Saturday, July 25, 2009

'Right' Minded

One of the most common—and consistent—inquiries I receive (via e-mail, anyway) is from readers looking for help in choosing a plan provider. I am always flattered by the request, and always try to do my best to point them to the resources we have on our site (our annual Defined Contribution Survey and the annual Recordkeeping Survey are quite popular).

Still, there is only so much help one can offer without a fuller understanding of the current needs of the program, as well as the goals and objectives set for the future. Furthermore, providers, like plan sponsors, have "personalities" and, in my experience, sometimes the chemistry that a good relationship needs to thrive just is not there, even when the plan's needs are reasonable and the provider's capabilities are top-notch.

Yes, picking the best provider for a retirement plan is one of the most important decisions a plan sponsor can make—both in terms of fulfilling their fiduciary obligation and in what might affectionately be called job sanity. That said, many plan sponsors really don’t have the time—or the expertise—to pick the best provider (much less monitor that performance), and so, the smart ones do what ERISA requires—they hire the expertise to pick (and monitor) the best provider. And that’s where the retirement plan adviser comes in.

The “Right” Adviser

However, in my experience, it’s no less challenging to find the “right” adviser/consultant than to find the right provider. In fact, IMHO, it’s harder to find that adviser. Why? Well, most of us have some idea as to the features/pricing we want/are willing to pay for from a provider, but how much is good counsel worth? And how do you know it's good counsel?

Here are seven things that I’ve told plan sponsors that they should know, and in some cases know before they start looking, before they engage an adviser’s services:

(1) Know what you want to accomplish with the adviser/why you want an adviser. Is this for a one-time consultation, or are you looking for an ongoing relationship?

(2) Know where the adviser will be. Do you care if they are geographically proximate, or is a phone call away close enough? How often will they visit? How often will they visit without charging?

(3) Know what the adviser has done for others. Get references—in fact, if you can get references first, and then call the advisers, so much the better.

(4) Know how the adviser is going to go about doing what they say they will do. Get that in writing—and hold them accountable.

(5) Know where the adviser stands on the issue of being a fiduciary to your plan. Know the size and strength of the organization that stands behind that commitment. Know that hiring an adviser who will be a fiduciary to your plan doesn’t diminish your responsibility as a fiduciary.

(6) Know what kind of background/expertise the adviser has. What kind of education, honors, and/or designation(s) do they have? How do they stay current on market and regulatory developments—and how will they keep YOU current?

(7) Know how much—and how—you will be asked to pay for the adviser. More importantly, know how much—and how—the adviser is paid for the services provided to your plan. Be sure that they aren’t compensated in a way that unduly influences (or could be seen to influence) their objectivity. If they won’t answer this question, no matter how good they seem to be, walk—no, run—away.

Of course, ultimately, the choice of the “right” adviser will be a combination of personal chemistry, professional acumen, relevant experience, and—perhaps the most element—trust.

—Nevin E. Adams, JD

P.S. I’m sure that, in the interests of focus and brevity, I have overlooked things. If so—or if you just want to tell me you agree—drop me a note at nevin.adams@assetinternational.com

Saturday, July 18, 2009

Tranquility Base

While I am sure there was a period in my youth when I wanted to be a fireman, a cowboy, or maybe even a professional athlete, my earliest memories are of wanting to be an astronaut.

Never mind that my odds of becoming a professional athlete were considerably better than those of joining the nation’s elite group of astronauts. It was evident even to me early on that I lacked the athletic acumen for a career in sports—it took years for me to appreciate what would have been required for me to satisfy NASA’s requirements (and be able to rationalize that the “real” reason was that I was too tall).

It was a magical time for our nation’s space program. There was a plan, three separate programs (Mercury, Gemini, and Apollo) to help us get there, and a vision—as President John F. Kennedy said in May 1961, of “achieving the goal, before this decade is out, of landing a man on the Moon and returning him safely to the Earth.” There was also a sense of national urgency (the so-called “Space Race” with the Soviets, which was a lot less scary than the arms race), and, while the program was remarkably bereft of injury, the tragedy of the fire on Apollo 1 that killed three astronauts reminded us of the stakes involved.

And then, after years of watching Americans enter space, circle the planet, exit their craft while circling the planet (at unimaginable speeds), and then leave Earth’s orbit to touch the lunar sky, I can still remember the grainy black-and-white images of Neil Armstrong’s “one small step for man” flickering across the screen of my family’s small black-and-white television (replete with its aluminum foil-festooned rabbit ears) on that Sunday evening in 1969. An experience that was, in some form or fashion, replicated around the world that special July evening 40 years ago in a rare planetary unanimity of experience as we got that report of a successful landing at “Tranquility Base.”

Of course, it wasn’t all about developing “Tang,” magical space walks, and those incredible images of our astronauts bounding across the lunar landscape. It was about knowing where we wanted to be; putting together a detailed, comprehensive plan to get there; having any number of contingencies and backups “just in case”; the tenacity, dedication, and intellect to work around the inevitable problems that arise that you didn’t anticipate with those contingency plans (just watch “Apollo 13”); and—IMHO, the most critical element in the successful completion of any project—a deadline.

It doesn’t take much imagination to draw a correlation between the planning for a landing on the moon and a successful arrival in retirement (OK, so maybe it takes a little imagination). It requires a notion of what constitutes a successful arrival, an idea of the steps that will be required to get there, the tenacity and ingenuity to deal with the inevitable bumps along the way—and the specificity of a date certain to give some structure to those plans.

Students of history know that one of the contingency plans for the Apollo 11 mission was a presidential statement if those astronauts had crashed (they got pretty low on fuel before landing), or if they hadn’t been able to return to Earth (some engineer actually forgot to put a handle on the OUTSIDE of the lunar module door—and if they hadn’t noticed that and left the door open while they were on the surface, they might not have been able to get back inside the LEM). Fortunately, those contingencies are now simply interesting historical anecdotes. Still, it’s worth recalling that the ultimate mission was not only to get men TO the moon, but to return them safely home.

Similarly, as we ponder the accomplishments and planning that helped our nation put men on the moon, IMHO, it’s worth remembering that our “mission” is not only to get tomorrow’s retirees safely to retirement, but to position them and their finances to carry them safely THROUGH retirement…to their “tranquility base.”

- Nevin E. Adams, JD

Saturday, July 11, 2009

The "Burden" of Proof

Recently the 7th Circuit responded to requests that it reconsider its opinion in the revenue-sharing/”excessive fee” case of Hecker v. Deere (see “7th Circuit Panel Limits Ruling’s 404(c) Effects”). The case, of course, was one of the earliest in the litany of those cases to be filed in 2006, and the only one (thus far) to reach the appellate level.

To date, the courts have, with little exception, dispensed with these cases harshly. Not that they aren’t entitled to do so, of course, and not that this particular generation of filings isn’t deserving of such treatment, IMHO. From the beginning, the plans targeted seemed better-designed to fill the pockets of plaintiffs’ counsel, if for no other reason than large employers frequently figure that it’s cheaper to settle than to fight (see “IMHO: Fighting Words”). That said, the courts—including the 7th Circuit—seem to have a more “generous” view of what it takes to earn the protections of ERISA 404(c) than most ERISA lawyers I know.

I was no less confused by the 7th Circuit’s response to the request for a rehearing (see “7th Circuit Panel Limits Ruling’s 404(c) Effects” ). Basically, the court said that there had been no judicial call for such reconsideration, and that, in fact, the judges who made the original determination had voted to deny the petition for reconsideration. However, the judges apparently felt the need to respond directly to some of the charges made in the amicus curiae briefs filed in support of the motion—and, perhaps more significantly, it took pains to point out that its ruling in the case, and on the facts presented, shouldn’t be applied too broadly. And that, of course, seems to have been a source of solace and comfort to the folks who have brought us these revenue-sharing lawsuits, who have reason to feel “down” (based on the limited adjudications to date), but are apparently not “out.”

Now, I didn’t mind that the courts have held there is no fiduciary duty to disclose fees to participants (there isn’t), nor the determination that plan sponsors need not scour the marketplace to find the cheapest investment choices (cheapest might not even be “reasonable”). But, having spent some reasonable part of my adult life trying to understand and help others understand the scope, implications of, and limitations to ERISA 404(c), I’ve generally been puzzled at how liberally the courts have been willing to apply its protections, certainly in contrast to the position espoused by the Department of Labor (which, I should add, has been remarkably consistent in its voice on the subject).

That said, in its response, the 7th Circuit spoke to the issue raised in this space previously—and acknowledged in the petitions of the DoL and plaintiffs for a rehearing (see “IMHO: ‘Second’ Opinion”):

“The Secretary also fears that our opinion could be read as a sweeping statement that any Plan fiduciary can insulate itself from liability by the simple expedient of including a very large number of investment alternatives in its portfolio and then shifting to the participants the responsibility for choosing among them. She is right to criticize such a strategy," the court asserted. “It could result in the inclusion of many investment alternatives that a responsible fiduciary should exclude. It also would place an unreasonable burden on unsophisticated plan participants who do not have the resources to pre-screen investment alternatives. The panel’s opinion, however, was not intended to give a green light to such ‘obvious, even reckless, imprudence in the selection of investments’ (as the Secretary puts it in her brief). Instead, the opinion was tethered closely to the facts before the court.”

It is that last sentence that now gives comfort to those pursuing these actions in other venues (venues that might have been inclined to toss those claims, citing the 7th Circuit’s decision), and one that, for the moment anyway, may assuage the DoL’s concerns.

But as I read the original decision, I saw a causal connection created by the court that suggested that there was no cause of action because the plan was protected under the shield of ERISA 404(c), a shield the court felt the plan was entitled to in no small part because the plan had provided the array of options outlined.

I, for one, would have been perfectly content if the court had held that it wasn’t sufficient to establish a fiduciary breach claim by just stating that the plan offered retail-priced mutual funds (even from a single fund family), particularly when that was offered alongside a brokerage window that provided participants access to investments beyond that core menu. One can argue that a plan the size of Deere’s could have negotiated a better deal for its participants, or that it perhaps would have been better-served to offer a more diversified menu than a single set of proprietary funds—but I think the court would have been comfortably within its purview to say that you need more than a simple insinuation that that arrangement is a violation on its face to bring a case in federal court.

What puzzled me then—and puzzles me still—is that the court apparently felt it necessary to invoke the safe harbor protections of ERISA 404(c) to, effectively, justify its conclusion. For, while there are any number of casual 401(k) plan adviser/consultants out there who will tell a plan sponsor that all they have to do to earn those protections is to offer a lot of funds, let participants transfer between those funds at least quarterly, give those participants prospectuses on those funds—oh, and file their intent to function as a 404(c) plan—there’s more to it than that, and we trust that the courts are as aware of that as any ERISA prudent expert.

Personally, I would have preferred that the 7th Circuit restated its rationale—clarify that, while they chose to invoke 404(c ), it wasn’t necessary to do so; clarify that the plaintiffs simply hadn’t established a case sufficient to go to trial.

And reminded us all that, while the standards ERISA fiduciaries are held to are demanding, so are the standards for asserting that that duty hasn’t been fulfilled.

—Nevin E. Adams, JD

See also:

Appellate Court Backs Deere Case Dismissal

IMHO: “Second” Opinion

IMHO: “Winning” Ways?