Fiduciary Standard TV Ads

I have long professed my concern that retirement issues get short shrift when it comes to political speeches and public discourse. I am not talking about industry discussions which occur all the time. I am referring instead to Main Street outreach. Even today, there seems to be scant mention by U.S. presidential candidates about how to strengthen programs like Social Security and reform tax laws to encourage savings. Of course what the pundits call the "silly season" has just begun, with many months of campaigning to go. Imagine my surprise then when, in between news segments this week, several ads appeared on television about impending changes. In one ad, a man and a woman are chatting in a car about their concern that talking to their advisor will become more expensive and they will end up talking to a robot. Another ad showcases a small business owner who worries that new regulations will make it harder for him to keep offering a 401(k) plan to his employees. Viewers are urged to call their lawmakers.

Research suggests that the ads are sponsored by the Secure Family Coalition. Its website lists organizations that include the following:

  • American Council of Life Insurers;
  • Association for Advanced Life Underwriting;
  • Insured Retirement Institute;
  • National Association for Fixed Annuities;
  • National Association of Independent Life Brokerage Agencies; and
  • National Association of Insurance and Financial Advisors.

On the opposite end of the spectrum are groups such the Institute for the Fiduciary Standard. Its website cites advocacy, research and education of the public as ways for "all those willing to help" to get involved.

Regardless of one's stance about the U.S. Department of Labor proposal (and discussions by other regulators and lawmakers), the hope is that further conversations about retirement planning will encourage a long overdue focus on the abysmal state of readiness in this country and around the world.

If ads are hitting the airwaves now, is a Hollywood movie next?

Fiduciary Standard Thrust and Parry Continues

In the aftermath of the recent U.S. Department of Labor hearings about the fiduciary standard, the debate continues with fervor. In the last few days, I have seen television ads that are subtle but seem to impugn attempts at getting a final rule in place. Elsewhere, estimates suggest that regulations could be costly. According to "SIFMA: DOL Fiduciary Rule To Cost Firms Over $5 Billion" (Wealth Management, July 20, 2015), the Securities Industry and Financial Markets Association posits that broker-dealers will incur a large start-up outlay of about $5 billion and then ongoing costs thereafter in excess of $1 billion. Others counter that the benefits are considerable and worth the incremental expense.

Ongoing lively debates may not make a difference if Plan Sponsor's John Manganaro is correct. In "DOL Stands Firm on Fiduciary Rule Despite Negative Comments" (August 12, 2015), the point is made that Secretary Perez feels strongly that the U.S. Department of Labor (a) has been diligent in vetting critics' comments and (b) making modifications to hopefully ensure flexibility.

School is still out as to the "what, when and how." I predict that the aftermath may offer unexpected surprises. As with so many mandates, there are plenty of people who immediately look for the loopholes and act accordingly.

U.S. Department of Labor Hearings About Conflict of Interest and Fiduciary Role

Though it may seem arcane to those outside of the financial services industry, the current debate about who serves as a fiduciary, compensation and duties is a big deal. Depending on what you read and with whom you speak, millions of retirees could be materially impacted. In the spirit that what happens next is newsworthy, you may want to tuck the hearing URL away and check back often. As the four days of public hearings proceed, the U.S. Department of Labor is expected to publish a transcript of what witnesses say. Besides a chance to know what professionals from a wide variety of backgrounds aver (both pro and con), interested parties can download nearly 2,600 comment letters. Click here to access the Public Hearing Agenda for the period from August 10, 2015 through August 13, 2015. Click here to download and read the following: (a) requests to present during public hearings (b) comment letters and (c) petitions.

Pension Plan Divestment and ESG Investing

In its quest to advise the City Mayor, Boris Johnson, about climate change, the London Assembly recently urged the London Pension Fund Authority ("LPFA") to rid itself of its carbon ("specifically fossil fuels") investments and allocate the proceeds to "responsible funds, which deliver appropriate returns to the taxpayer." They referenced the National Association of Pension Funds ("NAPF") and its recognition that institutions have a role to play in Responsible Investment ("RI") or what the NAPF describes as the "integration of environmental, social and governance (ESG) factors in the investment decision-making process and stewardship activities."

According to Chief Investment Officer, the LPFA, with assets in excess of 4 billion pounds sterling, replied, in a letter to its 80,000+ members, that it takes ESG investing seriously as a long-term vehicle, adding that its "key aim must be to ensure we can continue to pay your pensions as they fall due." Although this jumbo pension plan currently has "less than 1% invested in fossil fuels," it carved out space on the LPFA website to address the topic as follows: "Responsible investment factors, such as low carbon, may be relevant as an additional consideration. However, screening out stocks for investment/divestment on ethical grounds only is in conflict with the Board's fiduciary duty if the decision risks significant financial detriment to the fund."

The concepts of responsible investing and divesting are not new. Pension plans and sovereign wealth funds are a few of the many organizations that have been approached to jettison certain investments. Push back, when it occurs, is based on the notions that (a) entrenched shareholders can do a lot to effect change (b) divestment costs are high and/or (c) selling off a position could violate fiduciary obligations to beneficiaries. In "Selling out of fossil fuels no solution for climate change" (Financial Times, March 22, 2015), Anne Stausboll details the governance stance adopted by the California Public Employees' Retirement System to encompass "advocacy, engagement with companies and investing in climate-change solutions." As its CEO, she suggests that "Walking away by simply selling off assets through divestment will not help."

In 2007, I wrote about my interview with Maria Bartiromo, then CNBC senior anchor, on this topic of whether, how and when to divest. See "Is There Fiduciary Liability Attached to Divestment?" I offered four considerations as repeated below:

  • Selling an investment due to political pressures could end up costing "taxpayers and plan participants in the form of 'unexpected' transaction costs" which in turn could worsen sub-par funding levels;
  • Proceeds from any mandated sales could lead to lower returns than originally projected;
  • Fiduciaries may find themselves accused of breaching their duties unless they can adequately demonstrate the economic rationale for divesting; and
  • Plans, especially those with small staffs, could be overwhelmed with having to spend considerable time and money to get up to speed before making direct ESG type investments.

As with any investment action, there is never a free lunch. Every decision needs to be carefully reviewed.

Interested readers may want to check out the following items:

Beauty Makeovers and the Retirement Industry

As I milled around the counters last Sunday during a private shopping event, I was reminded how much fun it is to try out new products. Certainly the roughly $400+ billion beauty industry has realized to great effect that the concept of a makeover and the lure of a new look can generate profits. If the consumer likes a product, there is a strong likelihood that he or she will buy it again when the first bottle is finished. Indeed, some cosmetic and skincare retailers offer sign-ups to ensure regular deliveries of favorite creams and gels. Make no mistake however. The purchasing experience itself is an important part of the process. Those organizations that recognize the allure of feel, smell and touch are raking in the dough. According to "The Sephora effect: How the cosmetics retailer transformed the beauty industry" by Sarah Halzack (The Washington Post, March 9, 2015), brand loyalty has given way to plunking down dollars "in a place where you can easily test virtually any product." Buyers have constant access to information, in large part due to social media marketing. "They don't have to go to a counter to get that education."

Although lipstick and Individual Retirement Accounts ("IRAs") may seem like polar ends of the consumption spectrum, there are enough similarities that financial services marketing executives may want to spend some time perusing the powder and perfume aisles. To curry favor with investors who find it hard to differentiate among savings vehicles, savvy sellers are starting to recognize the importance of making the buying process "fun" and "lively." Offering a financial "beauty makeover" with encouragement about a better future is one way to establish a meaningful dialogue between an advisor and an investor. Being transparent and showcasing multiple products is another strategy.

Things are changing from Wall Street to Main Street but there is room for improvement. In "Creative Content Marketing for Financial Services: 3 Examples" (Chief Content Officer Magazine, March 7, 2013), Kevin Cain points out that "...the industry seemingly operates under the misconception that its heavy regulatory burdens both preclude and exempt it from taking a creative approach to content" and should embrace "the style and delivery of the message." He then illustrates the tact taken by three financial service firms to attract and retain business.

Sentient marketing and a dash of pizzazz may soon become a necessity if the financial services industry wants to sell to the younger generation. As the Society of Actuaries website informs, those in their twenties and thirties are expected to "make up 50 percent of the U.S. workforce by 2020" and therefore represent "a sizable market for financial products." To reach these millennials, TIAA-CREF executives, Richard Pretty and Jonathan Gentry, urge firms to: (a) explain both short-term and long-term planning issues such as paying off student debt while seeking to put money aside (b) recognize the imperative of digital communications and engage Generation Y accordingly (c) leverage the influence of parents and peers and (d) describe the vagaries of the capital markets and "restore confidence in investing." They may need to act fast if they want to compete with robo advisors. As Marlene Y. Satter writes in "Wealthy millennials want automated retirement" (Benefits Pro, April 28, 2015), a new study from Global Wealth Monitor will eschew the "personal touch in retirement planning" in exchange for online tools and analysis.

Those planning for retirement may not get a free lipstick but snappy interactions with prospects and existing clients are likely just the beginning of the brave new world of financial services marketing. Competition with robots and clarion calls for lower fees challenge service providers even further.

Investment Fiduciary Monitoring, Economic Damages and Tibble

Following the publication of "An Economist's Perspective of Fiduciary Monitoring of Investments" by yours truly, Dr. Susan Mangiero (Pensions & Benefits Daily, May 26, 2015), I decided to write a second article on the topic as there is so much to say. This next article is co-authored with Dr. Lee Heavner (managing principal with the Analysis Group) and continues the discussion about investment monitoring from an economic viewpoint. Entitled "Economic Analysis in Fiduciary Monitoring Disputes Following the Supreme Court's 'Tibble' Ruling" (Pensions & Benefits Daily, June 24, 2015), we address the case-specific nature of investment monitoring by fiduciaries and the complexities of quantifying possible harm "but for" alleged imprudent monitoring.

Noting the discussion of changed circumstances by the High Court as part of its Tibble v. Edison International decision, it is imperative to understand that investment monitoring involves multiple steps, each of which takes a certain number of days to complete. "In the world of dispute resolutions, every complaint, expert report, and decision by a trier of fact is specific to a date or period of time. Time is no less a crucial variable with regard to the creation and implementation of an adequate investment monitoring program." While "changed circumstances" are likely to vary across plans and plan sponsors, exogenous events can spur further monitoring. "The departure of a key executive, a large loss, or a government investigation for malfeasance are a few of the events that may lead plan fiduciaries to subject an investment to enhanced scrutiny."

The expense of monitoring is another issue altogether, one that is nuanced, important and necessary to quantify. We point out that (a) there are different types of costs (b) expenses occur at different points in time and (c) some costs may be difficult to assess right away. "For example, when monitoring leads to a change in vendor or investment that in turn results in participant confusion, blackout dates, account errors, or a lengthy delay in setting up a new reporting system, the true costs may not be known until well after the transition is completed."

There are no freebies. There is a cost to taking action as the result of monitoring. There can be a cost to inaction as well. Investment selection and investment monitoring are different activities. Categories of investment monitoring costs include: (a) use of third parties (b) search costs (c) change costs and (d) opportunity costs. Any or all of these categories may come to bear in a calculation of "but for" economic damages. As a result, "there may be substantial variation to when prudent fiduciaries would act let alone how long it would take an investment committee to complete each action." An assessment of economic damages - whether for discovery, mediation, settlement or trial purposes - requires care, consideration and an understanding of the complex investment monitoring process.

For further insights and to read about this timely topic, download our article by clicking here.

De-Risking Slides Now Posted

If you missed the May 27, 2015 webinar entitled "Pension De-Risking for Employee Benefit Sponsors: Avoiding Litigation and Enforcement Action," click here to download the presentation slides.

Union Plans and Politics

Since I created this pension blog over nine years ago, I have been surprised and puzzled as to why retirement plan issues have been given short shrift by politicians. I understand that rescinding benefits is likely to lose votes but there comes a time when reality intrudes and it becomes impossible to ignore that the emperor has no clothes.

With the passage of the Multiemployer Pension Reform Act of 2014, the tide appears to be slowly turning. Lawmakers worked with union plan trustees to craft an arrangement that allows for a reduction of pension benefits as a way to avoid disaster. According to "Congress passes major change to law on union pensions," the executive director of the National Coordinating Committee for Multiemployer Plans ("NCCMP") praised the new legislation as a "tourniquet on a gigantic gaping wound." A quick look at the U.S. Department of Labor website reveals a large number of multiemployer pension plans that are considered "critical" or "endangered." In its February 2015 assessment of "high-risk areas," the U.S. Government Accountability Office listed the Pension Benefit Guaranty Corporation ("PBGC") as having an "uncertain" future. Although it has one of the biggest federal portfolios in excess of $89 billion, "exposure to future losses for underfunded plans" is $184 billion with "the deficit in the multiemployer program, composed of about 1,400 plans" showing a rise of more than four hundred percent. In contrast, single-employe programs covered by the PBGC had improved although "still accounted for $19.3 billion of PBGC's overall deficit."

Despite an urging from U.S. presidential candidate Bernie Sanders (I-Vermont) to repeal the Multiemployer Pension Reform Act of 2004, at least one union plan is forging ahead to cut benefits. See "Teamsters plan moves to cut retiree benefits(Benefits Pro, April 10, 2015).

Let's see how the campaigns unfold in the months leading up to the 2016 elections. How will candidates tackle union pensions as well as public retirement plan economics, Social Security, Medicare and corporate retirement plans with gaps in their funding?

National Doughnut Day and Retirement Plans

In case you didn't know, today is National Doughnut Day. According to ABC News, Cumberland Farms and Krispy Kreme are a few of the sellers that are giving out freebies in celebration of this longstanding holiday. In its May 28, 2015 press release, Dunkin' Donuts (another participating retailer) informs that the holiday has been around since 1938, having been created "to honor women who served donuts to soldiers during World War I." The history of this sweet treat goes back even further. Smithsonian Magazine chronicles the popularity of the doughnut, citing its introduction to Americans by the Dutch when Manhattan was called New Amsterdam. Since then, sales have soared with 2012 doughnut store revenue reported at $11.6 billion.

Presumably free doughnuts generate sales of other products like coffee or tea and that is one motivation for holiday largesse. Another motivation for giving things away has to do with product branding. The Chief Marketing Officer Council website touts a 2015 global estimate of $540 billion as the amount that companies expect to spend on advertising. I experienced this firsthand when I recently spoke at the Government Finance Officers Association annual conference. Before my session, I perused some of the booths in the exhibition hall. I now have stress balls, pens and tote bags that sponsors gave away in droves to ensure continued name recognition. Two days ago, the subject of branding came up again when I met with the general counsel of a large financial institution. He specifically used the term "building the brand" when describing transparency and good governance as a way to differentiate his firm's offerings to pension funds, endowments and family offices.

This got me thinking about benefits that employers offer to attract new employees and retain existing talent. Jen Schramm writes about a 2014 survey in "Which Benefits Attract Highly Skilled Workers?" (Society for Human Resource Management, April 1, 2015), stating that health care, retirement and leave arrangements "were the top benefits used to retain employees at all levels of an organization." This finding leads to logical questions about (a) how employers are branding the benefits offered in seeking to fill jobs and (b) whether only well-funded and viable plan benefits get promoted to newcomers and existing workers.

Understanding some basics about branding helps. Mark Di Somma recently addressed the seven R's of a powerful branding strategy to include the following:

  • Resonance - Does a brand "talk to people's needs in ways that feel personal, relevant and wonderful?"
  • Resilience - Does the brand create a competitive advantage?
  • Results - Will the brand add to the bottom line?
  • Resolution - Is the brand inspiring and "Does it align with the vision and the purpose?"
  • Radiation - Will the brand generate positive conversations?
  • Redefinition - Does the brand dazzle or simply move the deck chairs around?
  • Recognition - Does a brand build on what customers (in my example, employees and prospects) already know?

His points can be applied to the offering of various benefits and related communications with participants. Based on my experience as a forensic economist, numerous cases on which I have worked in the last few years allege poor communications and rescinded benefits (even when perception differs from reality). In brand parlance, this means there is low resonance, low resilience and low resolution. Participants do not feel that the benefits meet their needs. Increased costs relating to factors such as longevity are reducing the bottom line and forcing lots of companies to rethink whether certain benefit programs should be maintained. Underfunded and badly managed benefits can lead to negative "radiation" as reflected in the growth of putative ERISA class actions with multiple disgruntled employees willing to serve as plaintiffs.

The topic of benefits "branding" (i.e. using benefits to attract and retain talent as a way to create enterprise value) is far from trivial. Companies throughout the world are seeking to balance the costs of offering benefits against the hope that a generous HR mix helps shareholders too. It is certainly food for thought, in between bites, for those who plan to munch on a free doughnut today.

An Economist's Perspective of Fiduciary Monitoring of Investments

I am delighted to share my recent article with readers of this pension blog. Entitled "An Economist's Perspective of Fiduciary Monitoring of Investments" (by Dr. Susan Mangiero and published in Bloomberg BNA Pensions & Benefits Daily, May 26, 2015), I wrote this article in the aftermath of the May 18 Tibble v. Edison decision by the U.S. Supreme Court.

A central thesis is that "ongoing oversight is an exercise in risk management" and that "[r]isk management is a never ending process." The article emphasizes the importance of (a) examining multiple risk factors and not relying on performance numbers alone (b) understanding the presence of financial leverage (should it exist) (c) clarifying the role of a service provider when an outside party is used and (d) letting participants know about the type of monitoring being done by an investment committee.

The topic of this article readily lends itself to at least one lengthy book as there is a considerable amount to say. I am co-writing a sequel article with fellow economist, Dr. Lee Heavner.

If you are interested in discussing investment fiduciary monitoring as relates to trustee training, compliance or dispute resolution, please email contact@fiduciaryleadership.com.