Monday, March 20, 2006

Eyes of the Beholder

Revenue-sharing has become an integral part of the business of serving retirement plans and, while a growing number of advisors have moved (or are rapidly moving) to a fee-based model, many have clung to the former. And let’s be honest here – a large number of plan sponsors still prefer that model for the simple reason that it is easy (no invoices, no checks to write) and seems, on the surface, anyway – cheap (not physically writing a check always seems less expensive).

However, the revenue-sharing model is coming under heightened scrutiny – because it does tend to obscure the actual fees paid from the oversight of plan fiduciaries, because its basis of calculation – plan assets – does not always comport equitably with services rendered in exchange for those revenues (and sometimes that means it undercompensates for the services rendered) and because, when you take money from someone other than the person you are providing services to for providing those services, it can look like a bribe.

The most recent warning bell on revenue-sharing practices came in a recent case involving Nationwide, and its practice of putting together retirement plan menus with funds from which it “shared” revenue (see Nationwide ERISA Suit Survives Challenge). Now, one shouldn’t make overly much of this particular ruling – Nationwide asked the court to dismiss out of hand some charges related to the suit, and the court, looking at things from a standpoint most favorable to the other side (which they are required to do in these requests for a decision without fully hearing evidence) instead found that these were issues that deserved a fair hearing. Not good news for Nationwide’s legal team, but hardly a “loss,” either.

But in its opinion, the court raised some issues that, depending on their final resolution, could be hugely impactful. It suggested that Nationwide’s role in constructing the plan menu could constitute control of plan assets, for one thing – making it a fiduciary. It also said that one might plausibly find, under a “functional” approach, that the revenue-sharing arrangements – which, by their very nature, come from plan assets – might actually BE plan assets. And, the court also noted that, even if the revenue-sharing payments do not constitute plan assets, a Trier of fact could plausibly find that “Nationwide's service contracts constitute prohibited transactions.”

Once again, I should note that the court’s determination that there might be issues that require a trial to resolve does not constitute a resolution of those issues, nor does it suggest a probable outcome. However, one of the dangers of being too long “inside” industry practices is that you forget how those “common” practices look to the outside world, particularly when “explained” by opposing counsel (remember how shocked Congress was at the notion of a 12-day blackout in Enron?).

The Nationwide ruling is a reminder that it’s worth taking a regular look at your revenue-sharing practices – or your business practices, generally - through the eyes of an outsider. Before you’re forced to do so.

- Nevin Adams

Saturday, March 11, 2006

Whacking The Sopranos

I may come to regret it – but we have decided to pass on the sixth season of the HBO “family” crime drama, The Sopranos.

This decision was not taken lightly in our household, where, since its January 10, 1999, debut, my wife and I sent the kids out of the room every Sunday night at 9 p.m. so that we could enjoy the “antics” of the “family” crime drama. I actually still have recordings of the first three seasons on VHS tape – before I realized that it wasn’t really the kind of thing you would watch over and over again (let’s face it, some story lines are more compelling than others).

A lot has changed since then (our kids no longer have to be sent out of the room, for one thing). But as season five drew to a close, two things became obvious – our cable bill was out of control (I have long had a fondness for multiple premium channels), and the only real reason we were still paying for all those premium channels was The Sopranos. And the fact was that, as the “sabbaticals” between Sopranos seasons ran longer and longer (I think season six will start after a hiatus of 22 months), the rationale for paying those cable bills for all those months in between was less and less compelling. So, with some trepidation, after season five, we went cold turkey on the premium channels (we did, l should add, upgrade our video rental package).

However, next week the Sopranos is finally back – and the truth is, as mad as I am at them for waiting so long between seasons, it is tempting to re-subscribe.

There are complications, however. In addition to the charges for adding HBO (actually, the package now includes ELEVEN HBO channels), our cable company requires one of those ugly boxes for premium channels (and there’s a charge for each box), and a separate remote control for the ugly boxes (for which there is also a charge, of course). All in all, considering the TVs in our house, I figure it will cost us about $35/month EXTRA for the Sopranos – excluding all the funky taxes and equipment deposits (and we’ll either have to go pick up the boxes, or pay someone to bring them out – there may even be an activation fee).

Aggravation and cost concerns aside (and I DO hate those ugly boxes!), it struck me that this is exactly the kind of “discretionary” spending that we routinely tell participants they should turn into retirement savings. The kind of small “sacrifices” that, over time, can add up to huge differences in the amount of money they are able to save for retirement. So, though I will doubtless have to suffer through water cooler conversations about events I will no longer be privy to, we have decided to put our money where our mouth is.

We can even test that notion that, when it comes to that extra reduction in pay, after a while, you “fuggedaboutit.”

- Nevin Adams

Saturday, March 04, 2006

Where There’s a Will…

Last week, a provider was perusing our editorial calendar, saw that we were covering automatic enrollment in our March issue, and volunteered their expertise on the issue. Well, it was too late for that issue – but they sent along a research paper on “quick” enrollment that had some interesting findings (see Plan Design below) – interesting enough that we wrote up a brief news item on it for, and in the NewsDash.

Next day, I get e-mails from three different providers – all picking up on the quick enrollment issue – and all, in slightly different ways, sharing their very positive experiences with the concept. What I found particularly interesting was that they all basically said, “Our plan sponsor clients have been slow to adopt auto-enrollment because of fiduciary and cost concerns…” so voila, “quick” enrollment, or “easy” enrollment, had been introduced – and was working quite well, without running afoul of the fiduciary concerns attendant with automatic enrollment.

Now, I’ve expressed my ambivalence about “automatic” solutions in this space before. Nonetheless, they appear to be all the rage among providers these days, and among no small number of advisors. They have their fans among plan sponsors as well – but frankly, most of the plan sponsors I talk to are hesitant to take on the additional risk (and cost), even if the automatic alternative would increase participation (and it seems to, I should add). My experiences notwithstanding, I routinely find myself in settings where I seem to be the only one acknowledging that there might be legitimate reasons why a prudent plan sponsor might NOT want to embrace the notion.

Consequently, I drew some solace from the “admissions” that plan sponsors weren’t all flocking en masse to automatic enrollment (though, in point of fact, the results of any number of surveys, including our own, also support that conclusion). What I found most encouraging, however, was that this kind of “easy” enrollment alternative had been developed and was being so widely promoted to plan sponsors (and participants) as a credible, working alternative to help increase plan participation even though, from a provider standpoint, “automatic” enrollment is surely easier.

I realize that there are commercial interests involved; nonetheless, I think it speaks to the ingenuity of the people committed to this industry – people who work hard every day to make retirement security a reality for so many people. People like you.

- Nevin Adams