Saturday, February 24, 2018

5 Things Plan Sponsors Should Know Before Hiring an Advisor

About a year ago, I was asked by an advisor if we had ever written anything about the potential pitfalls of hiring a relative as a plan advisor.

We hadn’t, as it turns out, in no small part because some things just seem (painfully) obvious to me – but it resulted in a column that, as I tried to point out at the time, was applicable to more than just familial relations.

In recent weeks I have received similar requests: one from an advisor looking for something on the hazards of “tying” bank business to providing services to a retirement plan, and another looking for validation of the wisdom of using a qualified 401(k) advisor on a plan rather than a part-timer.

Now, as someone who has been involved with ERISA and its fiduciary strictures his entire professional life, the responses to these questions are nearly self-evident. But let’s face it: Many, perhaps most, plan fiduciaries haven’t had that much exposure.

Before making a decision to hire an advisor – or for that matter, any decision involving the plan – here are some key considerations that plan fiduciaries should bear in mind.

If you’re a plan sponsor, you’re an ERISA fiduciary.

If you have discretion in administering and managing the plan, or if you control the plan’s assets (such as choosing the investment options or choosing the firm that chooses those options), you are a fiduciary to the extent of that discretion or control. Ditto if you are able to hire individuals to control or invest those assets.

If you’re an ERISA fiduciary, you have specific legal responsibilities.

There are several specific duties under the law, but the primary one is that the fiduciary must run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses.

Note the words “solely” and “exclusive purpose.” Now consider a plan fiduciary who decides to hire a service provider based on services they provide outside the plan. Would that be a decision solely in the interests of participants? For the exclusive purpose of providing benefits?

ERISA fiduciaries must avoid conflicts of interest.

ERISA fiduciaries must also avoid conflicts of interest – meaning, according to the Labor Department, “they may not engage in transactions on behalf of the plan that benefit parties related to the plan, such as other fiduciaries, services providers or the plan sponsor.”

That means that a plan sponsor must not cause the plan/participants to pay for services if it results in free and/or discounted services for the employer/plan sponsor. Oh, and that’s even if the price the plan/participants pay is deemed reasonable.

As an ERISA fiduciary, you’re expected to be an expert — or to hire help that is.

It’s one thing to find yourself in a job for which you are not immediately trained, or perhaps even qualified, but there’s no beginner track for ERISA fiduciaries. You’re not only directed to act for the exclusive purpose of providing benefits, but to do so at the level of an expert. The DOL has said that “Unless they possess the necessary expertise to evaluate such factors, fiduciaries would need to obtain the advice of a qualified, independent expert.”

There’s nothing that says that a relative can’t meet that standard, nor should providing other, unrelated services to the organization preclude a firm from consideration for offering services to the plan. And, of course, there is nothing that says a part-time advisor couldn’t provide a full-time level of service and attention.

On the other hand, as an ERISA fiduciary you need to be sure that they do, in fact, meet that standard.

As an ERISA fiduciary, your liability is personal.

ERISA holds plan fiduciaries to a high legal standard. Indeed, at least one federal court has described it as “the highest known to the law.”

There are any number of things that can go wrong in running a workplace retirement plan. That’s why it’s important to hire experts – and to keep an eye on them. But don’t forget that you, as an ERISA fiduciary, can be held personally liable to restore any losses to the plan, or to restore any profits made through improper use of the plan’s assets resulting from their actions.

It is, of course, possible that a brother-in-law, a banking relationship, or an individual who is only committed on a part-time basis is, in fact, an expert in such matters, that they bring real value to your plan and the participants and beneficiaries it serves, and that the decision to engage those services is based solely on your desire to fulfill your fiduciary obligations – for the exclusive benefit of the plan, its participants and beneficiaries.

Just make sure that you have made that determination independent of other factors, and that, perhaps particularly if those other factors are present, that your process and analysis is documented.

Your advisor-to-be will understand.

- Nevin E. Adams, JD

Saturday, February 10, 2018

The 3 Biggest Mistakes Fiduciaries Make

A recent Alliance Bernstein survey found that plan sponsors’ awareness of their fiduciary role, much less the responsibility, has deteriorated significantly in recent years. In fact, their survey found that less than half of plan sponsors knew they were fiduciaries.

Here are, in my estimation, the three biggest mistakes fiduciaries make.

Not knowing they are fiduciaries.

As noted above, a significant – and apparently growing – number of individuals who are, in fact, plan fiduciaries are oblivious to that reality. The reasons for that are varied, though the Alliance Bernstein survey suggests that knowledge gap is wider among those who serve on a plan committee than with those who have primary responsibility for the plan.

Of course, fiduciary status is based on one’s responsibilities with the plan, not a title. Simply stated, if you have discretion in administering and managing the plan, or if you control the plan’s assets (such as choosing the investment options or choosing the firm that chooses those options), you are a fiduciary to the extent of that discretion or control. If you are able to hire a fiduciary, you’re almost certainly a fiduciary.

Speaking of committees, if you’re responsible for selecting those who are on the committee(s) that administer the plan, you’re a fiduciary. Not to mention if you happen to be on a committee that makes decisions regarding the plan’s assets…

Not knowing the liability that comes with being a plan fiduciary.

ERISA fiduciaries are personally liable, and may be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. That’s right, the legal liability is personal (you can, however, buy insurance to protect against that personal liability – but that’s not the fiduciary liability insurance some have in place, nor is it typically covered by your standard corporate director liability insurance).

What does that liability mean? Consider that, in the Enron case, the outside directors and committee members settled for about $100 million, most of which was paid by the fiduciary insurer. However, the individuals also had to pay approximately $1.5 million from their own pockets.

And all fiduciaries have potential liability for the actions of their co-fiduciaries. So it’s a good idea to know who your co-fiduciaries are – and to keep an eye on what they do, and are permitted to do.

Thinking that they can outsource their fiduciary liability.

Even when they aren’t fully aware of their liability exposure – and certainly once they are – plan fiduciaries have a strong interest in shielding themselves from the consequences of that exposure.
They often think that by hiring another plan fiduciary – and frequently that’s a financial advisor –  they have managed to absolve themselves from that responsibility.

As it turns out, ERISA has a couple of very specific exceptions; more precisely, ways in which you can limit – but not eliminate – your fiduciary obligations. One exception has to do with the specific decisions made by a qualified investment manager – but even then, the plan fiduciary remains responsible for the prudent selection and monitoring of that investment manager’s activities on behalf of the plan.

The second exception has to do with specific investment decisions made by properly informed and empowered individual participants in accordance with ERISA section 404(c). Here also, even if the plan meets the 404(c) criteria (and it is by no means certain it will), the plan fiduciary remains responsible for the prudent selection and monitoring of the options on the investment menu.

It is important to remember that ERISA’s “prudent man” rule is a standard of care, and when fiduciaries act for the exclusive purpose of providing benefits, they must act at the level of a hypothetical knowledgeable person and must reach informed and reasoned decisions consistent with that standard. Fiduciaries who are concerned that they fall short of that standard – and let’s face it, many, perhaps most, are placed in those roles without training – may want to look to the counsel of the Department of Labor, which has said that “[l]acking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.”

Doing so may not insulate you from all liability – but turning to experts is not only prudent, it surely minimizes the likelihood of making big mistakes.

- Nevin E. Adams, JD

Saturday, February 03, 2018

Why the Match Matters – to Employers

It has been heartening in recent weeks to see a number of employers announce plans to expand and increase benefit programs, offer bonuses, and increase the employer match. Better still, a recent survey indicates that more positive changes could lie ahead.

A decade ago, the headlines were filled with stories about a number of large firms announcing that they were cutting, and in some cases eliminating altogether, the employer match. While the vast majority of employers didn’t reduce those matches, it was nonetheless a stark reminder that those defined contributions are “defined” annually, not in perpetuity.

The Match Matters

There are a number of things that we know about the importance of the employer match; there’s the obvious (though sometimes glossed over) impact that an employer contribution means in terms of retirement security in simple dollars, for one thing. Indeed, the nonpartisan Employee Benefit Research Institute (EBRI) has estimated that if future employer contributions were eliminated for Gen Xers, their retirement readiness rating would decline from 57.7% to 54.6% – and that doesn’t consider what might happen to employee contributions as a result.

And then there’s the reality that those who it save in a retirement plan at work appear to save at/near the level matched (though the amount of the match matters less than the existence of the match), suggesting that it provides a savings target of sorts for workers.

There’s little question that the match does good things for workers and their retirement security – but, let’s be honest, the employer match that is “free” for workplace savers is anything but for the employers that provide it. Here’s why it’s worth the money.

Better Finances Mean Better Work

A 2017 Mercer study found that on average, people spend about 13 hours per month worrying about money matters at work – about 5 hours at the median, suggesting that some spend a lot more time than others thinking about such things.

EBRI’s Retirement Confidence Survey suggests that retirement confidence — and the retirement savings that ostensibly underpin that confidence – are at least somewhat connected. There’s a growing body of research that suggests that financial concerns take a toll on productivity. That’s not just retirement, of course – but it’s a big part of it.

Little wonder that more than 8 out of 10 (82%) finance executives surveyed by CFO Research with Prudential Financial, Inc., believe that their companies benefit from having workforces that are financially secure – and nearly as many believe that employers should assist employees in achieving financial wellness during their working years.

Better Benefits Attract Better Workers

Okay, every time somebody talks about the reasons to offer a retirement plan, “attract and retain qualified workers” is on, if not at the top of, that list. Thinking about that next generation of workers? Well, the 2018 Millennial Benefit Trends Report from Pentegra found that, asked if they take into account whether a job offers benefits when considering applying – well, pretty much everyone (96.77%) said yes. And, asked to rate five general benefits categories in order of importance, “401(k) Retirement Savings” easily outpaced the others, with about 4 in 10 rating it “extremely important.”

The CFO Research survey noted above also found that nearly two-thirds (63%) say that employee satisfaction with benefits is important for their company’s success, and 65% believe that employee benefits are critical to attracting and retaining employees.

Better Benefits Keep Workers

By far, the finance executives surveyed consider higher employee satisfaction (59%) and increased retention (53%) as the most important benefits of a focus on financial wellness.

State Street Global Advisors’ 2016 research suggests that there is a noteworthy interplay between people’s happiness with their working life and their financial well-being. In fact, reports indicate that financial wellness actually influences an employee’s happiness at work.

Poor Savings Postpones Retirements

A report by Prudential (aptly titled “Why Employers Should Care About the Cost of Delayed
Retirements”) found that a one-year increase in average retirement age results in an incremental cost (the difference between the retiring employee and a newly hired employee) of over $50,000 for an individual whose retirement is delayed.

Moreover, the report notes that it results in an incremental annual workforce cost of about 1.0%-1.5% for an entire workforce. This represents the incremental annual cost of a one-year delay in retirement averaged over a five-year period. Prudential notes that for an employer with 3,000 employees and workforce costs of $200 million, a one-year delay in retirement age may cost the employer about $2-3 million.

It’s been great to see so many employers announce enhancements to their benefits programs, cash bonuses and – most particularly – increases to their 401(k) matches. However, every year tens of thousands of employers commit to helping their workers save for retirement by committing to making a company match – and they have done so in good times and times that weren’t so good.

It’s a commitment that makes a huge difference – and one that shouldn’t be taken for granted.

- Nevin E. Adams, JD

Friday, February 02, 2018

Are Stocks Swayed by the Super Bowl?

Will your portfolio soar with the Eagles, or get pummeled by the Patriots?

That’s what adherents of the so-called Super Bowl Theory would likely conclude. The Super Bowl Theory holds that when a team from the old National Football League wins the Super Bowl, the S&P 500 will rise, and when a team from the old American Football League prevails, stock prices will fall.

It’s a “theory” that has been found to be correct nearly 80% of the time — for 40 of the 51 Super Bowls, in fact. Though last year’s big comeback by the AFC Champion Patriots (who once were the AFL’s Boston Patriots) against the then-NFC champion Atlanta Falcons — alongside the 2017 market surge — surely places its validity in question. Not to mention 2016, and the AFC’s (and original AFL) Broncos 24-10 victory over the Carolina Panthers, who represented the NFC.

It was an unusual break in the streak that was sustained in 2015 following Super Bowl XLIX, when the New England Patriots (yes, those same Patriots) bested the Seattle Seahawks 28-24 to earn their fourth Super Bowl title. It also “worked” in 2014, when the Seahawks bumped off the Denver Broncos, a legacy AFL team, and in 2013, when a dramatic fourth-quarter comeback rescued a victory by the Baltimore Ravens — who, though representing the AFC, are technically a legacy NFL team via their Cleveland Browns roots.

Admittedly, the fact that the markets fared well in 2013 was hardly a true test of the Super Bowl Theory since, as it turned out, both teams in Super Bowl XLVII — the Ravens and the San Francisco 49ers — were NFL legacy teams.

However, consider that in 2012 a team from the old NFL (the New York Giants) took on — and took down — one from the old AFL (the New England Patriots). And, in fact, 2012 was a pretty good year for stocks.

Steel ‘Curtains’?

On the other hand, the year before that, the Pittsburgh Steelers (representing the American Football Conference) took on the National Football Conference’s Green Bay Packers — two teams that had some of the oldest, deepest and, yes, most “storied” NFL roots, with the Steelers formed in 1933 (as the Pittsburgh Pirates) and the Packers founded in 1919. According to the Super Bowl Theory, 2011 should have been a good year for stocks (because, regardless of who won, an NFL team would prevail). But as you may recall, while the Dow gained ground for the year, the S&P 500 was, well, flat.

There was the string of Super Bowls where the contests were all between legacy NFL teams (thus, no matter who won, the markets should have risen):
  • 2006, when the Steelers bested the Seattle Seahawks;
  • 2007, when the Indianapolis Colts beat the Chicago Bears 29-17;
  • 2009, when the Pittsburgh Steelers took on the Arizona Cardinals, who had once been the NFL’s St. Louis Cardinals; and
  • 2010, when the New Orleans Saints bested the Indianapolis Colts, who had roots back to the NFL legacy Baltimore Colts.
Sure enough, the markets were higher in each of those years.

As for 2008? Well, that was the year that the NFC’s New York Giants upended the hopes of the AFL-legacy Patriots for a perfect season, but it didn’t do any favors for the stock market. In fact, that was the last time that the Super Bowl Theory didn’t “work” (well, until this past year – oh, and the year before THAT).

Patriot Gains

Times were better for Patriots fans in 2005, when they bested the NFC’s Philadelphia Eagles (yes, it’s a rematch this year of sorts) 24-21. Indeed, according to the Super Bowl Theory, the markets should have been down that year – but the S&P 500 rose 2.55%.

Of course, Super Bowl Theory proponents would tell you that the 2002 win by (those same) New England Patriots accurately foretold the continuation of the bear market into a third year (at the time, the first accurate result in five years). But the Patriots’ 2004 Super Bowl win against the Carolina Panthers (the one that probably nobody except Patriots fans remember because it was overshadowed by Janet Jackson’s infamous “wardrobe malfunction” with Justin Timberlake - who, as it turns out, is back to perform in this year's Super Bowl) failed to anticipate a fall rally that helped push the S&P 500 to a near 9% gain that year, sacking the indicator for another loss (couldn’t resist).

Bronco ‘Busters’

Consider also that, despite victories by the AFL-legacy Denver Broncos in 1998 and 1999, the S&P 500 continued its winning ways, while victories by the NFL-legacy St. Louis (by way of Los Angeles) Rams (that have now returned to the City of Angels) and the Baltimore Ravens did nothing to dispel the bear markets of 2000 and 2001, respectively.

In fact, the Super Bowl Theory “worked” 28 times between 1967 and 1997, then went 0-4 between 1998 and 2001, only to get back on track from 2002 on (“purists” still dispute how to interpret Tampa Bay’s 2003 victory, since the Buccaneers spent their first NFL season in the AFC before moving to the NFC).

Indeed, the Buccaneers’ move to the NFC was part of a swap with the Seattle Seahawks, who did, in fact, enter the NFL as an NFC team in 1976 but shuttled quickly over to the AFC (where they remained through 2001) before returning to the NFC (see below). And, not having entered the league until 1976, regardless of when they began, can the Seahawks truly be considered a “legacy” NFL squad? Bear in mind as well, that in 2006, when the Seahawks made their first Super Bowl appearance — and lost — the S&P 500 gained nearly 16%.

As for Sunday’s contest, the Patriots have been here before (to put it mildly), the Eagles (just) twice – but not since 2004 (when they lost to the Patriots) and before that in Super Bowl XV against the Oakland Raiders — but are 0-2 in those appearances.

On a separate note, despite (technically) being the home team, the Patriots will (again) be wearing white jerseys. Not that they’re superstitious or anything, but 12 of the last 13 Super Bowl winners were wearing white jerseys — and, according to CBS, not only were the Pats in white the last time they beat the Eagles, they are (only) 2-2 when wearing blue jerseys in the Super Bowl, and 3-1 when in white (Bears fans at least will recall what happened when the Patriots wore red in Super Bowl XX).

All in all, it looks like it will be a good game. And that — whether you are a proponent of the Super Bowl Theory or not — would be one in which regardless of which team wins, we all do!

- Nevin E. Adams, JD
Note: Seattle is the only team to have played in both the AFC and NFC Championship Games, having relocated from the AFC to the NFC during league realignment prior to the 2002 season. The Seahawks are the only NFL team to switch conferences twice in the post-merger era. The franchise began play in 1976 in the NFC West division but switched conferences with the Buccaneers after one season and joined the AFC West.