Establishing Risk Management Protocols for Defined Benefit Plans and Defined Contribution Plans

As a follow-up to my January 12, 2017 announcement about retirement plan risk management education with the Professional Risk Managers' International Association ("PRMIA"), I am delighted to announce a co-presenter for the February 23, 2017 learning event. Distinguished attorney Meaghan VerGow will talk about ERISA litigation and fiduciary risk management as part of "Establishing Risk Management Protocols for Defined Benefit Plans and Defined Contribution Plans." Click here to read Meaghan VerGow's impressive bio as law firm partner and ERISA expert with O'Melveny & Myers LLP.

Session One will convene from 10:00 am EST to 11:15 am EST live this Thursday. If you cannot make it in real time, the event can be downloaded for later viewing. It is the debut event of four CPE-qualified events. Speakers will examine risk management for retirement plans from both a governance and economics perspective. Topics to be discussed include the following:

  • Procedural prudence and the costs of ignoring fiduciary risk;
  • Risk management differences by type of retirement plan;
  • Industry norms and pitfalls to avoid;
  • Role of Chief Risk Officer, investment committee members and in-house staff; and
  • Suggested elements of a Risk Management Policy Statement.

Visit the PRMIA website to register for Session One and read about course content for Sessions Two through Four. Our exciting roster of co-speakers for these future events will be posted shortly on this blog at

Five Retirement Fiduciary Events That Made a Big Difference in 2016

Kudos to Chris Carosa for his continued efforts as publisher of Fiduciary News. I share his mission to educate and provide independent insights. That is why I was delighted to be one of the contributors to his recent article, "These Five Developments Dramatically Changed the Retirement Fiduciary World in 2016."

My view is that it is hard to pinpoint standalone issues. So many areas overlap. For example, a discussion about fiduciary litigation frequently involves questions about the reasonableness of fees. A conversation about fees often means talking about asset allocation as well. An analysis of asset allocation trends is commonly linked to investment performance realizations. When one talks about returns, it is usually in the context of economic forecasts. Overlay regulatory mandates, including the imminent U.S. Department of Labor Fiduciary Rule, and it becomes apparent that retirement plan governance is complex territory. Nevertheless, Chris did a noble job of listing significant and distinct trends with his readers. His list includes the following:

  • Capital Markets - Low interest rates continue to challenge both institutional and individual investors. The pension risk transfer market is experiencing unprecedented growth as sponsors seek to focus less on retirement plan management and more on operating their core businesses. Post-election, the U.S. market seems poised for better returns in 2017 although it is thought that low-cost index funds will remain popular.
  • Excessive Fee Litigation - The attention paid to fee levels and the process of assessing reasonableness continues to grow. Some believe that the proliferation of lawsuits has resulted in improved governance regarding the selection and review of various funds. I am quoted as saying that "...investors in search of turbo-charged performance struggled with the reality that the costs of alternatives, derivatives and structured products are generally higher than passive funds."
  • Fiduciary Rule - Uncertainty is the watchword with multiple plan sponsors unsure about what they might want to delegate to a third party. Consulting firms that offer independent fiduciary services have an opportunity to help their clients solve real compliance problems.
  • State Sponsored Private Employee Retirement Plans - Deemed controversial by some, these arrangements to help small business employees are being rolled out by states throughout the nation. The goal is to encourage savings over the long-term although I have doubts about accountability and redress for disgruntled participants. Click to read "State Retirement Arrangements for Small Business Employees" (June 9, 2016) and "Public-Private Retirement Plans and Possible Fiduciary Gaps" (June 5, 2016).
  • Presidential Race - Carosa writes "Of all the events of 2016, nothing will have had more of an impact than the presidential election." Perhaps he is correct. Already the yearend markets have been chugging upward and optimism is on the rise. Yet there are questions about whether regulations such as the Fiduciary Rule will be weakened or perhaps eliminated altogether. Should that occur, financial service industry executives will need to respond.

The article lists other developments including restructuring deals. I am quoted as saying "Restructuring deals have made 2016 a notable year in terms of the number of pension risk transfers and the outsourcing of the responsibilities of a Chief Investment Officer to a third party. Bankruptcy has catalyzed the restructuring of multiple plans, much to the dismay of the savers who have been asked to accept lower benefits. Service providers who have been ordered by the courts to take less favorable terms as swap counterparties or consultants are correspondingly glum."

President John F. Kennedy declared "Change is the law of life. And those who look only to the past or present are certain to miss the future." I concur. Where there is disruption, there is always the opportunity to address a problem and win the hearts and wallets of investors.

Here's to a terrific 2017. Happy holidays!

Creating A Life Plan Before It's Too Late

In case you missed the announcement, today is part of a seven day celebration of National Retirement Security Week. The event is sponsored by the National Association of Government Defined Contribution Administrators, Inc. ("NAGDCA") and stems from Congressional action to:

  • Apprise employees about the need to be retirement ready in terms of personal finances;
  • Educate individuals about various ways to save for retirement; and
  • Help employers encourage their employees to save more.

While true that it's essential to address issues such as expected lifespan, job mobility, the power of compounding and taking advantage of a company match, money is not the only end goal. One could have a substantial piggy bank but end up lonely or in search of something satisfying to do. According to "How to Retire Happy" by Stan Hinden (AARP Bulletin, September 2014), it is important to ask what comes next. Some persons end up spending more time in retirement than the number of years they worked. Kerry Close reports for Time Money that a "record high number of retirees" are unhappy. She cites an Employee Benefit Research Institute study that shows a big drop in "very" satisfied retirees from 60.5 percent in 2012 to 48.6 percent in 2016.

One suggestion is to create (or update) a life plan, even if you are far from the gold watch party. According to a blog post by consultant and writer Royale Scuderi, this document should summarize "where you are now in all the areas that matter to you, where you want to improve and what you'd like your life to look like in the future." Easier said than done, pondering the big picture can be challenging but enlightening as well. As someone who is updating her life plan right now, I find the effort worthwhile. Acknowledging that you cannot recapture time reinforces the concept that one should be reflective about the past, grateful for the present and excited about the future. As Anthony Hopkin's character said in Meet Joe Black, the years go by "in a blink."

For those who want to give it a go, check out the the narrative provided by life coach Michael Hyatt. Earlier this year, he co-wrote Living Forward: A Proven Plan to Stop Drifting and Get the Life You Want with Daniel Harkavy. An online search yields additional educational resources. (Note: This blogger has no relationship with Michael Hyatt.)

More About the Fiduciary Gap

Thanks to the many people who shared their insights about various state retirement arrangements for eligible private company employees and the need for a proverbial umbrella to address the fiduciary gap.

Let me start with the Nutmeg State program since I discussed it in two earlier posts. Interested parties can click to download the final legislation that sets up the Connecticut Retirement Security Exchange. (Note the new name.) Several changes caught my eye.

  • On page 156 of 298, there is a provision that "If a participant does not affirmatively select a specific vendor or investment option within the program, such participant's contribution shall be invested in an age-appropriate target date fund that most closely matches the participant's normal retirement age, rotationally assigned by the program." If "rotationally" means "random," it will be helpful to know how board members identify age cohorts and select (and monitor thereafter) a particular product for each group.
  • Regarding a provision that allows the sitting governor to individually select the board chair without the advice and consent of the General Assembly, a best practice is that the engagement process be transparent. Interested parties want to know that the appointment reflects the right person for the job
  • It would be helpful to know the basis for why the voluntary opt-in for small businesses with more than five employees was removed. After all, forced regulation could end up costing firms so much in terms of paperwork and payroll set-up that hiring plans are put on hold.
  • It would be helpful to know how the three percent default contribution level will be tracked so that legislators will know whether to seek an increase later on. It's a low number, especially given the math for what can be done privately. Suppose a person makes $50,000 per year in wages. The three percent deduction translates into $1,500. In 2016, the IRA contribution limit for someone younger than fifty years is $5,500. Should an individual decide to allocate the maximum, participation in the state program will logically require that the individual go elsewhere to invest the additional $4,000. Why doesn't that individual simply invest the full $5,500 with one reputable organization? I assume the counter argument is that an individual who would not max the annual IRA limit needs a nudge in the form of the state program.

As I wrote in "State Retirement Arrangements for Small Business Employees," there are multiple state endeavors and one would need to examine the details of each one to assess economic impact and pension governance implications. Questions about federal programs exist as well. Putting aside dire long-term projections about the U.S. Social Security Trust Fund, absent reforms, several critics are unhappy with what they see as a fiduciary gap for anyone enrolled in the myRA program. By way of background, there are no fees to the individual enrollee. This is good but the guaranteed return is low because it is tied to federal debt security yields. For June 2016, the number is 1.875 percent APR. There is a lifetime maximum of $15,000 for eligible persons. A person's employer must agree to facilitate automatic deductions which means you must be employed.

One attorney I called today said he did not think there is a fiduciary in place for this federal product. Chris Carosa, editor of Fiduciary News, has another take. In "Does "myRA breach fiduciary duty?" he lays out reasons why he thinks the myRA product is "blatantly ill-suited for retirement savers." He decries the "oozing irony" of political leaders who want the Fiduciary Rule applied to others but not to themselves, adding there is no diversification potential and the selling firm (i.e. the U.S. Treasury) is conflicted by distributing its own product. Another retirement industry professional wants to know "What fiduciary would MANDATE that a twenty-five year old invest his or her retirement assets in a short to intermediate term government bond fund and expect to avoid liability?

You get the picture. We need to understand where the fiduciary gaps exist and then strive to close them as quickly and efficaciously as possible.

State Retirement Arrangements for Small Business Employees

After posting "Public-Private Retirement Plans and Possible Fiduciary Gaps," a senior legal expert kindly informed me that Connecticut's legislation draws extensively from U.S. federal pension law. (ERISA does not directly apply to most government plans and the U.S. Department of Labor has proposed a safe harbor that would exempt states from being tagged as ERISA fiduciaries.) Interestingly, a word search for "fiduciary" in the Public Act No. 16-29 document comes up empty. Specifically, as laid out in Section 6, entitled "Board Duty To Act With Prudence And In Interest of Participants," the Connecticut Retirement Security Authority board of directors are to act with the "care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims" and solely "in the interests of the program's participants and beneficiaries."

Regarding legal redress, my understanding is that individuals who allow their employers to deduct three percent of their taxable wages to be placed in an "age-appropriate target date fund" or similarly allowed investment will not have the right to sue individual members of the Connecticut Retirement Security Authority Board nor will they have the right to sue the State of Connecticut. They will have to rely on authorized directors and the Attorney General to properly oversee selected service providers and take corrective action to improve things going forward. However, even if participants can demonstrate economic harm, they would not be able to recover past damages.

Programs offered by other states vary. One would have to research dozens of legal documents to compare and contrast governance, investment opportunities and conflict of interest avoidance mechanisms. Interested parties can visit the Pension Rights Center's State-based retirement plans for the private sector or the AARP's State Retirement Savings Resource Center. I am not sure how often these websites are updated.

I remain skeptical and am not alone. Michael Barry, president of the Plan Advisory Services Group, explains his reservations in "Are State Plans the Answer?" (Plan Sponsor, November 2015). Paul Schott Stevens, president and CEO of the Investment Company Institute, gives a thumbs up to private initiatives such as expanding multiple employer plans or MEPs to include smaller companies. Another way forward would be to simplify 401(k) plan regulations to encourage employers to better help their workforce save for retirement. See "State-Run Retirement? Better to Go Private" (Wall Street Journal, February 7, 2016).

My lack of enthusiasm for these state-run programs has more to do with philosophy and a desire to encourage economic growth. Here is some food for thought.

  • Small businesses around the world are drowning in a sea of regulations. According to an article in Small Business Trends, there is an inverse relationship between company formations and the number of pages in the Federal Register. These "little engines that could" create jobs are not leaving the train station, discouraged by too many rules.
  • As any free market economist can handily demonstrate, unintended consequences often occur, resulting in added expense and unwelcome behavior. Instead of spending X hours per month on growing sales and profit, a small business owner that is obliged to complete paperwork may now forego hiring new employees or cut back on existing perks.
  • Some of the states that are setting up retirement programs for private company workers have a poor track record as evidenced by underfunded pension plans for municipal staff.
  • Unless one is convinced that small company employees are unable or unlikely to set up an IRA on their own, these state-involved arrangements are not needed. CNBC reports that "Employees participating in auto enrollment tend to contribute less than people who sign up for 401(k) plans on their own, often because their employers set a low default contribution level."
  • It's not clear to me that individuals will have a better level of consumer protection by being part of a state-run program versus setting up an IRA account directly with a reputable financial institution. So far, no one has convinced me to the contrary.

I'm all for encouraging individuals to save for the long-term but I seriously wonder why government has to be involved with every decision someone makes. Hopefully I will be proven wrong and these state programs for private company employees will succeed.

Note: I welcome insightful essays and commentaries on this and other relevant pension governance topics. If you would like to be a guest contributor, please email with your idea or write-up.

Corporate Finance and Pension Restructuring

As I wrote in "Pension risk, governance and CFO liability" for the Journal of Corporate Treasury Management, "Unchecked pension problems are increasingly wreaking havoc with merger, acquisition or spin-off deals." This notion that corporate finance and human capital issues are intertwined shows up in many other situations as well. When part or all of a workforce is unionized, there is the added complexity of collective bargaining as a decision point and what this means for a sponsor seeking to restructure a benefit plan.

Pfizer Inc. (ticker PFE) is a recent example. Articles in FiercePharma and elsewhere describe how this jumbo pharmaceutical company is gradually phasing out its traditional pension plan in Ireland and offering a defined contribution plan in its stead. The trade union Siptu has taken legal action, refuting Pfizer's assertion that the defined benefit scheme is too expensive to sustain. Click to visit the website of the Services Industrial Professional and Technical Union to read its various press releases about Pfizer.

As with other disputes, facts and circumstances must be evaluated. Nevertheless, we are reminded once again that shareholders and pensioners are not always looking at things through the same lens.

Fiduciary Certification and Training

Last week, I had the pleasure of speaking to Dr. Anna Tilba with the Newcastle University Business School in the United Kingdom ("UK"). A mutual colleague had suggested we speak since we both work in the governance area. Dr. Tilba has studied the fiduciary practices of investment intermediaries. Her report fed into the UK's Law Commission publication about current fiduciary standards and areas for improvement.

One of the topics that arose during our conversation was the need for adequate fiduciary education and what she referred to as the professionalism of investment stewards. I agree that having experienced and knowledgeable individuals in place is critical. Even if the intent is to outsource certain services to others, investment committee members are tasked with making an informed decision about what to delegate and to whom.

Stateside, the U.S. Department of Labor ("DOL") continues its Fiduciary Education Campaign. Each seminar covers topics such as those listed below:

  • Comprehend the nature of each ERISA plan offered;
  • Apply rigor in selecting and monitoring service providers; and
  • Steering clear of prohibited transactions.

DOL website visitors can access something called the ERISA Fiduciary Advisor for information and answers to questions about duties. It's a tool that should help beginners although the DOL cautions that content is not "intended to be a substitute for the advice of a retirement plan professional."

So far, there is no uniform set of answers to questions such as the following:

  • How should in-house fiduciaries be selected?
  • How should in-house fiduciaries (individually and as a group) be assessed in terms of demonstrating procedural prudence?
  • Should in-house fiduciaries receive a bonus for achieving certain plan-specific goals?
  • Does everyone on an investment committee need to be equally proficient in a particular subject area or should someone serve as a Sarbanes-Oxley type of "financial expert?" 
  • Do in-house fiduciary term limits make sense?
  • How do variables such as plan design and characteristics of the workforce impact the kind of fiduciary education needed?
  • How should training differ for small to medium sized plans as addressed by the "Report of the Working Group on Fiduciary Education and Training?"

The good news is that data exists to benchmark myriad types of retirement plan decisions in terms of process and not just outcomes. Furthermore, there is a large array of training opportunities. Click here to download the "Retirement Plan Professional's Designation & Certification Guide" to learn about several dozen available offerings. Note that this document has a 401k focus. The bad news is that not all programs are created equal in terms of topic coverage. Even if they were sufficiently similar, facts and circumstances for a given retirement plan often dictate the need for specialized training not required elsewhere. 

Although fiduciary training is uneven across plans, sponsors and geographic location, I predict that lawmakers here and outside the United States will eventually impose universal certification requirements for retirement plan fiduciaries. I don't think a "one size fits all" approach to fiduciary training is ideal but political pressures will almost surely prevail. As the collective pension crisis worsens (and I acknowledge that lots of plans are in great shape), participants and taxpayers will want to know who was in charge of troubled schemes and how they made decisions. Proverbial heads tend to roll when voters' wallets shrink.

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.

ERISA Investment Committee Governance

For those who missed the January 27 webinar entitled "ERISA Plan Investment Governance: Avoiding Breach of Fiduciary Duty Claims," click here to download the slides for this educational program. There were three presenters, each of us sharing a different perspective about this important topic. I spoke about economics and governance. Executive Rhonda Prussack (Berkshire Hathaway Specialty Insurance) provided information about ERISA fiduciary liability insurance. Attorney Richard Siegel (Alston & Bird) offered his takeaways for investment committee members as the result of recent litigation decisions.

As with most discussions about fiduciary considerations, there never seems to be enough time to address core concepts. So it was with this Strafford CLE event. Ninety minutes quickly came and went. Here are some of the highlights from my talk.

  • Expect more surveillance of ERISA investment committee decisions. A $25+ trillion retirement money pot and regulatory developments are two reasons. Just a few days ago, the Office of Compliance Inspections and Examinations ("OCIE") of the U.S. Securities and Exchange Commission ("SEC") emphasized conflicts of interest and disclosures as two components of its Retirement-Targeted Industry Reviews and Examinations Initiative.
  • It is a good idea to regularly review the Investment Policy Statement for each plan and either revise asset class limits or rebalance to reflect material changes such as rating downgrades of securities owned, changes in company ownership, large reported contingencies that could adversely impact cash flow or corporate recapitalization.
  • Consider crafting a companion Risk Management Policy Statement or beef up the risk sections in the Investment Policy Statement(s).
  • Document the process that dictates how new investment committee members are selected, whether they are trained (and by whom) and how they are reviewed, by whom and how often.
  • Consider installing a central figure or team to negotiate all vendor contracts and clarify exactly who does what. The goal is to avoid an expectation gap that arises when a contract is ambiguous or silent on tasks that an investment committee needs to have done but a service provider does not want to do or thinks it is not obliged to perform. 
  • Double check the compensation of investment committee members to minimize the risk of conflicts of interest. Suppose for example that a Chief Financial Officer ("CFO") sits on an ERISA plan investment committee at the same time that he is eligible for a bonus if he can cut costs.
  • Engage ERISA plan counsel to put together a "kick the tires" team of economists and attorneys who can render an objective assessment of existing internal controls, governance structure and investment policies and procedures and then recommend changes as needed. 

As with any exercise in good stewardship, taking (and documenting) relevant precautionary actions can be a good defense for an ERISA plan investment committee, especially at a time of heightened scrutiny.

ERISA Litigation and Investment Monitoring

Please save the date for an educational program entitled "Life After Tibble: Investment Monitoring and Litigation Defense Considerations for ERISA Fiduciaries." Produced by Bloomberg BNA, this webinar event will take place on December 3, 2015. Speakers are listed below:

  • James O. Fleckner, Esquire - Chair - ERISA Litigation, Goodwin Procter LLP;
  • Dr. D. Lee Heavner - Managing Principal, Analysis Group, Inc.; and
  • Dr. Susan Mangiero - Managing Director, Fiduciary Leadership, LLC.

In the aftermath of the U.S. Supreme Court "Tibble" decision, there are numerous questions as to what exactly comprises effective investment monitoring from a procedural prudence perspective. Given the newness of this important legal decision and little formal guidance from the High Court, the panel will present economic perspectives about what ERISA fiduciaries should do to assess, and possibly improve, their current investment monitoring process. Attention will be paid to related topics that include the delegation of investment monitoring to third parties (such as advisors, asset managers and consultants) and the kinds of information that should be communicated to plan participants about investment monitoring activities. The role of the economic expert and the factors that need to be considered in estimating damages will be addressed, along with a discussion of available industry resources. The panel will use examples from casework to illustrate some of the key points.

Further details will be posted shortly.

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?

ERISA Litigation Costs

After having just blogged about the April 13-14, 2015 American Conference Institute program about ERISA litigation in Chicago, it was somewhat coincidental that an article on the same topic crossed my desk today, painting a grim picture of what could happen to a plan sponsor in the event of a lawsuit.

While only two pages long, "An Ounce of Prevention: Top Ten Reasons to Have an ERISA Litigator on Speed Dial" invites readers to consider the advantages of staying abreast of increasingly complex rules and regulations as part of a holistic prescription for mitigating legal risk. Authors Nancy Ross and Brian Netter (both partners with Mayer Brown) cite "heightened interest" in ERISA by U.S. Supreme Court justices, a rise in U.S. Department of Labor enforcement and court decisions about the importance of having a prudent process. They add that de-risking compliance, disclosure requirements, conflicts of interest, large settlements and attorney-client privilege restrictions are other potential landmines for a public or private company that offers retirement benefits.

Elsewhere, Employee Benefit Adviser contributor, Paula Aven Gladych, predicts that the U.S. Supreme Court review of Tibble v. Edison International ("Tibble") could increase ERISA litigation risk for plan sponsors, regardless of its decision. In "Edison decision could be 'slippery slope' for plan fiduciaries" (February 26, 2015), she writes that "the court focused its attention on duty to monitor fees and investments, generally by investment committees and plan administrators of 401(k) plans." Interested readers can download the February 24 2015 Tibble hearing transcript.

Recent events reflect multi-million dollar resolutions, even when an ERISA litigation defendant feels strongly that it is in the right. In "Settlements offer lessons in breach suits" (Pensions & Investments, February 23, 2015), Robert Steyer reports that publicly available documents can shed light about what types of disputes are being settled, the dollar amounts involved and any non-monetary requests made by the plaintiffs. Competitive bidding as part of selecting a vendor is one example. He goes on to say that regulatory opinions are thought to be particularly helpful when they are viewed by the retirement industry as de facto guidance.

I will report back after attending the ERISA litigation conference in a few weeks although I suspect that judges, litigators and corporate counsel who speak will convey a similar message with respect to fiduciary scrutiny. As Bob Dylan sang, "the times they are a-changing."

Report Card For Teacher Pension Plans

According to "Doing the Math on Teacher Pensions: How to Protect Teachers and Taxpayers," just published by the National Council on Teacher Quality, "state teacher pension systems had a total of $499 billion in unfunded liabilities" in 2014, up by $100 billion since its 2012 study. On a gloomy note, they add that "the debt costs spread out across the K-12 student population amount to more than $10,000 per student and growing." This can only be seen as bad news for beleaguered municipalities with tight budgets.

Concurrent with funding pressures, researchers explain that numerous state sponsors "are also making it harder for teachers to receive benefits." Sprinkled throughout the report is a reference to fairness (or lack thereof) and limited flexibility, with occasional references to the advantages of offering a defined contribution plan to eligible educators. Few defined benefit plans were identified as being sufficiently portable or moderate in terms of what teachers were asked to contribute. Another cited flaw was the factoring of years of service instead of age only as a determinant of when one could retire. Long vesting periods and restrictions as to when employer contributions could be withdrawn by employees are other weak spots. The inability for teachers to purchase service credits for "prior teaching or approved leave" led to poor rankings for some states.

With a pension grade of A, Alaska tops the list. Mississippi lags with a pension grade of F. Too many states for comfort had a C, C-, D+ or D assessment. Fourth from the bottom is Kentucky with a grade of D-, accounting perhaps for its headlines about legislative reform. In "Ky. lawmakers demand reforms to teacher pension plan" (Louisville Courier-Journal, January 1, 2015 ) reporter Mike Wynn tallies unfunded liabilities at $14 billion, "on top of the $17 billion funding gap at Kentucky Retirement Systems." It is no surprise that the Bluegrass State is under pressure to implement change. In addition, a putative class action suit has been filed by a local history teacher against the Kentucky Teachers' Retirement System, "alleging their administrators have been negligent in protecting teachers' pensions from chronic underfunding by the state and bad investments..."

With low scores, large financial gaps and investment risk-taking on the rise for more than a few state teacher retirement plans, somebody may have to stay after school and write "I will change" one hundred times.

Retail Investors and Derivatives Trading

During a catch-up conversation, a now-retired colleague told me how much money he was making by trading options. Based on several recent articles, it seems that he is not alone in looking to Wall Street instruments in hopes of an income boost or a way to hedge uncertainty. In "Retail Investors Flock to Derivatives for Income and Safety" (, October 31, 2014), senior reporter Dan Freed describes a growing trend in trading options and futures, with growth rates that exceed the level of purchases and sales of stock. On November 3, 2014, the Options Clearing Corporation reported a 22.32 percent rise in total equity and index option volume in October 2014 from one year earlier, "the second highest monthly volume on record behind the August 2011 record volume of 554,842,463 contracts" or a year-to-date volume of 3,673,768,194 contracts.

Reuters journalist Chris Taylor describes the average options trader as 53 years of age, citing Options Industry Council statistics that put nearly thirty percent of those who trade options at between "the ages of 55 and 64." However, in "New baby boomer hobby: trading options" (July 9, 2013), even retirees with a high net worth are cautioned to educate themselves about the downside of leverage. Mary Savoie, Executive Director of the Options Education Program, talks about the free resources made available by the Options Industry Council.

Critics counter that formal training cannot replace experience and that retirement assets should be invested with a long-term goal in mind, especially for those individuals with a low net worth. What they may not realize is that numerous retirement plans are chockablock with exposure to derivatives in the form of investment funds that trade swaps, options and futures. In mid-September of this year, Bloomberg reporters Miles Weiss and Susanne Walker wrote that then PIMCO senior executive and co-founder of the Pacific Investment Management Company Bill Gross "sold most of the $48 billion of U.S. Treasuries held by his $221.6 billion Pimco Total Return Fund (PTTRX) in the second quarter, replacing them with about $45 billion of futures. In "SEC Preps Mutual Fund Rules," Wall Street Journal reporter Andrew Ackerman (September 7, 2014) cites a concern on the part of the U.S. Securities and Exchange Commission about the use of derivatives by certain mutual funds and could seek "to limit the use of derivatives in mutual funds sold to small investors, including both alternative funds and certain 'leveraged' exchange-traded funds, volatile investments that use derivatives to double or even triple the daily performances of the indexes they track..." 

Over the years, I have traded derivatives, valued derivatives, reviewed financial models, created hedges and stress tested deals for compliance purposes. Throughout that time, the global markets continue to grow, attesting to their popularity. Earlier this summer, the Bank for International Settlements measured the over-the-counter derivatives market as having expanded to outstanding contracts with a value of $710 trillion at yearend 2013, up from $633 trillion in a single year.

Whether singular derivative transactions are appropriate for any one individual plan participant depends on a number of factors. Suffice it to say, derivative instruments are here to stay. It would be incorrect to underestimate the ubiquitous nature of derivatives. Besides asset managers who use derivatives, there are plenty of structured products that layer in derivatives with traditional equity or fixed income securities.

Stay tuned for more from the regulators about the usage of derivatives and asset management. In the aftermath of the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, rules about derivatives trading and clearing are changing the operational and technology landscape. Fund directors not already in the know are being urged to pay attention to the economic impact on fund activity when derivatives are used. Click here to download a good risk management checklist. It is part of a November 8, 2007 speech by Gene Gohlke, then Associate Director, Office of Compliance Inspection and Examinations, SEC. Entitled "If I Were a Director of a Fund Investing in Derivatives - Key Areas of Risk on Which I Would Focus," Attorney Gohlke addresses the panoply of due diligence considerations such as custody, pricing and valuation, legal, contractual, settlement, tax, performance calculations, disclosure, investor reporting and compliance. These are important knowledge areas for investors too.

Pension Risk Matters Cited As Newsletter That 401k Advisors Should Read

As I have stated many times, this blog was created more than seven years as a labor of love (excuse the pun). Objectives include the following: (a) encouraging conversations about the importance of investment risk governance for U.S. and non-U.S. retirement plans (b) sharing educational surveys and research papers and (c) describing and interpreting important trends in the industry. Our readership continues to grow and it is my pleasure to dedicate time to the care and feeding of as the primary contributor.

Accolades about the website are appreciated, especially from individuals who themselves dedicate considerable time to the topics of fiduciary education and best practices. I am proud to learn that Ms. Sharon Pivirotto lists as one of "12 Newsletters All 401k Advisors Should Read" (, October 24, 2014), referring to our site as "a very robust blog with articles covering regulatory, risk, and practice management topics for pension professionals."

Thank you for the recognition Sharon. As co-founder of Financial Service Standards (now part of the fi360 family), your opinion counts.

Thanks too for the individuals who have generously provided time and energy since this pension blog launched in 2006. Readers tell us that they value the chance to read interviews with industry thought leaders and have access to various studies and insights about critical retirement industry topics.

To our readers, please accept our gratitude for your interest and helpful comments.

Headline Risk For Investment Fiduciaries

Following up my May 12, 2014 post entitled "Golf Course RFPs and Other Mistakes That Retirement Plan Fiduciaries Make," the source of that wisdom has given readers even more food for thought about the topic of service provider selection. In "More on the Golf Course RFP," senior ERISA attorney Steve Rosenberg warns that appointments "to smaller and mid-size companies, where benefit plans, particularly 401(k)/mutual fund programs, may be chosen by a company owner simply based on the vendors that are already in the owner's social circle, such as, yes, those at his or her country club." He adds that "picking a plan's vendor in that manner will most certainly come back to the bite the company owner" and that, "in a fiduciary duty lawsuit over that plan," such a selection would be deemed a "smoking gun used to show poor processes and a corresponding breach of fiduciary duty."

Attorney Rosenberg raises some good points about company size. Smaller to mid-size firms often have ownership that is concentrated in the hands of its owners or top managers. Diversification considerations can differ from those made by bigger plan sponsors as a result. That said, I have worked as a forensic and fiduciary expert on matters that entail carrying out an analysis of the service provider selection process used by various large companies.

More than a few investment fiduciaries have told me that they worry about personal and professional reputation in addition to liability for actions taken (or not as the case may be). A central take away is that standing out for the wrong reasons can have disastrous consequences.

Alternatives and Retail Retirement Account Owners

The prospect of being part of millions of retail retirement plans has some financial advisors and hedge fund managers giddy with excitement. The 401(k) market alone is huge. According to the Investment Company Institute, as of Q3-2012, these defined contribution plans held an estimated $3.5 trillion in assets. In 2011, over fifty million U.S. workers were "active 401(k) participants." This compares favorably to an approximate $2.66 trillion hedge fund market size in 2013, up from $2.3 trillion one year earlier. Private equity, real estate and infrastructure comprise the rest of the alternatives investment sector according to a press release issued by Preqin, a financial research company. See "Alternative Assets Industry Hits $6tn in AUM for First Time" (January 21, 2014).

CNBC contributor Shelly K. Schwartz explains that alternative investment strategies are appearing in the form of 400 plus mutual funds and exchange-traded funds ("ETFs") that employ "complex trading strategies" such as managed futures, long/short trading in stocks and multiple currency exposures. Allocating to leveraged loans, start-up ventures and global real estate are other ways that these relatively new funds seem to be mimicking the approach taken by hedge funds and private equity funds that traditionally have catered to institutional investors and high net worth individuals. Notwithstanding regulatory differences relating to diversification, percentage of "illiquid" investments, redemption, daily pricing and how much debt can be used to lever a portfolio, statistics suggest a growing interest on the part of smaller investors to get in on the action. See "Seeking safe havens? Analysts, advisors point to liquid alternative funds" (November 24, 2013). Also check out "Goldman pushes hedge funds for your 401(k)" (Fortune, May 22, 2013) in which reporter Stephen Gandel describes new funds being offered by various financial institutions, some of which invest in mutual funds that mimic hedge fund investing strategies and others that invest in hedge funds directly.

Not everyone is an ardent fan. In "FINRA warns investors on alternative mutual funds," Reuters reporter Trevor Hunnicutt (June 11, 2013) describes regulators' concerns that "not all advisers and investors understand the risks involved," especially with respect to whether a retail-oriented fund is truly liquid. In its "Alternative Funds Are Not Your Typical Mutual Fund" publication, the Financial Industry Regulatory Authority ("FINRA") cautions investors to assess investment structure, strategy risk, investment objectives, operating expenses, the background of a particular fund manager and performance history.

Given the ongoing search for the next big thing, we are likely to see a lot more activity in the alternative investments marketplace - for both institutional and high net worth clients as well as for individuals with modest wealth levels. will return to this topic in future posts. There is much to write about with respect to fiduciary implications, risk management and valuation.

In the meantime, I want to thank ERISA attorney David C. Olstein with Skadden, Arps, Slate, Meagher & Flom LLP & Affiliates for apprising me of a 2012 U.S. Department of Labor grant of individual exemption for Renaissance Technologies, LLC ("Renaissance").  Described as a "private hedge fund investment company based in New York with over $15 billion under management" by (September 26, 2013), Renaissance holds a large number of equity positions in stocks issued by household name companies. Click to see a recent list of their transactions. The "Grant of Individual Exemption Involving Renaissance Technologies, LLC," published in the Federal Register on April 20, 2012 makes for interesting reading for several reasons. First, it describes policies relating to important topics such as valuation, redemption and disclosures for "privately offered collective investment vehicles managed by Renaissance, comprised almost exclusively of proprietary funds" and the impact on retirement accounts in the name of Renaissance employees, some of its owners and spouses of both employees and owners. Second, as far as I know, there are not a lot of publicly available documents about proprietary investment products that find their way into the retirement portfolios of asset management firm employees and shareholders. Third, as earlier described, there is evidence of a growing interest on the part of the financial community in bringing hedge funds or hedge fund "look alike" products to the retirement "masses."

Institutional Asset Allocation

My comments about institutional asset allocation, along with those made by Mr. Ron Ryan (CEO, Ryan ALM) and Lynn Connolly (Principal, Harbor Peak, LLC), were well received on January 8, 2014. Part of a joint program that was sponsored by the Quantitative Work Alliance for Applied Finance, Education and Wisdom ("QWAFAFEW") and the Professional Risk Managers' International Association ("PRMIA"), our audience of investment professionals added to the lively debate about topics such as strategic versus tactical asset allocation, fees, role of the pension consultant and the likely capital market impact due to the implementation of strategies such as liability-driven investing ("LDI") and/or pension risk transfers ("PRT"). 

With the size of the U.S. retirement market at $20 trillion and counting, big money is at stake. Bad asset allocation decisions can lead to a cascade of economic woes. It is no surprise that fiduciary breach allegations in the form of ERISA lawsuits are increasingly focused on questions about the appropriateness of a given asset allocation mix and whether an investment consultant or financial advisor has helped or hindered the way that pension monies are allocated. Noteworthy is that scrutiny about the efficacy of the asset allocation process and resulting money mix can, and has been, applied to both defined benefit and defined contribution plans. Keep in mind that asset allocation decisions are likewise central to assessing popular financially engineered products such as target date funds. Accounting issues and how changing rules influence asset allocation decisions are yet another topic that we will tackle in coming months.

Click to access Susan Mangiero's asset allocation slides, distributed to members of the January 8 audience, and meant to peturb a discussion about this always essential topic. Interested readers can check out "Frequently Asked Questions About Target Date or Lifecycle Funds" (Investment Company Institute) and "Annual Survey of Large Pension Funds and Public Pension Reserve Funds: Report on pension funds' long-term investments" (OECD, October 2013).

If you have a specific question about asset allocation and/or the procedural process associated with asset-liability management, send an email to me.

De-Risking, HR Strategy and the Bottom Line

In case you missed our December 10, 2013 presentation about pension de-risking, sponsored by Continuing Legal Education ("CLE") provider, Strafford Publications, click to download slides for "Pension De-Risking for Employee Benefit Sponsors." It was a lively and informative discussion about the reasons to consider some type of pension risk management, considerations for doing a deal and the role of the independent fiduciary. The transaction and governance commentary was then followed with a detailed look at ERISA litigation that involves questions about Liability Driven Investing ("LDI"), lump sum distributions and annuity purchases.

Some of the issues I mentioned that are encouraging sponsors to quit their defined benefit plans in some way include, but are not limited to, the following:

  • Equity performance "catch up" from the credit crisis years and the related impact on funding levels, leading some plans to report a deficit;
  • Need for cash to make required contributions;
  • Low interest rates which, for some firms, has ballooned their IOUs;
  • Increased regulation;
  • Higher PBGC premiums;
  • Rise in ERISA fiduciary breach lawsuits;
  • Desire to avoid a failed merger, acquisition, spin-off, carve-out, security issuance or other type of corporate finance deal that, if not achieved, could lessen available cash that is needed to finance growth; and
  • Difficulty in fully managing longevity risk that is pushing benefit costs upward as people live longer.

While true that numerous executives have fiduciary fatigue and want to spend their time and energies on something other than benefits management, it is not always a given that restructuring or extinguishing a defined benefit plan is the right way to go. Indeed, some sponsors have reinstated their pension offerings in order to retain and attract talented individuals who select employers on the basis of what benefits are offered.

Given what some predict as a worrisome shortage of talented and skilled workers, the links among HR strategy, employee satisfaction and the bottom line cannot be ignored. For those companies that depend on highly trained employees to design, produce, market and distribute products, the potential costs of losing clients to better staffed competitors is a real problem. According to the "2013 Talent Shortage Survey," conducted by the Manpower Group, "Business performance is most likely to be impacted by talent shortages in terms of reduced client service capability and reduced competitiveness..." A report about the findings states that "Of the 38,618 employers who participated in the 2013 survey, more than one in three reported difficulty filling positions as a result of a lack of suitable candidates; the 35% who report shortages represents the highest proportion since 2007, just prior to the global recession."

As relates to the well-documented shift by companies and governments to a defined contribution plan(s), I recently spoke to a senior ERISA attorney who suggested a possible re-thinking of the DB-DC array, based on discussions with his clients. The conclusion is that a 401(k) plan is sometimes much more expensive to offer than anticipated. For employees who lost money in 2008 and beyond and cannot afford to retire, they will keep working. The longer they stay with their respective employer, the more money that employer has to pay in the form of administration, matching contributions, etc.

A plan sponsor has a lot to consider when deciding what benefits to offer, keep, substitute or augment. Dollars spent on benefits could reap rewards in the form of a productive and complete labor force. With full attribution to the seven fellas in Disney Studio's Snow White, will your employees be singing "Heigh-ho, heigh-ho, it's off to work we go" or will they instead bemoan their stingy boss and search for a new work home, with better economic lollipops, thereby leaving a business deprived of precious human capital?

Financial Executives Address De-Risking and ERISA Benefit Programs

According to "Balancing Costs, Risks, and Rewards: The Retirement and Employee Benefits Landscape in 2013" (CFO Research and Prudential Financial, Inc. - July 2013), numerous changes are underway. The opinions of senior financial executive survey takers validate the continued twin interest in expanding defined contribution plan offerings and managing the liability risk of existing defined benefit ("DB") plans. The strategic import of benefits as a way to attract and retain talent is recognized by "nearly all respondents in this year's survey." Regarding the restructuring of traditional pension plans, this report states that nearly four out of every ten leaders have frozen one or more DB plans yet recognize the need to manage risk for those plans as well as for active plans. Liability-driven investing ("LDI") programs are being adopted by "many companies". Transfer solutions are being "seriously" considered by roughly forty percent of companies represented in the survey. Almost one half of respondents agree that a return to managing its core business could be enhanced by doing something to address pension risk.

None of these results are particularly surprising but it always helpful to take the pulse of corporate America with respect to ERISA and employee benefit programs. I have long maintained that the role of treasury staff will accelerate. There are numerous corporate finance implications associated with the offering of non-wage compensation. As I have added in various speeches and articles echoing what numerous ERISA attorneys cite (and I am not an attorney), plan sponsors must carefully weigh their fiduciary responsibilities to participants against those of shareholders in arriving at a particular decision.

For a copy of the study, click here.

Interested readers may also want to check out the reference items listed below:

If you have further comments or questions, click to email Dr. Susan Mangiero.

Gloomy Jobs Outlook and Impact on Retirement Planning

Job hunters and those already employed may need super powers to ready themselves for retirement. A big part of planning is knowing what you are likely to earn from work. For so many without jobs and deep in debt, looking ahead is tough. People with jobs are affected too. Even fuzzy mathematicians have to acknowledge that taxpayers will be stretched further as the number of non-contributors goes up.

To say that this issue has touched a nerve is a gross understatement.

ERISA attorney Stephen Rosenberg and blogger extraordinaire at ruminates about labor force participation all the time and commented accordingly. "I have always thought that a reduction of force ("RIF") of people in their 50s, perhaps via early retirement programs (combined with subtle bias, structural and otherwise, against older workers), on the one end, and the demands for more education before starting careers/difficulty getting first jobs on the other end, were creating a much smaller and more demographically circumscribed labor pool. I am reminded all the time that the most important thing in the economy is job creation – real jobs, like when a new business makes it. It creates such a ripple effect for everyone else, that nothing equals it." ERS Group labor economist, Dr. Dubravka Tosic, asserts that "A critical lack of supply of qualified labor in certain occupations is really startling. Consider the shortage of truck drivers and truck mechanics as two examples. There is a nursing shortage as well although the imbalance may be somewhat corrected as qualified persons are allowed to work in the United States on special visas from countries such as the Philippines. Returning veterans with needed skills could be another way to help companies in need of qualified workers." She points to a recent article entitled "Seventy Four Percent of Construction Firms Report Having Trouble Finding Qualified Workers" (September 4, 2013) as one of many references.

Last week, the U.S. Department of Labor announced the addition of 169,000 jobs in August 2013 with a steady unemployment rate just above seven percent. Netted against its downward adjustments for June and July 2013 number, the true increase is pegged at 95,000 jobs. See "U.S. Adds 169,000 Jobs in August, But Economic Outlook Remains Gloomy" by Christopher Matthews, Time, September 6, 2013. Ask most people what they think about the future and expect to get a reply that reflects cautious optimism at best. Withdrawals from 401(k) plans have exacerbated an already difficult situation for the disillusioned, underemployed and out of work professionals.

This blog author will return to the issue of retirement planning as it is important to all of us, individually and collectively, except perhaps to the top one percent of wealth owners. According to "Top 1% take biggest income slice on record" by Matt Krantz (USA Today, September 10, 2013), individuals at the head of the class account for "19.3% of total household income in 2012, which is their biggest slice of total income in more than 100 years."

Labor Force Shrinks - Hurts Economy

Labor Day always marks an assessment of where things stand with the state of employment (or unemployment as the case may be). This year is no different except that the news continues to get worse with respect to how many people are contributing to the country's bottom line.

According to MarketWatch contributor Irwin Kellner, the unemployment rate is a poor substitute for knowing whether people are ready, able and willing to work. In "Labor pains - don't count on jobless rate" (September 3, 2013), the point is made that the participation rate is at an all-time low. Excluding military personnel, retired persons and people in jail, fewer adults than ever before in the history of the United States are pursuing work. One reason may be that schools are not preparing young people to assume jobs that require a certain level of skills. Another reason is that being on the dole is a superior economic proposition for some individuals. Yet another factor is that long-term unemployed persons are too discouraged to keep going.

Indeed, I wonder if there is a productivity tipping point, beyond which a person says "never mind" to gainful employment. Certainly people with whom I have spoken talk about the need to work many more years beyond a traditional retirement age. However, they are quick to add that they enjoy what they do and sympathize with those persons who have jobs they loathe or are hard to do after a certain age. Some people simply believe that going fishing on other people's dime, as a ward of the state, is a rational response to current incentives.

The numbers are gigantic and that should put fear in the hearts of those who are pulling the economic wagon. According to labor expert Heidi Shierholz, "More than half of all missing workers - 53.7 percent - are 'prime age' workers, age 25-54. Refer to "The missing workers: how many are there and who are they?" (Economic Policy Institute website, April 30, 2013). The Bureau of Labor Statistics, part of the U.S. Department of Labor, estimated in July 2013 that there are 11.5 million unemployed persons, of which 4.2 million individuals fall into the long-term unemployed bucket since they have been out of work for 27 weeks or longer. Click to review statistics that comprise "The Employment Situation - July 2013."

The combination of no job and an anemic retirement plan, if one exists at all, are harbingers of doom for taxpayers and for plan sponsors that are under increasing pressure to help their employees. Mark Gongloff, the author of "401(k) Plans Are Making Wealth Inequality Even Worse: Study" (Huffington Post, September 3, 2013) describes a recent study that has the wealthiest Americans with "100 times the retirement savings of the poorest Americans, who have, basically no savings."

My predictions are these. Even if you are a rugged individualist who keeps a tidy financial house, you will be paying for the economic misfortunes of others. Taxes are destined to rise, benefits may fall and you will likely have to work for a long time to pay for this country's dependents. Retirement plan trustees, whether corporate or municipal, will be under increased pressure to make sure that dollars are available to pay participants, regardless of plan design. In lockstep with expected changes in fiduciary conduct, ERISA and public investment stewards could face more enforcement, scrutiny and litigation that asks what they are doing and how.

401(k) Fee Letter to Trustees

If you were one of the "lucky" ones, you may have noticed a new item in your mailbox. According to Wall Street Journal reporter Kelly Greene, a letter about 401(k) fees has been sent to roughly 6,000 companies. The author, Ian Ayres, is a law professor at Yale University. The message is that some companies are paying too much in fees and that offenders can expect to see their name in lights. In "Letters About 401(k) Plan Costs Stir Tempest" (July 24, 2013), Greene writes that critics have pounced on the age of the data used to determine whether monies paid to service providers are "too much" or "just right." Certainly stale inputs or numbers that are overly broad could lead to accusations of a Goldilocks porridge test instead of a rigorous assessment of costs. Since the final paper is not yet published, it is impossible to gauge details of the rigor applied in assessing fee levels.

What is particularly interesting to me is that various articles about the letter have generated large numbers of comments with no apparent consensus about the helpfulness of the forthcoming study. (The study is said to have extracted data from federal regulatory filings.) Some readers say "bravo" to a topic that demands attention. Others say "not so fast" unless you incorporate an assessment of fund performance, identify what services are being offered and review the quality of vendor support.

Several senior ERISA attorneys have been quick to comment, perhaps because 401(k) fee litigation is still a reality for more than a few sponsors. In "Much ado about nothing...or is it?" (July 18, 2013) Nixon Peabody lawyers Jo Ann Butler and Eric Paley point out that even the U.S. Government Accountability Office ("GAO") document entitled "401(K) Plans: Increased Educational Outreach and Broader Oversight May Help Reduce Plan Fees" (April 2012) addressed limitations of the Form 5500. Attorneys Butler and Paley add that high fees do not necessarily constitute a fiduciary breach and that "ERISA does not require a plan to offer the lowest cost investments available, nor that they even fall within a particular range." Instead, decision-makers with fiduciary responsibilities must select investments "with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims." When I asked Attorney Paley for a comment about what he deemed the key take away point, he replied that the letter may "upset the plan sponsor community, though it remains to be seen whether Ayres' study will serve as a catalyst to more expansive plan fee litigation."

Advocates point out that any heightened transparency about 401(k) fees that participants pay is a good thing. In "A Professor Puts the Scare in Plan Sponsors" (July 22, 2013), John Rekenthaler describes "annoyances" as part of the deal. A Vice President with Morningstar, he adds that "The 401(k) plan has given fund companies nearly $3 trillion in incremental assets -- $15 billion in annual revenues..." and "permitted corporations to shed the burden of guaranteeing pensions." He states that "Those benefits for fund companies and plan sponsors don't come for nothing. They come with a spotlight."

What should be a point of universal agreement is that facts and circumstances must be considered in evaluating the prudence of any fee arrangements and the related monitoring of service providers.

Dr. Susan Mangiero Will Speak at ACI ERISA Litigation Conference

I am delighted to join the roster of multi-disciplinary speakers for this exciting October 24-25, 2013 New York City event. Designed for and by attorneys, the American Conference Institute's 6th National Forum on ERISA Litigation will include comments from renowned judges, in-house counsel, insurance experts, economic consultants and practicing litigators in the ERISA arena. According to the conference flyer, attendees will learn about the following:

  • Emerging trends in multiple facets of ERISA litigation;
  • Understanding new theories of liability arising from investment decisions, including alternative investments and the trend towards de-risking;
  • 401(k) fee case considerations and a discussion about evolving defense strategies, the issue of service providers and the viability of float claims;
  • ESOP litigation to include an overview of DOL investigations and settlements;
  • Benefits claims litigation
  • ERISA fiduciary litigation and ways to minimize liability exposure:
  • Class action update; and
  • Ethical issues that arise in ERISA litigation.

Having spoken and attended prior ERISA litigation conferences sponsored by the American Conference Institute, I always learned a lot. In particular, the discussions among jurists, the plaintiffs' bar and defense counsel makes for a collection of timely and lively debates. I hope you will be similarly satisfied if you decide to attend.

As a courtesy to readers of this blog, the American Conference Institute has activated a discount code of $200 for anyone who registers for the conference. Simply type "PRM200" when prompted. Click here to register. Click to download the agenda.

$89 For An Umbrella and No Money To Retire

In between business meetings in Greenwich, Connecticut the other day, it started to rain heavily so this blogger walked a few blocks to an upscale department store (the closest in sight), in search of a reasonably priced umbrella. Since I have so many umbrellas already (but had forgotten to pack one), I figured I would spend a modest $15 or $20 to buy another umbrella to keep me dry. How much could an umbrella cost after all? To my surprise and shock, none of the umbrellas came in at less than $89 (plus tax of course). For some people, that's a tiny price for protection. Certainly this merchant was thriving with designer attire, shoes and jewelry finding its way into shoppers' bags.

However, the reality is that not everyone is going to shell out 89 big ones for an umbrella, no matter what the brand. For a large segment of the U.S. population, money is a scarce resource and confidence in a secure future is low. According to the results of a recent Wells Fargo/Gallup Investor study, optimism is down and pessimism is up. At the same time that 68% of respondents say they have "little to no" confidence in the stock market as a way to prepare for retirement, 80% of investors urge lawmakers to act now so that savings is encouraged.

Unfortunately, most of the initiatives that individuals cite as "must have" elements of a national retirement readiness program are in direct conflict with the political grab to raise taxes. Consider a few examples.

  • Sixty-nine percent of the survey respondents say it is "extremely" or "very important" that politicians encourage every company to offer a 401(k) plan to its employees. Since there is already talk in Washington, DC about stripping companies of the tax benefits associated with offering retirement plans, it is unlikely that employers will realize further tax advantages at the expense of big spenders having to lose tax "revenue."
  • Sixty-six percent cite the need for the government to figure out how Americans who participate in 401(k) plans can get "more quality investment advice." Anticipating increased regulations as relates to investment fiduciary duties, some financial advisors are becoming less generous with information for fear of being sued. As described in "401(k) Lawsuits, Investment Advisers and Fiduciary Breach" (November 18, 2012), breach of fiduciary duty is cited as the top complaint in FINRA arbitration matters.
  • Sixty-nine percent want the government to establish initiatives that will motivate individuals to participate in their employer's 401(k) retirement savings option, assuming that they work for a company that offers benefits. Yet here we are, talking about a fiscal cliff that could impact millions of people with incomes below the magical "rich" benchmark of $250,000.  For one thing, in the absence of inflation indexing, the Alternative Minimum Tax that was enacted decades ago will show up as a nasty spring 2013 surprise for countless tax-paying middle-class households. Then there is the issue of jobs not created because employers will be writing larger checks to the IRS instead as various tax rates go up.

The United States is not alone in having to tackle difficult problems. The list is long and includes (but is not limited to) insufficient aggregate savings, underfunded social programs that are not sustainable safety nets without reform, high unemployment, corporate jitters about parting with cash, uncertain tax and regulatory environment and conflicting interests that make it almost possible to come up with near-term solutions.

There is a way forward to expand economic growth but that will require political courage. Let's hold our policy-makers accountable in 2013.

New RFP Template to Select and Monitor 401(k) Plan Vendors

In June 2012, the Association for Financial Professionals (AFP) debuted its Request for Proposal (RFP) template to "help treasury and finance professionals evaluate 401(k) plan service providers." Developed in response for help in selecting vendors who provide products and services to companies that sponsor defined contribution benefit plans, the detailed guide considers numerous facets of the purchasing process.

Dr. Susan Mangiero, CFA, certified financial risk manager and Accredited Investment Fiduciary AnalystTM served as a member of the drafting committee. Click here to purchase a copy of the 401(k) Service Provider RFP template.

Rethinking Work

I caught the last half hour of "Castaway" the other day on television. I've seen this 2000 morality tale several times. Directed by Robert Zemeckis and starring Tom Hanks, the plot is straightforward. A Federal Express executive survives a plane crash, only to find himself alone for four years except for the company of a sports ball he names Wilson. When he is finally saved, a reunion with his beloved girlfriend is bittersweet. Having reconciled herself to having lost the "love of her life," she has since married and become the mother of a baby girl. The film ends with the protagonist standing at the crossroads where four paths converge, deciding on his next move and feeling sad but hopeful about what tomorrow will bring.

As I read "Boomers Find 401(k) Plans Fall Short" by E.S. Browning (Wall Street Journal, February 19, 2011), I kept thinking how more and more people are finding themselves cast away on remote islands of life, having to figure out how to survive and overcome tough times. With the typical balance of "less than one-quarter of what is needed in that account to maintain" a "standard of living in retirement," it is no doubt a shock to countless individuals to discover that a trip down easy street won't come any time soon. Whether starting too late or saving too little or both, the net effect is the same. With rare exceptions, current monies are insufficient to support early retirement. To the contrary, working longer may soon become the new norm.

Like Tom Hanks whose rescued film persona looks to the future, learning from the past, attitude is everything. According to "'I'll work till I die': Older workers say no to retirement" by Jessica Dickler (, September 28, 2010), some individuals refuse to exit the labor force, even if they can afford to do so. Citing a study by Barclays Wealth, "nevertirees" choose to earn a living for as long as they can.

Tom Hanks is a fine actor but he too must be sensing a sea change in how people live their lives. Later this year, he plays Larry Crowne, a middle-aged man who "reinvents himself by going back to college" after losing his job. I've read that he also bought the movie rights to "How Starbucks Saved My Life: A Son of Privilege Learns to Live Like Everyone Else" by Michael Gates Gill. This former executive and now best-selling author says that "losing my job turned out to be a gift in disguise." See "Fired exec: 'Starbucks saved my life'" by Lola Ogunnaike, February 5, 2009.

As French entertainment legend Maurice Chevalier said, "Old age isn't so bad when you consider the alternative."

Public Pensions, Politics and Risk Management

According to "Florida governor wants cheaper state pensions" by Michael Connor (Reuters, February 1, 2011), Governor Rick Scott wants to put public employees into 401(k) plans and migrate away from traditional defined benefit plans. Though the state's system is "relatively strong financially," the article goes on to say that local town halls "pay between 9 and 20 percent of each worker's salary for pensions" and that "Florida's 572,000 state and local-government workers now see no paycheck deductions for a fixed-benefit pension program, which supports 319,000 retirees."

Expect more to come after Governor Scott puts his budget to the Florida taxpayers on Monday, February 7, 2011.

Notably, risk management is not any less important for defined contribution plans. To the contrary, a quick survey of some of the litigation underway is focused on 401(k) issues relating to fees, portfolio selection choices, investor education and much more. Moreover, greater pressures for reform are going to force enhanced transparency and allow little time and latitude for decision-makers to focus on prudently realizing risk-adjusted returns. The last thing a board member, lawmaker, regulator or politician wants to address is a worsening retirement IOU situation when taxpayers, shareholders, employees and other stakeholders are grumpy and impatient.

If you did not get to read it when originally published, click to download "Pension Risk Management: Necessary and Desirable" by Susan Mangiero, PhD, CFA, FRM, Journal of Compensation and Benefits, March/April 2006.

Editor's Note: Fiduciary Leadership, LLC is the new name for BVA, LLC.

Stable Value Risk Management

Kudos to the Stable Value Investment Association for encouraging several days of lively discussions about important topics such as asset allocation, behavioral investing and risk management.

In my comments about stable value risk management, I emphasized the importance of having robust policies and procedures in place across all providers. I likewise mentioned the need for plan sponsors to investigate the use of derivative instruments on the part of both the asset managers and the wrappers, adding that some stable value funds may pose valuation challenges. Given the approximate $700 billion size of the stable value market and the widespread use of these products in 401(k) plans, financial service organizations have a golden opportunity to differentiate themselves from competitors by making their risk stance transparent with investment committee member buyers. This is especially true at a time when plan sponsors are increasingly asked to justify their due diligence and oversight of service providers.

Click to read "Stable Value Risk Management - Remarks Made by Dr. Susan Mangiero Before the Stable Value Investment Association on November 19, 2010."

You might also want to check out "Fiduciary Alert: Stable Value," provided by the team at Harrison Fiduciary. In speaking to Attorney Mitch Shames the other day about stable value risk management, he concurred with many points I made in my speech and added a few of his own. See below for his comments.

"Most of the time stable value ("SV") products are sold by recordkeepers. Often plan fiduciaries simply sign-off, thinking that they are getting a turn-key "stable" product which provides "value".  Plan fiduciaries rarely understand that SV is a hybrid product,   with an investment component and an insurance component. For instance, ask a fiduciary about the crediting rate on the stable value vehicle and they may give you a blank stare. Ask them to identify the wrap provider and describe their crediting rating and they may be equally in the dark. Finally, fiduciaries are sometimes surprised when they find out that traditional HR issues can have an impact on the wrap contract. Most all wrap contracts provide that if the work force is reduced by a certain percentage, then the wrap provider is released from the wrap coverage. So, if a sponsor has a significant plan closing, this can give rise to problems under the SV Program. Similarly, there are often restrictions on the number of participants who can withdraw from an SV plan.  Imagine if participants get sick of low returns and start shifting assets out of the SV program into equities, emerging markets, etc. This can create huge problems for SV programs.The point is that SV is extremely complicated and the devil, as always, is in the details. All fiduciaries must be familiar with the terms of the wrap agreement."

Another noteworthy read is "Risk Controls and the Coming Stable Value Surge." According to the author, Robert Whiteford, Bank of America, "wrappers and asset managers have made great progress in reducing risk in a way that should allow the existing wrappers to increase capacity in the future," adding that "new investment guidelines have been constructed to more faithfully reflect the mission of stable value funds."

Like most industries, the stable value sector is confronted with challenges to be more transparent and thereby lessen the pain for their fiduciary buyers and plan participants.

401(k) Plans, Mutual Funds and Derivatives - Hello SEC

Given that mutual funds are a popular 401(k) plan choice, it's not surprising that further regulatory scrutiny of the use of derivatives by traders is underway.

"SEC Staff Evaluating the Use of Derivatives by Funds" (U.S. Securities and Exchange Commission Release 2010-45, March 25, 2010) talks about a new initiative to review the current practices by pools of capital regulated under the auspices of the Investment Company Act of 1940. Scrutiny will focus on items such as:

  • Leverage, concentration and diversification
  • Existing risk management policies and procedures
  • Oversight of use of derivatives by fund board of directors
  • Rules for proper pricing
  • Prospectus disclosures.

Click here for more information.

401(k) Fee Complaints Go Populist

In reading "Earlier Retirement: Beating Back the High Fees" by Wall Street Journal reporter Eleanor Laise (March 6, 2010), I felt an immediate empathy for the subject of the article, Mr. Jeff Powelson. Apparently, this 401(k) plan participant lobbied his management hard to pay lower fees by replacing actively managed funds with index-tracking vehicles.

I am reminded by my own sorry experience with a "fully transparent" vendor a month ago, albeit a different product. Not having rented a car in many years, I okayed a $60+ per day fee to trek from a large Midwest airport to an important business meeting about 90 miles away. Our travel agent told me that it would cost $61 to rent a mid-size car for my colleague and me each day. I kept thinking how much we'd save by not having a van pick us up. Lo and behold when we arrived to sign the paperwork, quelle surprise! We were bombarded with hidden fees aplenty.

  • If I paid with my company credit card, my colleague could not drive without me paying a surcharge of $21 per day.
  • We could pre-pay for the gas at $2.98 per gallon or pay $7.98 per gallon the next day if we ran out of time to refuel before returning the car.
  • Insurance would cost us about $80 per day.
  • The use of a GPS device would be another $20 or $30.

A car that was supposed to cost less than $100 for our one-day excursion ended up costing about $220 with the various add-ons. More than the money, what upset me was that the car company would only let me view the numbers on an electronic screen and could not print out the contract and tally for me to review.

For those retirees (existing and prospective), fees deemed excessive, hidden and unfair are causing quite a stir. It's one thing to make a decision based on what you think is full information, only to discover that your wallet is being emptied quickly. 

More complete disclosure is one answer though, as Ms. Laise points out, what does that exactly mean? Should fees be decomposed by type of expense such as "investment management, plan administration, transaction costs and other items?"

A few basis points may not seem like much but, compounded over the years, it adds up. Looking under the hood sounds right but assumes that the latch quickly gives away. If money managers and plan sponsors alike are reluctant to provide details, it will be tough going for individual savers. Also smaller companies that want to provide generous benefits may not have the negotiating power to move away from "retail" pricing. That said, the issue of fees hits home. Companies are likely going to have to move towards enhanced reporting or risk upsetting their workers who could possibly make a bee line for the exit door. When skilled and productive workers are hard to find, that outcome is far from optimal.

Investment Ethics, Balloon Boy and Sizzle

A colleague called me the other day, after attending a recent Connecticut event that addressed "too big to fail" concerns on the part of state regulators. In response to her comment about the large crowd size, I queried her about whether a forum on investment ethics would likely be a similar draw. Somewhat surprising to me she said "no" with nary a hesitation in her voice. Teasing her for more information, she simply declared that the topic of ethics is boring. Is she right?

Is ethics too dry to appeal, even to those tasked with compliance and investment best practices? Should we even compare ethics hounds to those of us who watched the silver spaceship-like balloon, floating above the Colorado countryside a few weeks ago, wondering if Balloon Boy was safely tucked inside? (Go on, admit it. You took at least one peek to hear whether a 6-year old really can fly, unsupervised, 8,000 feet above ground.)

Let's assume for a moment that celebrity and quirky news stories trump discussions about ethics and governance. Should we care? 

I've long maintained that carrying out one's professional duties with integrity does indeed impose a need to pay attention to what is right. Yet recognizing that one should be "ethical" is a necessary but insufficient condition. One can acknowledge the need to act properly yet do nothing about it, exposing ultimate beneficiaries to potential ruin. Then there are those who embrace the mantra but are blind to the gap between "investment best practices" and compliance. One can adhere to the letter of the law and yet fail miserably in terms of improving internal controls (and much more) so that investment risk is mitigated.

Since compensation levels are in the headlines of late, I'd like to repost an article that my colleague Wayne Miller and I wrote several years ago. Though written for retirement plan executives, the issues we discuss in "Do Fiduciaries Need Better Incentives to Make the Retirement System Work?" ring true today and will apply tomorrow. The primary assertion is that individuals behave according to incentives in place. The rewards must be clearly positive and attainable for anyone who rightly walks the extra mile on behalf of beneficiaries (mutual fund investors, retirement plan participants, etc).

What will entice my friend to race to a meeting to learn more ethical behavior, along with hundreds of others? Free wine and cheese or a true belief that comprehensive risk management is simply the only course of action for high-integrity stewards of other people's monies? Alas, she may not soon have a choice. Regulators and politicians will not be handed the next Madoff scandal on their watch.

According to her October 27, 2009 speech to attendees of the SIFMA Annual Conference, the SEC Chairman Mary Schapiro has created a new Division of Risk, Strategy and Financial Innovation and has its sights set on "new products - particularly those related to retirement investing." She emphasizes the need for "simple, clear disclosure" in lieu of "complex fee arrangements or product descriptions...Already on the radar screen are target date funds and securitized life settlements."  Click to read "The Road to Investor Confidence."

Is the SEC focus a faux reward? Comply and stay out of trouble (a carrot of sorts) but not necessarily map actions to best practices (hence one runs into a proverbial brick wall with attendant pain). How will good players be differentiated from bad but lucky investment professionals? Alas, this is a topic for another day.


Trust, Institutional Investors and Their Service Providers


Financial scandals, decimated 401(k) plans and significant fallout on Wall Street are only a few of the pain points that leave one longing for halcyon days of yore. There is a lot of talk about broken promises and attempts to regain client trust.

Even outside the financial services sector, long known for its reliance on interpersonal relationships, sellers are working hard to rekindle the love with their consumers. In "Corporations work to regain customers' trust" (September 18, 2009), Business Week reporters David Kiley and Burt Helm write that "In the world of branding, trust is the most perishable of assets." Adding to marketers' woes, recent polls suggest gross unhappiness with business in general, something that slick ads are unlikely to fix.

Closer to home, "Can You Trust Your Consultants and Service Providers? (Human Resources, October 2009) addresses the critical relationship between service providers and consultants and 401(k) plan fiduciaries. The article quotes Nixon Peabody attorney Sherwin Kaplan as saying that "trust with providers should be earned, not implied" and that sponsors must properly select and then monitor each vendor. Aside from the obvious problems associated with conflicts of interest and fees, Attorney Kaplan mentions new worries in the form of fiduciaries suing each other over questions about suitability and due diligence.

In yet another related item, uber venture capitalist Fred Wilson opines on "Ten Characteristics of Great Companies" (September 3, 2009) with attribute number 10 being that "Great companies put the customer/user first above any other priority." We concur absolutely but know that more than a few service providers are challenged to deliver above and beyond the call of the duty at the same time that sales and client relationship management budgets are being cut to (in some cases) unsustainable levels. 

In "Broker's World: Fiduciary-Like Process Could Become Voluntary" (September 23, 2009), Wall Street Journal reporter Annie Gasparro describes the inevitability of a national (U.S.) focus on new broker-dealer rules. Boston University law professor Tamar Frankel is quoted as saying that "If the clients can trust them, they won't have to do all the freebies like lunches to get their business."

As both a buyer and seller of services, I like to think that my perspective considers both sides of the aisle. In the spirit of open conversation, I've listed a few thoughts below. I welcome your comments.

  • Integrity (a precursor to building a relationship of trust) must be a core element of an organization's enterprise-wide culture.
  • Customer service does not have to deteriorate with budget cutbacks.
  • Discounting of fees does not necessarily translate into automatic trust, especially if it encourages a service provider to cut back on quality or lose money instead.
  • Clients should be willing to provide constructive feedback to service providers before calling it quits. A reasonable period of "remedy" should be decided upon before pulling the plug.
  • The compensation structure on both the buy and sell side should encourage long-term value maximization on behalf of relevant constituencies.
  • Conducting assessments as to what remains critically important to institutional investors versus "nice to have" or "waste of time" should occur on a regular basis.

It is undeniably a brave new world. Without trust and a focus on long-term relationship building, new business for investment service providers may end up costing a bundle. Instead of being hired to "rescue" institutional investors such as pensions, endowments and foundations by granting advice, an absence of trust could induce more risk in the form of litigation and harm to reputation, resulting in service providers themselves asking for a safety net.

Disappearing Trash Can and 401(k) Withdrawals


The other day, I visited our local Blockbuster store to rent a fun movie (anything for a pick me up with this gloomy market) and I noticed something missing. The trash can that I would ordinarily use in disposing of my weekend coffee cup was gone. In chatting with the video store manager, I was surprised to hear her say that the shopping center manager had deemed it a luxury and had it carted away. At $400 a month to empty, no more waste container. A true sign of the times no doubt but a bit disconcerting nonethless.

Retirement accounts have been likewise impacted by hard times. In "401(k)s Hit by Withdrawal Freezes" (May 5, 2009), Wall Street Journal writer Eleanor Laise describes what must be a horribly uncomfortable situation for plan participants. Unable to transfer their money out of funds invested in illiquid instruments such as real property or securities such as Lehman Brothers debt, individuals are confronted with lack of liquidity at the same time that they are watching the value of their holdings plumment. More than a few 401(k) plan fiduciaries are scratching their collective heads, wondering how otherwise "safe" alternatives could have been invested in "hard to value" securities or financial arrangements in the first place.

In defense of the asset managers, their claim is that unwinding positions to facilitate redemptionsfor some would place an undue burden on remaining investors. This is a familar theme. More than a few hedge fund managers last fall put the kabosh on redemptions by defined benefit plans, even when contractually permitted.

In "More People Tap Retirement Accounts" (May 7, 2009), Wall Street Journal reporter Arden Dale cites a recent Watson Wyatt study that chronicles an increase to 44% of the "number of companies reporting early withdrawals for hardship from 401(k) and 403(b) plans. Penalties for early withdrawal, taxes and the opportunity cost of not being able to earn interest on interest makes such requests expensive. However, if someone is laid off or asked to accept lower wages, it is no surprise that pull-outs are occurring now on a regular basis. Advisors suggest taking out a loan against defined contribution holdings if possible. 

Let's hope that financial woes are soon contained and that individual retirees are not asked to continue subsidizing decisions by others, over which plan participants had no control. The inconvenience of a disappearing trash can is one thing. Disappearing retirement accounts is a far more serious situation.

New GAO Study About Conflicts of Interest and Impact on Retirement Plans

In his Congressional testimony, U.S. Government Accountability Office ("GAO") executive, Charles A. Jeszeck, describes a "statistical association between inadequate disclosure and lower investment returns." The stated premise is that pension consultants who fail to disclose  their conflicts of interest could cost defined benefit plans in excess of 100 basis points if or until the situation is corrected. Conflicts can take many forms, including, but not limited to, business relationships between pension consultants and broker-dealers that question whether pensions are getting the best execution possible.

Though the research focused on traditional plans, the GAO suggests that "participants could be more vulnerable to potential adverse effects of conflicts of interest in DC plans such as 401(k) plans." The report cites one study that showed that "36 percent of responding sponsors either did not know the fees being charged to participants or mistakenly thought no fees were charged at all." Revenue sharing arrangements remain a mystery for some while others are unaware of "hidden" fees.

As the world awaits final proposals from the U.S. Department of Labor about conflicts of interest and disclosures, one ponders - How much disclosure will truly help save the day in terms of minimizing conflicts of interest that otherwise weaken the bond of trust between a plan sponsor and its service providers as well as the relationship between plan participants and sponsor?

Editor's Note:  See "Testimony Before the Subcommittee on Health, Employment, Labor and Pensions, Education and Labor Committee, House of Representatives: Private Pensions - Conflicts of Interest Can Affect Defined Benefit and Defined Contribution Plans" by Charles A. Jeszeck, Acting Director, Education, Workforce and Income Security, March 24, 2009.

New Blog About 401(k) Plans

Following his user-friendly book entitled "Fixing the 401(k)," independent fiduciary Josh Itzoe is now a dedicated blogger. While I've added a link to this new blog on the left hand side of, you can check it for yourself now by visiting Pension Governance, Inc. applauds Mr. Itzoe for his continued commimtent to the "repair and transformation" of the U.S. retirement system.

On a personal note, I encouraged Josh to blog but warned that it is hard work. His decision to go ahead tells me that he believes, as do I, that getting the word out is serious stuff.

Best of luck Josh!

History Repeating Itself or a New Start in 2009?

Philosopher George Santayana once said that "Those who cannot remember the past are condemned to repeat it." If Nikolai Kondratiev were still alive, he might agree. An advocate of  long duration boom-bust periods, this Russian economist is credited for giving life to what is oft-described as a Kondratieff wave. His study of  American, English and French prices and interest rates from the 18th century led him to believe that an economic cycle is likely to repeat every 60 years, occuring as four distinct phases (inflationary growth, recessionary stagflation, mild growth and then depression). Click here and here for an interesting overview of Kondratieff's theories, applied to modern times.

As we launch into a new year, full of hope for a respite from what can only be described as a roller-coaster horrible, one wonders what lessons will be learned and acted upon. The Pension Governance team, not surprisingly, votes for a renewed (or for some organizations, a de novo) emphasis on enterprise risk management wherein plan sponsors hunker down to identify and properly measure the alphabet soup of nasties that can roil either a defined contribution or defined benefit plan. As I wrote several years ago, "Risk comes in many forms and ignoring it, while emphasizing returns, makes little sense." Click to read "Pension Risk Management: Necessary and Desirable" (Journal of Compensation Benefits, March/April 2006),

Importantly, a holistic risk management process must go well beyond benchmarking against point-in-time numbers alone. A June 9, 2008 article proves this point with respect to traditional pension plans. In "Surplus hits $111 billion," Pensions & Investments writer Rob Kozlowski chronicles a two-year rise in excess funding for the top 100 U.S. corporate schemes. Just six months later, Barrons reporter Dimitra Defotis cites a Credit Suisse report that has S&P 500 companies facing a "pension deficit of at least $200 billion," the "largest shortfall since 2002, when pension liabilities exceeded assets by a record-setting $218 billion in the aftermath of the dot-com bust." See "The Math Doesn't Add Up" (December 8, 2008). Owners of defined contribution plans are taking it on the chin as well. As USA Today reporter Christine Dugas lays out, more companies are dropping the 401(k) match at the same that plan participants have been hit with large negative returns. See "401(k) losses: Older investors' retirement funds hit hard" (October 31, 2008).

Questions abound, though not directed to any particular plan or organization. What could have been done differently to minimize the ill-effects of a systemic meltdown? What was the role of intermediaries in terms of advice-giving? Was there proper diversification? Was too much latitude given to asset managers? Was scant attention paid to risks relating to internal controls, valuation and restrictions on being able to liquidate particular holdings? Were investments in some cases not truly suitable for beneficiaries?

If New Year's Day marks an opportunity for a fresh look at life, why not make 2009 the year of the comprehensive pension risk manager?

Reader's Comment About Retirement Fallout

In response to this blog's September 23, 2008 post entitled "Retirement Fallout - Breaking the Bank, Piggybank That Is," we received a link to an opinion piece, published in The Baltimore Examiner. Sent by editor Frank Keegan, the first part of the piece, entitled "Public pension panic," is shown below.

<< It’s pension panic time. Panic early. Panic often. Demand reform. Public employees must take control of their financial destinies. Politicians have made promises they never can keep. They and the union bosses who fleece workers don’t have to worry about it because they figured by the time the inexorable mill of reality turns up their deceit, it all will be somebody else’s problem. They counted on being long gone with millions – maybe billions. Well, the day of reckoning arrived a little earlier than they anticipated. >>

Wall Street Retirement Nest Eggs - Splat

According to, to "put your all your eggs in one basket" is "to risk losing all at one time." This notion is oft-touted in the mainstream press for the benefit of non-financial readers. Logically speaking, one would expect the maxim to resonate with investment banking staff who should, by the nature of their work, have a good command of diversification principles.

According to "Wall Street Lays Egg With Its Nest Eggs: Retirement Lessons of the Dumb Moves by 'Smart Money',"  it appears that the lessons of Enron and other costly examples of excess concentration have been lost on some. (Wall Street Journal, September 27, 2008). Pundit Jason Zweig regales readers with a litany of bad news bears, including the following:

  • "At the end of 2006, Merrill employees had 27% of all of their retirement money in Merrill shares" with losses this year close to $400 million.
  • Morgan Stanley employees have "lost some $500 million on their 401(k) holdings of company stock in 2007."
  • "At Lehman Brothers Holdings, employees saving for retirement lost 'only' about $200 million on their shares" in the last 18 months.
  • "Twelve out of every 100 people whose 401(k)s can hold company stock have at least 60% of their retirement money riding on it."

Generally speaking, employees should heed "excess" concentration that could take several forms, including, but not limited to:

  • Company stock in 401(k) plan
  • 401(k) company match in form of company stock
  • Company stock as part of profit-sharing plan
  • Company stock match as part of a dividend reinvestment plan ("DRIP")
  • Company stock options
  • Career risk tied to fortunes of employer
  • Employee ownership via an ESOP
  • Company stock in defined benefit plan ...

Wall Street firms are not alone in encouraging employee ownership and that is not necessarily bad, as long as everyone fully understands the risks.

According to the National Center for Employee Ownership, statistics updated in February 2008, suggest that:

  • $1.5 million participants were tied to 748 401(k) plans that were "primarily invested in employer stock" with an estimated value of $133 billion
  • 10,000 ESOPs and stock bonus and profit sharing plans were "primarily invested in employer stock," with an estimated value of plan assets exceeding $928 billion and impacting 11.2 million workers
  • 3,000 broad-based stock option plans encompass 9 million participants
  • 4,000 stock purchase plans cover 11 million workers.

What are you doing to track your diversification potential, or lack thereof, as relates to your current employment situation?

Omelette anyone?

Retirement Fallout - Breaking the Bank, Piggybank That Is

According to financial reporter Jennifer Levitz, a dismal trifecta accounts for recent retirement withdrawals. Rising unemployment, stricter credit conditions and a sagging equity market make defined contribution piggybanks a tempting target. Despite a 10 percent penalty for early withdrawals, participants are tapping into their post-employment savings to make ends meet. In addition, and not surprisingly, some employees are reallocating away from equities into money market funds.

Overall, "Investors Pull Money Out of Their 401(k)s" (Wall Street Journal, September 23, 2008) paints a gloomy picture of the retirement landscape. Keep in mind that traditional defined benefit plans are no longer a reality for countless individuals. A dwindling 401(k) plan balance spells real hardship since many participants will be unable to "make up" any monies taken out before they exit the workforce.

On the topic of 401(k) plans, ERISA attorney Stephen Rosenberg vents about poor plan governance as described in Fixing thte 401(k) by Joshua Itzoe (earlier reviewed by this blogger). Alleged excessive fees, poor investment choice selection and not controlling plan costs are a few of the ills he deems important yet beyond the reach of plan participants who "have neither the power, responsibility nor authority" to address fiduciary problems by themselves. Click to read the Boston ERISA & Insurance Litigation Blog.

New Book on 401(k) Issues

In Fixing the 401(k): What Fiduciaries Must Know (And Do) To Help Employees Retire Successfully, author Joshua P. Itzoe suggests that the 401(k) industry is broken and in bad need of repair. As many employers migrate away from defined benefit plans to defined contribution plans, it is critical to understand any weaknesses in the current system and work vigorously to correct them.

Chapter 1 states conflicts of interest and opaque fee disclosures as two of the biggest issues faced by the 401(k) industry. Chapter 3 explains basic fiduciary duties as codified by U.S. pension law in the form of ERISA, co-fiduciary liability and how fiduciary types differ from one another. Subsequent chapters are rich with descriptions of relevant industry players (and there are many of them), inherent conflicts of interest and the generally accepted compensation arrangement for each category of service provider. Though there is an entire chapter devoted to types of fees, it would have been nice to sink one's teeth into some meaty math examples, along with some empirical data about magnitude and dispersion of fees across plans. 

Written for 401(k) fiduciaries, the basic nature of the book is both refreshing but worrisome. If current plan fiduciaries (the target market for the book) are unaware of their core duties, how have they been getting along so far? Far from being pedantic, Mr. Itzoe includes several chapters with concrete advice for improving 401(k) fiduciary practices. His provision of important questions at the end of each chapter is a nice touch, along with some helpful appendices such as a "Sample Fiduciary Audit File," "20 Steps to 404(c) Compliance" and a relatively long glossary. There is no index but a short bibliography is provided for interested readers.

For more information, check out Click to read the author's bio. At $13 and change, I recommend this primer. Kudos to Mr. Itzoe, CFP and Accredited Investment Fiduciary, for putting forth a solid book on an important topic.

New Research on 401(k) Plans and Amassing Wealth

As companies and government employers shed their traditional defined benefit ("DB") plan offerings, defined contribution schemes become absolutely and proportionally more important to individuals. In two new papers published by the National Bureau of Economic Research ("NEBR"), authors James Poterba, Steven Venti and David Wise conclude the following:

  • Self-directed retirement assets will outflank DB plans by 2010, "even though defined benefit plans remain the most important source of retirement assets for federal, state, and local employees."
  • The growth in self-directed retirement assets are influenced by a number of factors. These include (a) expected stock returns and bond yields (b) number of employees permitted to participate (not currently enrolled) and (c) asset allocation mix.

Citing data from the Survey of Income and Program Participation ("SIPP"), the research trio reveals that "only 5.8 percent of 44-yers old had 401(k)-type accounts" some 20 years ago. In 2003, that number had escalated to 44.3 percent. In 2000, per capita retirement assets for individuals about to exit the labor pool, and in their mid-60s, averaged nearly $30,000. A decade from now, available assets are projected to rise to $90,000 (in terms of year 2000 dollars). In 2040, the prediction is that nest eggs will topple $269,000.

Click here to order "Rise of 401(K) Plans, Lifetime Earnings, and Wealth at Retirement" (NBER Working Paper 13091) and "New Estimates of the Future Path of 401(K) Assets" (NBER Working Paper 13083).

Wall Street Journal reporter Jennifer Levitz offers a competing, albeit grim, reality. In "Americans Delay Retirement As Housing, Stocks Swoon," she writes that graying Americans favor longer work lives for a variety of reasons. Preservation of health benefits is one factor. Sagging equity returns in 2000-2002 didn't help, especially for those employees who had allocated a big chunk of their savings to stocks. Of course, no trend exists in isolation. A delay in retirement means younger workers will face more competition for promotions or even jobs though the impact is uneven across industries. Skilled workers are nearly always welcome, being indispensable for many knowledge-oriented businesses. Though written on April 1, her description of a brave new world is no April Fool's joke. Companies are fast being forced to reckon with changing demographics and altered employment patterns.

As a colleague aptly bemoans, the retirement trifecta (Social Security, juicy defined benefit plan payouts and hefty salaries, let alone a job) is a fantasy for most everyone still in the work force. For those who expect to live as well as your grandparents or parents, good luck. Start pinching those pennies hard and often.

LaRue, ERISA and the U.S. Supreme Court

Inside the hallowed halls of the U.S. Supreme Court, pension history may be in the making. On November 26, 2007, justices heard the case of LaRue v. DeWolff, Boberg & Associates Inc. The long awaited outcome could put employers in the ERISA litigation spotlight as never before by allowing individuals to sue, one person at a time.

By way of background, Mr. James LaRue sought to have his employer switch his 401(k) monies from one mutual fund to another, in his attempt to migrate to "safer" investments. The plan administrator failed to make the change, allegedly costing LaRue an estimated $150,000 in lost profits. In August 1996, the United States Court of Appeals for the Fourth Circuit, in Richmond, Virginia denied LaRue an opportunity to seek redress, claiming that ERISA emphasizes harm to a plan in aggregate. The opinion reads:

<< In ERISA, Congress sought to provide fair and generous remedies for plan participants without imposing ruinous personal liability on plan fiduciaries. That balance pervades the statute, and it is not for us to readjust it. With respect, we think the Secretary’s view does recalibrate the balance, and we do not possess authority to modify plain statutory text, several Supreme Court decisions, and the corpus of circuit law on the subject. If the Department believes fiduciaries should face personal liability for every wrong alleged by individual beneficiaries, even in the absence of personal profit or misuse of plan assets, it will have to seek a forum other than this court. >>

This begs the question then as to how an individual plan participant can hold administrators and relevant parties accountable for mistakes. The import of this issue is huge. At a time when countless companies are terminating defined benefit plans and opting to offer 401(k) plans in their stead, anything that makes that strategy more expensive and/or troublesome could create pushback. If this occurs, employees are going to be under even more pressure to save for their retirement on their own. Add Social Security and Medicare woes, along with what some predict is an imminent recession, and Joe Everyman is likely to truly feel the pinch in a major way. On the other hand, employers fear an honest mistake that arguably opens the floodgates to costly litigation.

A read of the June 19, 2006 and August 8, 2006 LaRue opinions is instructive, as are the salient documents presented to the U.S. Supreme Court. Click here to download relevant files. Click here to read an informative overview provided by law professor Paul Secunda (who predicts a 6-3 victory for LaRue). One item in Secunda's text that struck me as notable is the line of inquiry by Chief Justice Roberts wherein he "points out that the SPD does not say administrators have to follow the investment directions of participants."  Reading these words catches one's breath. Is the honorable jurist suggesting that the Summary Plan Description ( a guiding document as regards the administration of the plan) preclude an asset allocation change? If so, how are employees to deal with market volatility or altered circumstances that mandate a different investment risk-return tradeoff? I await feedback from ERISA attorneys on this and other points.

Pay close attention when this opinion is rendered. It will make a difference! 

IRS Provides Tool for 401(k) Plan Check-Up

In a special edition of employee plans news (October 2007), the Internal Revenue Service provides a link to its new web-based tool to help with 401(k) plan compliance. This 43-page document includes a chart that describes eleven "problem areas in retirement plans" as well as suggested ways to identify, correct and avoid such mistakes.

Click here to access the tool.

Disclosure and Fiduciary Implications - Big Problem?

Disclosure is fast becoming the proverbial four letter word in pension fiduciary land. Critical questions abound.

  • How much information do pension fiduciaries need in order to make an "informed" decision?
  • Who should provide that information, how often and in what form?
  • Is there a danger of having "too much" information?
  • What does the law currently require?
  • What information is currently available and to whom?
  • Is there an industry consensus about what constitutes "good quality" information?
  • What are the consequences of "incomplete" disclosure and are they equally unpleasant for plan participants, shareholders, taxpayers and plan sponsors?
  • What current roadblocks stand in the way of "better" disclosure (once that term is defined)?

 The topic of disclosure and transparency is as broad as it is critical to good plan governance. We've written extensively about this topic as applied to investment risk and will continue to do so. Click here if you would like to receive copies of some of our many articles. After hours of work, our research librarians are completing an Ebook on the topic of pension information resources. Click here if you want to be notified of its publication.

With a copyright date of July 4, 2007 (symbolic perhaps?), independent fiduciary Matthew D. Hutcheson addresses the topic of 401(k) plan information in "Retirement Plan Disclosure: A Declaration of Ethical Principles and Legal Obligations." Not known for being shy about his point of view, Hutcheson makes a compelling case for additional, complete and user-friendly disclosure about fees and related compensation arrangements.

“The Department (Department of Labor) emphasizes that it expects a fiduciary, prior to entering into a performance based compensation arrangement, to fully understand the compensation formula and the risks associated with this manner of compensation, following disclosure by the investment manager of all relevant information pertaining to the proposed arrangement. [Advisory Opinion Letter 1989 WL 435076 (ERISA)]

Thus, for a fiduciary to know all relevant information ahead of time, service providers must disclose all relevant information prior to entering into an engagement. The failure to disclose all relevant information effectively forces fiduciaries to violate the law unknowingly. The SEC has taken action against various service providers of 401(k) plans because of hidden compensation arrangements which obscured relevant information to fiduciaries. "

Hutcheson provides solid legal and regulatory evidence in support of full disclosure of all types of fees and related non-fee agreements. In addition, he reminds readers that fees impact economic performance and are therefore integral to any kind of investment decision-making. Would we buy a car or get surgery without enough information to gauge potential risk and rewards? 

His message comes at an opportune moment to begin a national "no holds barred" conversation about fees, fiduciary duty and protection of plan participants.  Countless companies are switching from defined benefit plans to defined contribution structures. In loco parentis NOT.  While employers transfer more responsibility to employees, research suggests that individuals are saving much less than is minimally needed to secure a reasonable lifestyle in retirement. Add to that an uncertain outlook for the long-term viability of Social Security and Medicare (and international equivalents to the U.S. post-employment safety net) and policy-makers are starting to take notice. Not a day too soon for many folks. If you think a train is about to crash, why wait to seek preventative measures?

Hutcheson concludes that "industry and regulators must either: (a) Return to the model originally contemplated under ERISA, in which recognized fiduciaries would make all decisions regarding trust assets; or (b) Empower participants to make their own individual decisions with respect to the assets in their personal tax-deferred 401(k) accounts. If the chosen course is to return to the original intent of ERISA, then fiduciaries of 401(k) plans must be armed with all relevant information necessary to construct a low-cost prudent portfolio for the benefit of the participants. Alternatively, if the chosen course is to enable those holding tax-deferred investments to, in essence, serve as their own mini-fiduciaries, then they must be afforded the information necessary to construct the same sort of prudent, low cost personal portfolio."

Those who advocate individual responsibility, and therefore favor the idea of choice at the employee level, get push-back from some that Sally or Joe "Every Worker" is unlikely to delve deep with respect to investment issues. Yet people make decisions for themselves every day - choosing a doctor, buying a car, voting, changing jobs and so on. But, for argument's sake, let's agree that a "mini fiduciarization" of the workforce is impractical, infeasible or otherwise unappealing. What then?

If only plan sponsors are to decide on all things 401(k), should we not be seriously engaged in identifying what makes for a "top quality" fiduciary? Besides access to good and complete information about fees and other pecuniary arrangements, we've long advocated a requirement for "suitable" qualifications (education and experience) before someone makes multi-million decisions with other people's money. To be clear, the use of the term "require" here refers to that which is self-imposed by plan sponsors, perhaps with the help of various industry and fiduciary organizations. Mandatory requirements would be problemmatic and could exacerbate the situation. (Our firm, Pension Governance, LLC provides fiduciary training, process checks and research in the areas of investment risk and valuation. Part of a growing industry to help fiduciaries do a better job, we complement work done by our partners but always with the same message. Good process is everything!)

On the topic of information, the more voices the better as long as it gets us to an enlightened place. This means that "good" disclosure would be seen as a value-enhancing tool for all concerned parties, not another costly, "go nowhere" exercise.

To read the full text of Hutcheson's article, click here. You will be taken to the Social Science Research Network site. Pension Governance, LLC is a proud sponsor of four SSRN sections. Click here to learn more about our sponsorship of a pension risk management section (created just for us) and a research section about mutual funds and hedge funds. Click here to learn more about our sponsorship of a research section about employment law and litigation and a research section about corporate governance.

For further reading, click on the title of each item listed below:

"Who Wants to be a Fiduciary Anyhow?"

"Do You Know the True Cost of Your Retirement Plan?"

"Searching for Hidden Treasure"

"Do We Need an Easy Button for Fiduciaries?"

"401(k) Fee Analysis - Who Benefits?"

Pension Fiduciaries - Time to Wake Up and Smell the Coffee, Part Two

In "A Conversation with a Fiduciary" (published by Morningstar), independent pension fiduciary Matthew D. Hutcheson provides a thought-provoking assessment of ERISA Section 404 and passive versus active investment choices for 401(k) plan participants. Click here to read the article and here to read Hutcheson's March 6,2007 testimony about 401(k) fees before the U.S. House of Representatives.

On the other side of the fence, Financial Times writer John Authers extolls the virtues of Dave Swenson's "uninstitutional portfolio" approach in his June 9, 2007 article about the Capital Asset Pricing Model and market efficiency. With more than two-thirds of the endowment fund for Yale University in alternative assets "which are not readily marketable," the contrast is telling. While the evidence seems to strongly support Swenson's approach for Yale, issues abound with respect to alternatives investments and command attention. "See "Yale puts academic theory of investment into practice.")

I co-led a workshop on the valuation of "hard to value" assets on June 12, 2007 and came away with a renewed appreciation of the fact that more than a few institutions may truly be in the dark with respect to risk factors. Worth mentioning again is that risk itself is not bad. However, risk that is ignored cannot be measured and, by extension, can certainly not be managed. For most investors, limited resources make it difficult to replicate the Connecticut Ivy's success. Addressing a recent gathering of alumni, Swenson said that "Yale is set up to make high-quality active management decisions" with a staff of twenty and a long time horizon.

The debate continues with respect to style because it is a crucial (nay impossible to ignore) element of investment management. Strategic asset allocation and tactical implementation are likewise integral determinants of fiduciary liability for a given organization. To the extent that Hutcheson reminds us to focus on the "F" word and move the conversation to process that supports duty, plan beneficiaries applaud.

Tell us what you think. Should fiduciaries do a better job of justifying when active strategies make sense? We will talk more about these issues because there is a lot to say.

Click here to email your comments. Please indicate if you would like the comments kept private.

Pension Fiduciaries - Time to Wake Up and Smell the Coffee, Part One

Today's post and the next few that follow focus on pension governance (the name of our new website and a term that is often used to describe fiduciary duties and best practices). For a discussion of what pension governance means, click here to read interviews with market leaders. It's such an important topic yet often overlooked. In fact, the U.S. Department of Labor created an educational program ("Getting It Right") in order to help individuals understand their duties. (The results of countless audits apparently left examiners nervous about the folks who did not properly self-identify as fiduciaries.)

"Hot off the press" is a set of standards devoted to the topic of pension governance. Newly published by the Stanford Law School, the so-called Clapman report urges pension funds, endowments and charitable funds to adopt principles that reflect prudence, ethics and transparency. Citing some big dollar "no-no's" on the part of institutional decision-makers, chief architect of the report, Peter Clapman,and others rightly point out that giant institutions must walk the walk if they admonish corporations to do the same. CEO of Governance for Owners USA and former chief investment counsel of TIAA-CREF, Clapman adds that “Bad governance also weakens funds by eroding public support for them." One element of the report calls for funds to provide clear (and make public) information about governance rules.

Yippee Yahoo!

A few of us sometimes feel as if we've been screaming in the wind about the urgent need to know who is in charge and how they are running the show. (I'm sure Clapman and others would agree.) To read how bad things are in terms of NOT being able to easily identify where the buck stops, check out "In Search of Hidden Treasure." More than a year ago, I wrote "that a systematic identification of who does what and why with respect to employee benefits is simply not a reality as things stand today. This makes it difficult (perhaps impossible) to effect change."

The Clapman Report suggests that funds hire "trustees who are competent in financial and accounting matters." Read "Practice What You Preach" for our list of basic questions about pension fiduciary selection, training and performance evaluation. Anecdotally, I've often queried trustees and  other types of fiduciaries - "How do you become and stay a fiduciary? Do you take a quiz? Do you possess a certain amount of relevant experience? Do you get paid what you're worth in terms of liability exposure and hours spent on plan-related tasks?"

Scary to say, selection is frequently a function of who is seen as having a few hours of free time. Unfortunately, being a plan fiduciary is arguably a full-time job. Moreover, with so many complex decisions to make, someone with a limited background in topics such as investing may truly struggle to understand basics, let alone nuances of evaluating risk-adjusted return expectations. Even when an external consultant is used, a fiduciary still retains oversight responsibilities (a topic deserving of its own separate post).

Another proffered recommendation from the Clapman Report is to "establish clear reporting authority between trustees and staff" and to "define appropriate responsibilities and delegation of duties among fund trustees, staff, and outside consultants." We couldn't agree more. Check out our earlier discussion about the importance of incentives in "Paper Clip Theory of Pension Governance."

One thing is clear. Pension governance is starting to attract attention. That's great news for the many fiduciaries already doing things the right way. (You deserve recognition.) For those who need to improve, perhaps the spotlight on practices, good and bad, will encourage change. That would be a huge plus for plan beneficiaries, taxpayers and shareholders.

Here are a few resources for interested readers.

1. Committee on Fund Governance: Best Practice Principles -"Clapman Report" (Stanford University)

2. Prudent Practices for Investment Stewards (Fiduciary 360, AICPA, Reish Luftman Reicher & Cohen)

3. Asset Manager Code of Professional Conduct (CFA institute)

4. Standards of Membership and Affiliation (The National Association of Personal Financial Advisors)

5. CFP Certification Standards (Financial Planning Standards Board)

6. Regular Member Code of Ethics (National Investor Relations Institute)

7. Code of Professional Responsibility (Society of Financial Service Professionals)

8. Also check the site for the Financial Planning Association. I understand that they are soon to release a new set of standards for financial advisors.

401(k) Governance Webinar Emphasizes Growing Fiduciary Focus

On June 4, 2007, Dr. Susan M. Mangiero, president of Pension Governance, LLC moderated a panel of experts who waxed poetic about current challenges for 401(k) plan stewards, their advisors and money managers. Click here to order the recording if you missed the event. (Past events are listed by original date with older events shown first.)

All three speakers agreed that more pressure on fiduciaries is inevitable. Mr. Blaine F. Aikin, AIF®, CFA, CFP® and Managing Partner (Fiduciary360) said that many people either do not understand their responsibilities or fail to recognize how to discharge duties properly. As the investment world becomes more complex, this gap between statutory requirements and reality is likely to grow.

Mr. David J. Bauer, Partner (Casey, Quirk & Associates LLC) explained how the asset management industry is changing to accommodate an undeniable trend away from traditional plans in favor of 401(k) offerings. He added that the asset management industry struggles with what products they can offer that will help plan sponsors manage their fiduciary risk. Everyone opined that both buyers and sellers are still too heavily focused on performance and should be more aware of risk-adjusted returns at a minimum.  It was also agreed that adopting new products and strategies could increase fiduciary liability exposure if approved without demonstrating a solid understanding of risk.

Mr. David Vriesenga, Chief Rating Officer, with the Centre for Fiduciary Excellence, LLC spoke about the wave of new pension litigation cases. He explained that asset managers will continue to be targeted as defendants. Susan M. Mangiero commented that a forthcoming website,, has more than ninety (90) percent of its investment fiduciary cases cross-coded as alleged breach of duty. Scary stuff!

All speakers agreed that change is a constant. Challenges for plan sponsors and money managers abound. Part of that has to do with the heavy (literally and figuratively) nature of the Pension Protection Act (PPA) of 2006.

Note to Readers: Do you understand everything about the PPA? If not, you are far from alone.

From this blogger's perspective, the introduction of complex products could hurt more than help (given the current state of investment fiduciary literacy).

The audience was reminded that good process is everthing.

How true!

401(k) Fee Fights - Here We Go

On March 29, Reuters reported that  Judge David Herndon of the U.S. District Court for the Southern District of Illinois had given the green light for a 401(k) fee case to proceed. One of about a dozen lawsuits brought by St. Louis firm Schlicter, Bogard & Denton, plaintiffs allege that plan consultants were paid an "unreasonable" amount for record-keeping services rendered in 2004.

Coincidentally, on that same date, I listened to a lively discussion about fees, revenue-sharing and the state of 401(k) fee litigation. Moderated by Nell Hennessy, Fiduciary Counselors Inc. and sponsored by the American Bar Association, other speakers - Lynn Sarko (Keller Rohrbach LLP), Chris J. Rillo (Groom Law Group) and Kristen L. Zarenko (Office of Regulations and Interpretations, EBSA, US Department of Labor) - parried back and forth about procedural prudence, proper fee-related disclosure and new enforcement initiatives in the form of the Consultant/Advisor Program (CAP). Click here to read the program description. 

Always important, the topic of fee economics is arguably more so now since countless organizations are switching from traditional plans to defined contribution plans.

2007 looks to be an active year in terms of court-watching!

Fidelity Abandons its Traditional Plan

According to its May 12, 2006 press release, Fidelity Investments expands its offering to deliver "defined benefit plan sponsors increased investment flexibility and greater access to and control of plan data to help them identify and mitigate financial and fiduciary risks."

In today's Investment News, reporter Kathie O'Donnell writes that Fidelity Investments will replace its traditional pension plan for over 30,000 participants and instead offer them a "retiree health reimbursement plan and a beefed up profit-sharing plan." O'Donnell adds that Fidelity's in-house studies suggest the need to address the health care gap, the company match will increase to 7% from 5% and profit-sharing contributions will continue.

For some reason, today's headline stood out, causing me to wonder. Might it make sense to ask pension advisors, consultants and money managers what plan(s) they offer to their employees and why?

Congressional Examination of Plan Fees

Jerry Kalish tells us to buckle up for a bumpy ride now that Congress is ready to explore the issue of 401(k) fees. Click here to read his informative post.

Reiterating the emphasis on process, as written in an earlier post about 401(k) fees, "lower" fees are not necessarily "better" if plan participants "pay" for them in terms of additional restrictions on their money. Analogous to the idea of buying a luxury sedan versus something less fancy, price should reflect a variety of features for which people are willing to pay a premium. Whether fees are "high" or "low" for a specific plan and particular investment choice depends on a host of factors and requires a rigorous assessment of relevant information.

Process is everything!

401(k) Fee Analysis - Who Benefits?

Thanks to attorney Stephen Rosenberg for giving our 401(k) fee webinar a round of applause. In "401(k) Plan Fees and Breaches of Fiduciary Duty", Rosenberg writes "On the key issue of how to avoid incurring liability for breach of fiduciary duty as a result of the fees incurred by 401(k) plans and their impact on plan performance, the speakers emphasized a commitment to due diligence. In particular, the speakers favor a systemic and periodic review of the entire issue of the fees affecting the plan, and proper investigation and selection of funds and advisors with the issue of fees firmly in mind. In other words, don't put the plan together without thinking about the issues of fees and ensuring that the applicable fees are consistent with industry benchmarks, and even after you do that, don't just forget about the issue, but instead return to the topic regularly and make sure fees and performance remain appropriate."

Some other points are noteworthy, especially given questions that arose after the event.

1. A comprehensive fee analysis, done before manager selection and regularly thereafter, benefits multiple constituencies - plan sponsors, participants, shareholders, money managers and consultants.

2. While plan participants arguably have limited information, relative to what is available to plan sponsors, both groups should understand fee structures and the expected economic effect of different types of fees. Remember that all fees are not "created equal." For example, some fees may be front-ended or tied to performance and therefore differ as regards portfolio performance impact.

3. What looks like "higher" fees on the surface may not be necessarily "bad" (and this is a gross simplification). In part, it depends on what they represent. A plan participant could have more flexibility in one situation (i.e. fewer restrictions perhaps), thereby boosting base fees. It likewise depends on, apples-to-apples, how a particular fund's fee structure compares to an appropriate fee benchmark. Other issues might come into play. Bottom line - A thorough analysis is paramount.

4. Fees are influenced by many factors, including asset class, investment strategy, market structure, fund structure, performance, terms, regulation and competitiveness.

Regarding the process itself, the U.S. Department of Labor provides guidance in its online publication, "A Look At 401(k) Plan Fees."

Here are a few excerpts:

"Establish a prudent process for selecting investment alternatives and service providers

Ensure that fees paid to service providers and other expenses of the plan are reasonable in light of the level and quality of services provided

Select investment alternatives that are prudent and adequately diversified

Monitor investment alternatives and service providers once selected to see that they continue to be appropriate choices"

Other resources exist in the form of checklists such as those provided by the Foundation for Fiduciary Studies. Click here to access the "Self-Assessment of Fiduciary Excellence" for investment stewards, investment advisors and money managers, respectively.

More to come...

401(k) Fee Webinar on November 28

In the aftermath of the Pension Protection Act of 2006, 401(k) plan sponsors are required to carefully select "fiduciary advisors", identify appropriate default investment choices for participants and comply with more rigorous federal reporting procedures. All of this could spell trouble for retirement plan fiduciaries who fail to realize that regulation, public awareness and employee angst put them in the spotlight as never before. This is especially apropos with respect to plan fees.

In a flurry of lawsuits involving nearly a dozen U.S. corporations, allegations of fiduciary breach regarding "excessive" compensation are making headlines. At the same time, the U.S. Department of Labor urges decision-makers to take care in assessing the reasonableness of fees and to uncover hidden costs.

Join us on November 28, 2006 from 11:00 a.m. to noon (EST) for an informative and timely webinar about 401(k) plan fees - what they are, how they can affect reported performance and the fiduciary practices that address investment management fees. Click here to register. There is a small charge to cover production expenses.

Featured Panel:

Edward M. Lynch, Jr.
Accredited Investment Fiduciary Analyst
SVP - Dietz & Lynch Financial Strategies Group of Wachovia Securities LLC

J. Richard Lynch
Accredited Investment Fiduciary Analyst
Executive Director - Foundation for Fiduciary Studies

Dr. Susan M. Mangiero
CFA, FRM, AVA and Accredited Investment Fiduciary Analyst
Managing Member - BVA, LLC and Founder - Pension Governance, LLC

401(k) Fee Redux

In "Workers' suit highlights secrecy over 401(k) fees" (Baltimore Sun, November 5, 2006), journalist Eileen Ambrose looks at the effect of nearly a dozen plan-related lawsuits filed against large U.S. companies. Her conclusion? "Regardless of the merits of the lawsuits, consumer advocates and benefits experts say that increased attention to fees is a good thing."

Unfortunately, getting good information about fees is not a walk in the park since no one document tells a complete story. "Workers with sharp eyes and a calculator can generally figure out what they pay by going through the prospectus and quarterly statement, but they will have little luck uncovering the soft-dollar arrangements that could affect their nest eggs." Then there is the fact that there are many kinds of fees, with disparate effects on economic performance.

Edward M. Lynch Jr., a benefits expert with Dietz & Lynch Financial Strategies Group, a retirement plan consulting firm in Massachusetts, offers that no standard exists. Some mutual funds may charge a small or no administrative fee, planning instead to earn management fees. Other arrangements such as revenue-sharing do not show up on Form 5500 and are not always disclosed to plan participants. According to Lynch, "Revenue sharing could be a good thing if it is fully disclosed and reduces costs for workers." Otherwise, "it can be a problem if it influences the decisions on which mutual funds end up in the 401(k)."

Ambrose points out that, absent lawsuits, reform is on its way with the U.S. Department of Labor recommending improved disclosure about fees and the relationship between plan decision-makers and service providers. (In case you missed my blog about Form 5500 revisions and information resources, click here.)

Regarding employees, I am quoted as saying the following. "Ask about fees that you pay, even indirectly, for administration and record keeping" as well as the employer's selection process. "How often does that process get vetted" and on what basis?

With so much attention being paid to the topic of 401(k) fees, this may be the beginning of the end for performance reporting as it exists today.

The 401(k) Fee Blame Game: Who's Next?

Chances are you've read about the flurry of cases recently filed against nearly a dozen 401(k) plan sponsors, alleging fiduciary breach by allowing plans to levy unreasonably high fees. Regardless of the legal outcome, the complaints are creating a buzz while encouraging plan sponsors everywhere to reassess their own situation.

In a recent client alert, law firm Dechert LLP wrote that "Under ERISA, an employer that provides a 401(k) plan to its employees is a "Plan Sponsor" and may also serve as "Plan Administrator." Both the Sponsor and Administrator are fiduciaries of the 401(k) plan. ERISA requires that that the Sponsor and Administrator ensure that fees borne by the plans be reasonable, and be incurred solely for the benefit of plan participants. In addition, 401(k) plans generally provide for participant-directed investment and are designed to comply with the rules under ERISA Section 404(c) which permit Plan Sponsors and Administrators to avail themselves, under certain circumstances, of a statutory safe harbor from fiduciary liability for the results of such investment elections. The safe harbor under ERISA Section 404(c) is available only where the fiduciaries allow the participants "the opportunity to obtain sufficient information to make informed decisions with regard to investment alternatives available under the plan."

More recently, Mr. Robert J. Grassi (Director, Pensions & Investments - Corning Inc.) and Attorney Michael J. Prame (Principal, The Groom Law Group) addressed this important issue as part of the Association for Financial Professionals Annual Conference - "401(k) Plan Fees: What You Need to Know and What You Need to Do." Citing concerns such as lack of fee transparency, hidden costs and potential conflicts of interest, Grassi and Prame provided audience members with a laundry list of types of direct and indirect compensation, respectively.

Both gentlemen talked about "the other shoe still to drop", adding that the U.S. Department of Labor is "formulating guidance that would essentially require plan fiduciaries, before contracting with a service provider, to consider the indirect compensation to be received by the service provider." They described a basis for imposing this obligation on fiduciaries in the form of the Frost/Aetna letters whereby "fiduciaries have a duty to obtain 'sufficient information' about the compensation that service providers receive from third-parties so that plan fiduciaries can make 'informed decisions' about whether the amounts that the plan pays are reasonable." Expected U.S. Department of Labor initiatives to amend 408(b)(2) regulations are likely to accelerate additional disclosure about plan fees.

Regulatory and policy-making scrutiny is on the rise. As we wrote in an earlier post, the U.S. Department of Labor wants to amend Form 5500, Schedule C, to include more stringent information about fee arrangements with service providers beyond what is currently required. U.S. Congressman George Miller has requested a report from the General Accounting Office about pension fees and the SEC reported on the relationship between pension consultants and fees in 2005.

Noteworthy is the sentiment that company decision-makers in the hot seat today will likely be followed by external plan fiduciaries next. According to attorney Stephen D. Rosenberg, author of the Boston ERISA & Insurance Litigation Blog, "Given the number of different advisors and other players involved in the operations of these types of retirement vehicles, there are bound to be plenty of fiduciaries - as that term is understood in the context of ERISA - involved in almost any 401(k) plan, making for plenty of targets for such suits."

One thing is certain. The spotlight will not dim on the fee issue any time soon.

Editor's Note:
The paper about fees by banker Ed Lynch, attorney Fred Reish and Dr. Susan M. Mangiero, Accredited Investment Fiduciary Analyst will be completed soon. We have created a list of recipients who requested our paper.

Focus on 401(k) Plan Fees

A flurry of lawsuits and investigations about 401(k) plan fees is moving center stage. Wall Street Journal reporter Tom Lauricella writes that New York State Attorney General Elliot Spitzer is close to concluding a settlement with a large insurance company "over allegations that it took undisclosed fees to promote certain funds in a retirement plan for New York State teachers." (See "Spitzer Aims At Another Mark: Fee Disclosure," Wall Street Journal, October 10, 2006.)

In "Suits Claim Excessive 401(k) Fees at 7 Firms", LA Times reporter Kathy M. Kristof describes allegations of excessive fees being borne by 401(k) plan participants at some of this country's largest businesses. Seeking class action status, the cases focus on whether "employees were charged millions of dollars in excessive management fees, which often were hidden in obscure agreements and not disclosed to the workers."

According to the U.S. Department of Labor website page entitled "Meeting Your Fiduciary Responsibilities", decision-makers are urged to analyze whether fees are "reasonable" when deciding on a money manager. In addition, fiduciaries should "compare all services to be provided with the total cost for each provider", "ask prospective providers for a detailed explanation of all fees associated with their investment options" and "specify how fees are paid."

New regulation is a factor too. ERISA attorney Fred Reish offers that the selection of a fiduciary advisor, pursuant to the Pension Protection Act of 2006, requires employers to "satisfy a fairly complex set of requirements that they did not need to satisfy in the past". One possible effect is that participants are harmed because of higher fees, "due to increased compliance burdens."

In the interest of full disclosure, I am writing an article with senior banker Ed Lynch and attorney Fred Reish about the rigorous process of comparing fees on an "apples-to-apples" basis. Send an email if you would like a copy of the paper when it is published.

Celebrating 401(k) Day

Did you know that September 8, 2006 is 401(k) Day? "An annual celebration spotlighting the importance of employer-sponsored profit sharing and 401(k) plans," this holiday follows Labor Day "as retirement follows work."

You can try out several planning tools such as the 401(k) Day Retirement Checkup, a glossary and a 401(k) calculator.

Provided by the Profit Sharing/401(k) Council of America (PSCA), a nonprofit association, these tools and many other resources can be retrieved and used throughout the year.

401(k) Plan Spotlight

CNN senior writer Jeanne Sahadi describes increased limits, automatic enrollment (encouraged but not mandated) and greater flexibility with respect to selling company stock held in a 401(k) plan as only a few of the many elements of the Pension Protection Act of 2006 that bode well for the future of what the IRS describes as "the most popular type of retirement plan used today." (The Act still requires the President's sign-off.)

By way of background, a "401(k)" plan takes its name from a section of the Internal Revenue Code. According to the 401(k) Resource Guide, created and made available by the IRS:

A 401(k) plan is a qualified (i.e., meets the standards set forth in the Internal Revenue Code (IRC) for tax-favored status) profit-sharing, stock bonus, pre-ERISA money purchase pension, or a rural cooperative plan under which an employee can elect to have the employer contribute a portion of the employee's cash wages to the plan on a pre-tax basis. These deferred wages (elective deferrals) are not subject to federal income tax withholding at the time of deferral, and they are not reflected as taxable income on the employee's Form 1040, U.S. Individual Income Tax Return.

Since this blog deals with pension risk, it is worth mentioning that defined contribution programs such as 401(k) plans are not a risk-free alternative for employers. See Myth #4 of this author's article entitled "Pension Risk Management: Necessary and Desirable".