April is Financial Literacy Month

Every year, April brings spring showers and a celebration of Financial Literacy Month. Instead of balloons and party favors, the Council for Economic Education launched a video campaign of famous people who explain "what they've learned about the importance of financial literacy and saving." Given the dismal outlook of retirement readiness, any effort to get people thinking about putting money aside for the future is a good thing.

According to the 2016 Retirement Confidence Survey, roughly one of every five individuals expects to postpone retirement for monetary reasons. Insured Retirement Institute research suggests that "less than a quarter of baby boomers, 24 percent, are confident they will have enough savings to last throughout their retirement years."

The extent to which the recently released U.S. Department of Labor Fiduciary Rule will impact savings patterns is unknown at this time. Certainly the goal is to empower individuals to plan ahead.

National Institute of Pension Administrators Workshop About Fiduciary Issues

In a few weeks, on April 27, Dr. Susan Mangiero will address the Connecticut chapter of the National Institute of Pension Administrators ("NIPA"). The educational workshop entitled "Impact of Final DOL Fiduciary Regulation" will address topics such as service provider due diligence and plan participant communication from an economic perspective. Interested persons should email clawton@retirewelltpa.com with questions or to register.

According to the NIPA website:

"The National Institute of Pension Administrators (NIPA) is a national association representing the retirement and employee benefit plan administration profession. It was founded with the idea of bringing together professional benefit administrators and other interested parties to encourage greater dialogue, cooperation and educational opportunities. NIPA’s goal is to improve the quality and efficiency of plan administration.

From its beginning in 1983, the founding concepts and specific purpose of NIPA is to educate and train plan administrators. NIPA started as an outgrowth of an eight person work study group. It is now a 1000-member national organization. NIPA's educational forums include courses, workshops and seminars focusing on the various aspects of plan administration."

We hope to see you there. 

Pension Risk Matters Blog Turns Ten Years Old

A decade after its debut on March 23, 2006, Pension Risk Matters is still going strong with well over 1 million visitors and over 1, 000 commentaries. At the time of its inception, there weren't too many economic blogs devoted to topics such as pension governance and risk management. I'm not sure why. Then and now, these areas command attention. Nevertheless, I want to express my heartfelt thanks to readers, commenters and individuals who allowed me to interview them and also to Pensions & Investments for its recognition of Pension Risk Matters as a "best blog."

As I reflect on the last ten years of blogging, I decided to pen ten takeaways about my experiences. Here they are:

  1. Blogging can be enjoyable if you like to write (and I do). However, it does take time and not everyone has the inclination to research a topic, write about it and then edit their work. On average, I review each blog post for grammar, spelling and consistency two or three times before I hit the "publish" button. In addition, I test any embedded web or file links to make sure that they work.
  2. When it comes to blogging about a time-sensitive topic, not everyone can respond quickly. Many companies have social media policies that strictly prohibit an employee from posting to a blog or other platform without having content pre-approved by a compliance officer.
  3. A blogger should have a mission that makes it easy to return to the keyboard over and over. In my case, I have long been a believer in the importance of sharing information about industry trends and best practices. I strive for neutrality by writing in a way that hopefully educates and informs rather than taking an advocacy position about a particular investment or service provider.
  4. Identify a good technology vendor with whom you can collaborate. Originally, I created blog posts as part of a company website but soon found that approach wanting. As a result, I searched for a company that could provide added functionality. I ended up selecting Lex Blog to design Pension Risk Matters as a standalone blog destination. Later on, I asked Lex Blog to design a second blog - an investment compliance blog called Good Risk Governance Pays. Luckily I have not had too many reasons to contact customer support. When I have, they have responded quickly. Another advantage of working with a dedicated blog company is the ability to bounce ideas around about content delivery and enhancing traffic.
  5. Know the parameters of what is likely to work in terms of ease of use and access. Last year, I had Lex Blog migrate content on Good Risk Governance Pays to a responsive platform that allows readers to quickly view blog posts on a smart phone or tablet. I plan to do that soon with Pension Risk Matters.
  6. Add humor whenever possible. It's not easy to spin jokes about serious subjects such as due diligence or reasonableness of fees. What I do instead, when appropriate, is to choose colorful photos that stand out or begin a commentary with an attention-grabbing quote or anecdote. I'm always happy when readers tell me that they enjoyed reading a post because it was funny or at least memorable.
  7. If you use photos (and I recommend that you do), make sure that you have permission. I am a paid subscriber to several stock photo services, each of which has its own terms and conditions and rate schedule. Whenever someone contacts me with a request to use a photo, I suggest that they contact one of these photo services directly.
  8. Link back to earlier posts if it makes sense to do so. I mark each of my essays as belonging to one or more categories such as Fiduciary Education, Hedge Funds or Valuation. By doing so, life is simpler later on. I can click on any category link to refresh my memory about a preceding analysis that may have relevance to the topic du jour. For example, I just wrote about possible private equity obligations to a portfolio company with an underfunded pension plan(s). I did not remember the exact dates of an earlier set of posts I authored but clicked on Private Equity to quickly find four related posts. In a few minutes, I was able to retrieve and embed various links in my April 2, 2016 write-up.
  9. Be curious and stay abreast of industry happenings. This should be occurring anyhow, especially as the financial services industry continues to shake out from changing regulations, competitive pressures and market events. It's straightforward to set up Google alerts for various keywords and sign up for magazine newsletters. Make notes when attending conferences or webinars. Ask readers for suggestions about what they want to know. I never have a shortage of ideas. 
  10. Have fun. While true that numerous business bloggers commit time and money as part of an overall marketing and sales campaign, it is equally rewarding to be able to interact with professionals about how to stay current and seek to do the best job possible. If one of my blog posts is the springboard to such a discussion, so much the better.

Note to Readers: Many thanks again for your continued interest. If you want to guest blog about the financial services industry and are amenable to writing an educational essay, please email your topic idea and contact information.

Court Says Private Equity Funds Are Liable For Pension Liabilities of Portfolio Company

If you open a box and a dog pops out, your enthusiasm will be curbed if you were expecting something else. Surely this is how several private equity funds must feel now about one of their investments. According to "Private Equity Funds Liable to Union Pension Plan" by Jacklyn Wille (Pension & Benefits Daily, March 30, 2016), a federal judge recently ruled that several Sun Capital funds are "jointly liable for more than $4.5 million in withdrawal liability" that one of its portfolio companies, Scott Brass, "owed to a Teamsters pension fund." (You can visit Bloomberg Law to read the March 28, 2016 decision by clicking here.)

I will defer to attorneys to address the legal issues. So far, I found two commentaries on the heels of this 2016 legal decision. See "District Court Concludes Private Equity Fund Is Liable for Pension Obligations of the Portfolio Company" (Fried Frank Harris Shriver & Jacobson LLP, March 30, 2016) and "Private Equity Funds Held Liable for Pension Liabilities of a Portfolio Company" (Sullivan & Cromwell, March 31, 2016).

From my perspective as an economist, any surprise claim on future cash flows could be disastrous if it is large enough to jeopardize the ongoing viability of a business. Even if a business has sufficient resources to maintain itself as an ongoing concern, utilizing cash for something that was not planned for could lead to a lower growth rate than originally expected. Keep in mind that pension funds, endowments and foundations frequently allocate monies to private equity on the basis of expected returns for this asset class.

Projecting cash flows as part of due diligence is nothing new for many investors. That said, I am not convinced that all enterprise investigations fully address the impact of an underfunded defined benefit plan. I was recently contacted by a firm that was tasked to render a fairness opinion and wanted my views about pension math. The investment bankers were reviewing documents from bidders that radically differed with regard to the treatment of the target company's benefit plan burden. When I was asked to speak and also write about pensions and enterprise value, the invitation came from a senior valuation executive who felt that the topic was not being adequately addressed. See "Pension Plans: The $20 Trillion Elephant in the (Valuation) Room" by Dr. Susan Mangiero (Business Valuation Update, July 2013). Email me if you would like a copy of my 2013 slides about this topic.

In 2013, when this Sun Capital case originally made its way to the court, it struck me as an important issue. (I was not involved in this matter as an expert.) Several editors agreed and I ended up co-writing two articles with Groom Law Group partner David Levine. I've uploaded one of these articles to this pension blog. Click here to read "Private Equity Funds and Pension Plans: A Changing Dynamic" (CFA Institute Magazine, March/April 2014). At my request, Attorney Levine responded to this 2016 decision by emailing the following: "In short, while some private equity firms have already moved to evaluate and, in some cases, clarify their fund structures, this case is likely to lead to a second look at their structures and methods of involvement with their portfolio companies."

If certain limited partners are not already asking questions of their private equity fund general partners about the nature of portfolio company pension plans, controlling interest status and deal structure, their due diligence could quickly change in the aftermath of the 2016 Sun Capital litigation.

Interested persons can click on the links provided below to read earlier blog posts about this topic:

Fiduciary Rule: Instant Gratification or Panic

If you haven't viewed Tim Urban's TED Talk about procrastination, I urge you to do so when you have a short break. He spins a tale of prioritization woe by referencing different parts of our brain. There is the Instant Gratification Monkey who tries to lure the Rational Decision-Maker from productive endeavors. This playful little fella holds sway until deadlines force the appearance of the Panic Monster. Someone then responds by pulling an all-nighter or two until the next crisis. As this illustrator and Wait But Why blog site co-founder explains, it's not an enjoyable way to manage tasks and seldom generates good results. It is far better to prepare in advance and schedule "must do items" accordingly.

Occasionally, planning ahead is difficult. Other times, it is easy. As Mr. Urban illustrates during his fifteen minute "eat your peas" presentation, there are signposts that indicate when acceleration is required. In his case, it was the appearance of his photo and bio in a TED Talks program that gave a date certain he could not ignore. For investment professionals who anticipate the eventual passage of the U.S. Department of Labor Conflict of Interest Proposed Rule into law, it is clear that significant change is afoot. Even if the exact final language or timing is unknown today, fiduciaries (now and later) may not want to sit back and wait.

Already there is talk of increased delegation to organizations that are willing to serve as either an ERISA 3(21) or 3(38) fiduciary, acknowledging that nothing eliminates risk completely. As Pension Resource Institute CEO Jason Roberts opines in an Investment News interview, "...while these offerings can limit fiduciary responsibility for advisers at the plan level, advisers could still be exposed at the participant level."

Others advance the idea that the so-called fiduciary rule will catalyze creative problem-solving, especially in the technology area, and that smart money is on first movers. See "Fiduciary Rule May Spur Product Innovation" by Andrew Welsch (Financial Planning, March 16, 2016). If you missed my earlier posts on this topic, see "Retirement FinTech Gets Another Suitor - Goldman Sachs" and "Financial Technology and the Fiduciary Rule."

Whatever path is decided on will require a minimum amount of time for contracting and setting up operations. Starting late could be costly for everyone involved. Lest you figure out a way to be able to succumb to the Instant Gratification Monkey (unlikely in the case of regulations and rules that require sufficient compliance), now is a good time for procrastinators to address priorities. Expending time right away may not be fun but is nonetheless necessary.

Retirement Planning and Risk Management

Retirement planning is hard work and requires discipline and care. Few of us can rely on luck or the proverbial leprechaun's pot of gold at the end of the rainbow, Assessing uncertainty on an ongoing basis is as important as identifying goals. Sadly, I'm not convinced that the topic of risk management is being discussed as often as it should be with workers and retirees alike.

In the last month, I spent copious time reviewing educational materials produced by a handful of financial advisory firms. What I found confirmed my suspicion that coverage of the topic of risk does not often extend beyond an initial assessment of risk tolerance. A prospective client is asked to complete a questionnaire. The financial advisor then reviews the answers and makes a recommendation about what asset allocation mix seems right. When scenario modeling is used, an individual may be given several possible portfolios from which to choose. Ideally, as an individual's circumstances or goals change, the questionnaire should be completed anew and modifications made accordingly.

Outside of product boilerplate language and short paragraphs about diversification and dollar cost averaging, I did not uncover much information about specific risk management techniques that an individual investor can put to work. This is lamentable. Investment risk management is not just for corporations, financial service companies and governments.

There are lots of techniques that an individual can utilize, starting with the creation of an inventory of what protection is already in place, if any, and a risk map that specifies outcomes that an investor wants to avoid at all costs. In behavioral finance, the desire to avert losses is a well-known psychological bias and should not be ignored. It is important that an individual investor and his financial advisor acknowledge the "worst case" situation as part of setting objectives.

While gauging tolerance for risk is necessary, it is seldom sufficient for several reasons. First, a financial plan may focus only on investments and therefore exclude different kinds of insurance policies that are integral to capturing which risks are already hedged and which ones are not. Second, an investor may realize a target level of return but have a portfolio that is too small to generate sufficient cash flows. Bills are paid with cash, not returns. Third, if securities or funds are selected on the basis of expected return and standard deviation only, material quantitative and qualitative risk factors are likely excluded. As a result, an investor could be assuming "excessive" risk or not enough risk.

As famed author Mark Twain quipped "There are two times in a man's life when he should not speculate: when he can't afford it and when he can." One might say he was a risk manager ahead of his time.

Retirement FinTech Gets Another Suitor - Goldman Sachs

No sooner had I written "Financial Technology and the Fiduciary Rule," an invitation to the Future of Finance 2016 appeared in my in-box with the call-out that "Technology is about to revolutionise financial services." (Note the British spelling for this Oxford conference.) Based on session titles, attendees will hear about topics such as how technology can:

  • Be "used to build trusting relationships with clients" and increase transparency;
  • Substitute for "expensive human intermediaries" to lower costs; and
  • Encourage the creation of "simpler and cheaper" insurance and savings products.

Increasingly, angels and venture capitalists are waking up to the fact that the global retirement marketplace is big and ripe for innovation. Earlier today, Goldman Sachs Investment Management Division announced its intent to acquire Honest Dollar. According to CrunchBase, this transaction follows a seed financing last fall to further build a web and mobile platform that allows small businesses to cost-effectively set up retirement plans. Expansive Ventures led that round that includes former Citigroup CEO Vikram Pandit and will.i.am, founder of The Black Eyed Peas musical group.

Yet another indication that investors see "gold in them thar health care and retirement plan hills" is a $30 million capital raise for a company called Namely. Its February 23, 2016 press release lists Sequoia Capital as the lead venture capital firm for this round, bringing its total funding so far to $107.8 million for this "SaaS HR platform for mid-market companies."

Interestingly, in articles about both Honest Dollar and Namely, the tsunami of complex regulations is cited as a reason why employers need help from financial technology organizations. With mandates growing and becoming more muscular, no one should be surprised if cash-rich backers write big checks to financial technology businesses. As Xconomy reporter Angela Shah points out, multiple start-ups are "trying to compete for the 80-plus percent who don't offer benefits."

There is no doubt that the competitive landscape is changing and will prompt more strategic soul-searching for vendors and policy-makers alike. I've listed a few of the many questions in search of answers as things evolve.

  • Will other large financial service organizations like Goldman Sachs swallow up smaller start-ups? If so, does that change the role of angels and venture capitalists?
  • If enough of these companies pop up to serve small businesses and self-employed persons, is there still a need for the product offered by the U.S. government - myRA?
  • Will the U.S. Department of Labor fiduciary rule, if passed into law, accelerate the formation and growth of financial technology companies? If so, how?
  • Will there be a need for more or fewer financial advisors as the financial technology sector grows?
  • Will individuals buy more insurance and savings products? If not, why not?

Life in financial services land will never be dull.

Financial Technology and the Fiduciary Rule

Whether the proposed U.S. Department of Labor so-called fiduciary rule becomes law this year remains to be seen. Many in the industry think its passage is nigh. Critics hope for a reprieve, asserting that costs are likely to outweigh benefits.

One oft-repeated concern is that small savers will be harmed if financial service companies decide to jettison accounts that fall below target asset levels. The Securities Industry and Financial Markets Association ("SIFMA") explains "Because they cannot afford a fiduciary investment advisory fee, they will instead be forced to solely rely on a computer algorithm known as a 'robo-advisor.'"

Financial technology enthusiasts will counter that a more automated approach to retirement planning is a good thing for big and small savers alike. Certainly the topic merits review for at least two reasons.

  • The use of machines has exploded in recent years. In her November 9, 2015 speech about technology, innovation and competition, U.S. Securities and Exchange ("SEC") Commissioner Kara Stein foretells buoyant growth with an expected $2 trillion in assets under management by robotized advisors by 2020.
  • There are central questions about the fiduciary obligations of a company that concentrates on algorithmic advising and money management. Besides seeking to contain model risk, there is a need, at a minimum, for a vendor to regularly review client objectives and constraints. Click here to access a white paper on this topic by National Regulatory Services.

A few weeks ago, a handful of venture capitalists and prominent angels announced a $3.5 million capital round for a financial technology company called Captain401. Its stated goal is to help small businesses streamline the creation and administration of 401(k) plans that the founders argue would be too expensive to offer without automation. A cursory review of the company website makes it impossible to know much about its business model, technology safeguards or compliance infrastructure. Nevertheless, the funding of this and other "Fin Tech" organizations augurs favorably for added growth in this area.

As the global retirement marketplace adapts to regulatory and economic realities, it will be interesting to watch (or perhaps lead) what unfolds in terms of innovation, service provider competitiveness, cost tiers and other outcomes that impact savers and those who have already retired.

Simplifying Investment Product Jargon

Being able to make an informed decision about what to buy is important and retirement products are no exception. If language is obtuse, confusing or otherwise difficult to understand, an investor may end up making an inappropriate selection or assuming too much risk.

Although each industry has its share of technical jargon, UK personal finance editor Simon Read thinks there is a "massive problem when it comes to financial services, with the pensions industry arguably the worst of the lot." In "Pension firms urged to use plain English" (Independent, March 2, 2016), he suggests that terms such as "flexi-access drawdown" or "safeguarded benefits" mean little to the everyday reader and are therefore not helpful.

In its 2014 Wall Street Journal compilation of "loathed investment jargon," American Association of Individual Investors ("AAII") executive Charles Rotblut explains "There is too often an assumption that everybody understands what is being discussed, when the reality is much different."

Naming a product for an investment strategy does not necessarily help the investor either, especially if the strategy means different things to different people or has multiple monikers. Products that are part of the smart beta family come to mind.

According to the Financial Times, their use is "swelling," with assets of around $400 billion or one fifth of the $1.7 trillion Exchange Traded Fund market. At the same time, this strategy has no singular definition or name. Ben Johnson with Morningstar describes terms such as "smart beta" and "enhanced indexes" as a "broad and rapidly growing category of benchmarks and the investment products that track them." See "A Sensible Approach to 'Smart Beta'" (Morningstar, May 14, 2014). Eric Balchunas with Bloomberg writes that "Few can define it..."

A 2015 investor alert, issued by the Financial Industry Regulatory Authority ("FINRA"), describes a smart beta index as one that is "based on measures other than weighting by market capitalization" and gives examples of labels being used to market these products. Their recommendation is that interested persons pose six questions before purchasing as follows:

  • What is the product's strategy?
  • What are the costs?
  • What are the potential advantages?
  • What are the potential risks?
  • How liquid is the product and its holdings?
  • Are the performance figures back-tested?

This is not a universal list of questions to ask nor is this type of risk-return inquiry unique to smart beta products. Investors and their advisors should be kicking the proverbial tires on any product being considered. Retirement plan fiduciaries need to do likewise on behalf of plan participants. The message remains the same. In order to make an informed decision, it is important that product language is clear and easy to understand.

Speaking of words, logophiles have cause to celebrate. March 4, 2016 is National Grammar Day.

Investment Management and Stress

The fact that some people thrive on stress could be a plus if you want to work in the financial services industry. According to "The most (and least) stressful jobs in banking and finance" (efinancialcareers.com, December 31, 2015), careers that were ranked as most stressful to least stressful are as follows:

  • Investment banker;
  • Trader;
  • Risk management and compliance;
  • Wealth management/private banker;
  • Institutional sales;
  • Management consulting;
  • Private equity;
  • Equity research;
  • Fund manager; and
  • Accounting.

Interviews with recruiters and employees mentioned long hours and a lack of control over issues that create problems and demand solutions. Respondents who work in the risk management and compliance areas talked about their frustration when they call out areas in need of improvement but then "nothing is done." 

Other professionals, such as those who work in wealth management, talked about competition as being a source of stress. Making money only occurs after an advisor expends considerable effort to build a big client base but then more time is needed to prevent an aggressive peer from taking assets away.

Besides job-specific concerns, industry changes can be a source of worry if they are expected to radically transform the way business is conducted. Consider the rise of financial technology ("FinTech") or what Inc. Magazine referred to as "One of the Most Promising Industries of 2015." According to a recent Wall Street Journal article entitled "Can Robo Advisers Replace Human Financial Advisors?", assets managed without human intervention grew from $3.7 billion to $8 billion between July 2014 and July 2015. Although critics counter that robots cannot offer individualized advice about specialties such as estate planning, a reliance on automation, if substantial, will result in winners and losers.

Regulatory changes can raise stress levels too, especially if one has little latitude to adapt to a new rule at the individual level. The U.S. Department of Labor's proposed fiduciary rule is already showing up in the form of strategic corporate decisions that are moving people from one place to another. This week's announcement about a sale of MetLife's U.S. advisor unit to the Massachusetts Mutual Life Insurance Co. comes on the heels of the American International Group's decision to sell its broker-dealer unit rather than potentially incur added compliance costs. See "MetLife exits brokerage business as DOL rule looms" (Investment News, February 29, 2016).

Although not specifically mentioned in articles about stressful jobs, ERISA retirement plan fiduciaries are surely aware of their personal and professional liability exposure. Add the complexities of new legislation and economic challenges such as negative interest rates and it's not a stretch to understand why some fiduciaries might need to take a few deep breaths to relax. No doubt their public pension colleagues may need a zen moment as well.