical lessons for committees

This case was decided by the 1st US Circuit Court of Appeals in 2018 in favor of the plaintiffs/participants. Yes the case involved proprietary investments which is an issue for very few firms (also, check to make sure your advisor isn’t proposing proprietary funds or collective investment trusts of his/her firm). What was interesting in this decision is the court said that a fiduciary can “easily insulate itself” from liability by “selecting well-established, low-fee and diversified market index funds” or for those selecting active funds it states, “it too will be immune as long as it follows a prudent selection and monitoring process.”

Now if you have invested in an index fund recently, you know that like Baskin-Robbins, there are at least 33 flavors. Market weighted, cap-weighted, rules based…. You also know there are certain indices that probably shouldn’t be made available as part of a core fund line-up. This case was petitioned to the Supreme Court to review the 1st circuits’ decision but was declined so the decision remains.

For retirement plan committees with massive laundry lists of funds, this can obviously create an unnecessary burden for you on an ongoing basis. It is one thing to evaluate & monitor fifteen funds but what if you have 50. More importantly, why do you have 50? It is important to not only follow common best practices in the industry but it is also key to read the tea leaves of what the courts opinions are telling you. #401k #403b #fiduciary #QPRetirement

Pitfalls of Passive Enrollment

With resources stretched thin, many plan sponsors utilize a passive enrollment. This is essentially a process whereby employees essentially rubber stamp the benefits they already receive. It simplifies the process for both the employee and employer but it also can serve to cement existing enrollment which may not be beneficial for the employee.

We frequently see plans that have adopted auto-enrollment but have only instituted this for new hires. This can leave decades of employees who have been with you the longest out of the plan (or not part of the plans escalation clause). While a plan that goes back and re-enrolls the entire workforce will have the benefit of bringing everyone into the plan except those who opt out, for some employees the auto-enroll rate may be sub-optimal.

This is where a coordinated active enrollment can compliment a plan that has auto features available. It allows the retirement plan advisor to engage employees and educate them on the other advisory tools available as well as capture those employees who don’t make the meeting or are otherwise pre-occupied. This also allows the H.R team to shine while they get to address the issues they are hearing about the most from employees. #401k #403b #QPRetirement

Uncashed Checks

For many small plan sponsors, dealing with former employees who maintain account balances can be a major issue. These folks are naturely not as engaged in the day to day communications that extend to current employees. Many either don’t read mail or email from their prior employer or they have moved and those addresses no longer apply.

When automatic distributions occur for those former employees under 5K (auto rollover) or under 1K (cashed out), sometimes the checks go uncashed. SPARK Institute conducted a member survey this past year that covered ten providers who distributed four million checks in 2017. Of those, 185,500 went uncashed with a value of $47 million dollars.

The IRS has chimed in with guidance in revenue ruling 2019-19:

This addresses how the taxation issues are to be handled but what about a small plan sponsor that is slowly approaching large plan filer status? These types of issues can multiply for growing businesses and a savvy retirement plan advisor can assist with creative solutions. #401k #403b #QPRetirement

Coronavirus, SARS & Markets

In November of 2002 another virus was sweeping across Asia and it was known as SARS (severe acute respiratory syndrome). During its nine months, it moved into 29 countries and according to the WHO (world health organization), there were 8,098 confirmed cases. Those resulted in 774 deaths for a fatality rate of 9.6%. The swing flu outbreak of 2009 had much lower fatality rates and wasn’t as widely spread.

What markets don’t like is the unknown. What Coronavirus has introduced to the markets is more unknowns. What we saw back in 2003 with the SARS outbreak was that it had the most significant impact on air travel, tourism, and domestic demand in Asia. Hong Kong, for example, experienced some of the most severe economic impacts, with its GDP growth falling by -0.5% y/y in 2Q 2003, and its retail sales declining by -7.7% y/y that quarter. China’s growth slowed to 9.1% y/y, and its retail sales, industrial production, and fixed asset investment suffered. However, these rebounded quickly as the new cases dropped and the Chinese government offered supportive economic measures. During that period, U.S. equities fared better than stocks in EM Asia when concerns over SARS were rising. However, Asian stocks rebounded once concerns about SARS abated. This indicates that prevailing market conditions and fundamentals have a more prominent influence on returns.

While all viruses are different, so are all markets. What was happening in 2003 was quite different from what was occurring in markets recently. The current environment is one of slowing global growth and earnings. The Coronavirus is likely to impact the economy and markets in similar ways, although perhaps to a greater extent. With this as a back drop, what is a retirement investor to do.

If you are like many Americans and you are years from retirement and right in the middle of your accumulation phase, you should keep saving, keep re-balancing (or letting your target date fund or model portfolio do it for you), and keep buying shares that are now less expensive than they were a week ago. In 2018 we saw a significant correction in the fourth quarter that in some asset classes was over 20% yet the bounce back was rather quick and didn’t linger on future quarterly statements. While this is tough to stomach, this is part of a healthy long term market that will see many corrections, recessions, and expansions during your lifetime.

Those words are likely irrelevant for those who are now spending down those accumulated assets to fund retirement. With Americans living longer many have a larger allocation to stocks then they would have in the past. For those investors they need to revisit their risk tolerance and range of expectations to determine if one week has wiped out a lifetime of planning. You should work closely with your advisor at this time to look at your risk and evaluate what your immediate income needs are. For many the short term fluctuations force us to want to sell at a point like this but if we have matched our risk to our allocation, while markets may be down a lot we probably aren’t in as bad of shape as we might assume from reading the headlines. Those RMDs (required minimum distributions) aren’t due tomorrow and you have some time to evaluate all of your options.

Considerations for Plan Committees

Many Universities were recently sued due to how they handled their recordkeeping relationships on their plans. While much of the cases mirrored what we have witnessed in the for-profit space, there were some modern twists as it related to data.

Many are now familiar with how technology companies monetize the “free” stuff that we have come accustomed to. So if you Google “ceiling fan”, it’s possible and quite likely that the next time you are on their search engine or a social media site, you just might get hit with a slew of ads for ceiling fans. While this may be annoying, it doesn’t effect your ability to retire (unless you buy a ridiculous amount of fans).

But what if your retirement plan recordkeeper is data mining your employee participants to cross sell investment management, annuities, life insurance, mortgages, banking products, etc? Is this ethical? Does it open up the retirement committee to liability?

One prominent attorney who specializes in the retirement plan space has commented on his considerations for retirement plan committees (Fred Reish from Drinker Biddle) and they are:

  1. Review your recordkeeping agreement to see what it says, if anything, about the use of participant data,
  2. Invite a representative of the recordkeeper to a committee meeting to explain how they use data to provide non-plan sales or marketing to participants,
  3. If they use data, determine which of the services provide value to participants and whether appropriate safeguards are in place,
  4. Determine if the recordkeeper considers use of the data in determining the price of recordkeeping,
  5. Document the process and decisions.

Like most committee tasks, the documentation of the process is extremely important and a good advisor can guide you through the process. #401k #403b #QPRetirement

Plan Loans & What Can go Wrong

Plan loans can be a very enticing way for employers to offer a plan and yet allow employees to feel like they aren’t locking up their money for a lifetime. These loans have benefits as well as they are generally easier to obtain than other bank financing, are initially tax-free and penalty-free if all conditions are met, have lower interest rates than loans available elsewhere, and require payments back to the individual (vs. a bank).

If a plan offers loans, they generally allow you to take out 50% of your vested balance up to a maximum of $50,000. But what happens if you default on the loan? When employees leave an employer, they typically have to cut a check for the outstanding balance on the loan or it will go into default.

If a participant is under 59 1/2, they frequently pay ordinary income on the loan balance as well as a 10% penalty. If they took a loan, it is fairly common that they don’t have the means to pay back the loan if they were to leave their employer. Sometimes this happens because a new opportunity arises but other times it happens due to lay-offs, leaving to care for a loved one, or other circumstances beyond ones control.

With this in mind, what is the best way to approach loans? Frequently we recommend these only as a last resort due to the potential tax ramifications in a default. An employee should also seek out tax advice prior to defaulting on a loan or refinancing a plan loan (if that option exists). There are many hang-ups that can occur that an HR department is not going to be equipped to handle. Lastly, know the difference between a deemed distribution and a plan loan offset. A loan offset amount can be rolled over to an IRA or another employer plan by April 15th of the year after the offset occurs (or Oct. 15th if an extension is filed). A deemed distribution is taxable and cannot be rolled over. #401k #403b #QPRetirement

Prophet’s, Profits, & New Year’s Resolutions

For those who watch CNBC, Bloomberg, Fox Business, every day presents a new set of challenges. Some guests tell you that 2020 will be great because….insert any number of reasons. After the commercial break, another guest will let you know why you should run for the hills, stock up on non-perishable food, and invest in….insert any investment.

While entertaining, this can be extremely unnerving for the everyday retirement plan investor. With hindsight being 2020, Google “2019 market predictions”. You will get a whole host of correct and incorrect projections. Many thought the market was set for a major pullback in 2019. That obviously didn’t happen. Remember the major pullback from the fourth quarter of 2018? Fortunately, not many investors do because we are so hyper focused on the latest news.

What about the China/US trade war? You will read a lot about it in those 2019 predictions but it still didn’t prevent the market from providing very strong returns. What about that inverted yield curve? Exactly, it still could be signaling a recession but when is pretty tricky to solve.

So what should you do? Like any investor, you will want to start with the stuff that puts you to sleep. Do you have a basic budget? Are you spending less than you are making? Are you saving at an appropriate rate? If you checked all three of those boxes (most Americans don’t), then we can proceed to asset allocation discussions. Those will inevitably be focused on your time horizon, risk tolerance, retirement income replacement needs, and all sorts of other stuff that you would probably rather push off until you have more time. Unfortunately, the one prediction we will make is that you won’t have more time for this sort of thing until it is an immediate problem. So focus on the present and start that New Year’s Resolution today.

The only other prediction we will make is that or prediction for 2021 will be as boring as our prediction for 2020. Focus on the stuff you can control and spend your time enjoying the journey. Your focusing on the market & investment news will only leave you more confused and less likely to succeed on a long term path to financial success. The key being…long term!

You don’t still use a flip phone? The DOL’s new proposed electronic disclosure safe harbor

What were you doing in 2002 and what did your phone look like? We would venture that your phone wasn’t your main hub for how you access & digest information. It was probably intended to make phone calls and maybe send some text messages. As technology has changed, the DOL has decided to offer up a second safe harbor for the electronic delivery of required plan notices.

Many plan sponsors are unaware of the relatively high bar to achieve the 2002 safe harbor. Under the current safe harbor, employees had to have notices (think summary plan descriptions, fee disclosures, safe harbor testing disclosures, summary of material modifications, black out notices, qualified default investment alternative notices, auto-enrollment and escalation notices…did I miss any) either delivered by hand, first class mail, or electronically IF participants have electronic media at work or have consented affirmatively to allowing electronic delivery.

There aren’t many plan sponsors that meet this bar for employees and even fewer who meet this bar for terminated participants who maintain balances and beneficiaries. Fortunately, the DOL has offered up a 2nd safe harbor to meet your disclosure requirements (a shade under 17 years, thanks Big Paper and the AARP lobby)!

The new safe harbor would be optional for plan sponsors and could be used to communicate to plan participants who either provide an electronic address (which could include a phone number for a smartphone) to the plan sponsor or have an electronic address assigned by an employer. Under the proposed rule, plan participants would need to receive both:

-a one-time paper disclosure stating that some or all disclosure documents will be furnished electronically, and

-for each required disclosure, an electronic notice of internet availability with a brief description of the document(s) and instructions on how to access information on the website.

Participants must also be notified of their right to receive paper copies of some or all plan notices. The website hosting the disclosures must also meet certain requirements. This new proposed rule would help alleviate some of the burden. It is far from perfect and more importantly it isn’t a final rule but as plan sponsors are going through their annual disclosures and wondering why you have to mail these things (mainly), you now know the reason and the alternatives. #401k #QPRetirement #403b

What can we learn about the Nationals World Series title (and even the Astros)?

Even if you are not a baseball fan, you may have read about the Washington Nationals improbable run from a record of 19-31 to the wild card and eventual World Series title. During that run a lot of strange things happened. That Nationals were down 3-2 to the 106 win Dodgers. Miraculously they won the last two to win the series. In the World Series, the Nationals jumped out to a 2 game to 0 lead winning both games in Houston.

Clumsy sportscasters were already planning the parade only to watch in horror as the Nationals dropped the next three at home. Down 3-2 in the series, the Nationals were largely assumed to be done. But low and behold, the Nationals won the next 2 and for the first time in 115 years, no home team won a game in the World Series.

What can this teach us about investing & retirement? The first lesson is to never give up. Whether you got off to a late start, weren’t able to save much early in your career, or ran into some road bumps along the way that forced you to watch your account balance rapidly diminish, it’s not over until it’s over.

The second thing this teaches us is small adjustments can reap huge benefits. They may not be obvious at the time, but increases to contributions, deliberate allocations, budgeting discipline, and realistic expectations can all help towards achieving a successful retirement. Down 0-2, the Astros made some adjustments and got back into the series despite being written off early in the series.

The last thing the series taught us is all things aren’t always as they appear. Maybe your living expenses are going to be considerably less in retirement. Maybe your savings rate will jump up significantly as soon as your student loan debt is paid off. Maybe your health is strong and you plan to work well past the assumed rate of return. As I walked to game five of the series, the reality of Max Sherzer not pitching immediately dimmed expectations for that evening. While the Nationals lost, the silver lining was that Max Sherzer was able to get healthy for game seven and help propel his team to a title. It’s never too late to start doing the right thing and to get your retirement savings in order. #401k #403b #457b