Readiness by Design - American Society of Pension ... · Readiness by Design How TPAs Help Shape...

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An official publication of ASPPA fall 2013 Readiness by Design How TPAs Help Shape the Future of Retirement Fiduciary Challenges of TDFs Building Pension Administrators

Transcript of Readiness by Design - American Society of Pension ... · Readiness by Design How TPAs Help Shape...

Page 1: Readiness by Design - American Society of Pension ... · Readiness by Design How TPAs Help Shape the Future of Retirement in America By DeBorah ruBin 28COVER STORY FAll 2013 Cover

A n o f f i c i a l p u b l i c a t i o n o f A S P P A

fall 2013

Readiness by Design

How TPAs Help Shape the Future

of Retirement

Fiduciary Challenges

of TDFs

Building Pension

Administrators

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1www.asppa.org/pc

Readiness by DesignHow TPAs Help Shape the Future of Retirement in America

By DeBorah ruBin

COVER STORY

28

FAll 2013

Cover Illustration: Tyler Charlton

Contents

38 Fiduciary Challenges of Target Date Funds

TeSS J. FeRReRA

44 The Expanding Alternative Universe in 401(k) Plans

STeven SullivAn

50 Pension Risk Transfer Solutions

GeoFF DieTRicH

feature stories

6 From the President BARRy MAx levy

20 ASPPA’s GAC Meets with Federal Officials

RonAlD J. TRicHe

70 Welcome New and Recently Credentialed Members

72 Government Affairs Update RonAlD J. TRicHe

76 David M. Lipkin, ASPPA’s 2013-2014 President

TRoy coRneTT

78 ASPPA’s New Code of Professional Conduct

lAuRen M. BlooM

asppa in aCtionAre you ready to roll over missing and nonresponsive plan participants?

• Let Millennium Trust locate them and connect them to their retirement funds – at no cost to you

• Spend your time managing active plan participants instead

We are Millennium Trust Company, the industry’s leading financial custodian for Automatic Rollover IRAs. You’ll be amazed at our responsiveness, flexibility and innovative solutions. Whatever you want to do, we make the custody and administration easy, so you can do more.

DO MORE

Alternative Assets Private Funds Rollover Solutions Advisor Services Millennium Trust Company performs the duties of a custodian and, as such,

does not provide investment advice or sell investments, nor offer any tax or legal advice.

EXPERT FINANCIAL CUSTODY SOLUTIONSTo learn more about Millennium Trust's Automatic Rollover Solutions, contact us today - 630.368.5614

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2 Plan Consultant | fall 2013

Columns

teChniCal artiCles

praCtiCe management artiCles

34 Building Pension Administrators ADMiNiSTRATivE

JJ McKinney

54 Catch the One That Got Away MARkETiNG

W. JeFFRey ZoBell

58 Game Changers: How Advisors (and Record keepers) Can Enhance Retirement Readiness ADviSORy

WARRen coRMieR

60 No Lemons TECHNOLOGy yAnniS P. KouMAnTARoS ADAM c. PoZeK

62 The Clock is Ticking: 408(b)(2), Tussey v. ABB and Time BUSiNESS PRACTiCES

DAviD J.WiTZ

66 Conversion Communication in a Commoditized World EDUCATiON

SARAH SiMoneAux

68 The Decay of Ethical Discernment: The importance of inspiration ETHiCS

DonAlD B. TRone

04 Letter from the Editor

8 Q&A with Brian Graff about DOL’s fiduciary standard redefinition effort REGULATORy/LEGiSLATivE

10 The Operational Assessment COMPLiANCE

GReG clARK

14 Liability Driven investing: Not Just for the Big Boys ACTUARiAL

JoHn cieRZniAK

24 Pension ‘De-Risking’ Passes First Test LEGAL

GeoRGe M. SePSAKoS

62

ContentsPublished by

Editor in ChiefBrian H. Graff, Esq., APM

Plan Consultant CommitteeMary L. Patch, QPA, QPFC Co-chair

Gary D. BlachmanGenelle M. Brakefield, QKA, QPFC, TGPC

James T. Comer, III John Feldt, CPC, QPA

John Frisvold, QPA, QKACatherine J. Gianotto, QPA, QKA

William C. Grossman, QPA Ronald A. Hayunga, QKA, QPFC

Barry Kozak Michelle C. Miller, QKA

Mark S. Nichols, CPC, QPA, QKA Lauren Okum, MSPA

Norman F. Pierce, QPFC Robert J. Seidell, III, QKA, QPFC

Anne M. Weinblatt, QPA, QKADavid J. Witz

EditorJohn Ortman

Associate EditorTroy L. Cornett

Art DirectorTony Julien

Graphic DesignerMichelle Brown

Technical Review BoardRose Bethel-Chacko, CPC, QPA, QKA

Michael Cohen-Greenberg Sheri Fitts

Drew Forgrave, MSPAGrant Halvorsen, CPC, QPA, QKA Jennifer Lancello, CPC, QPA, QKA

Robert Richter, APM

Advertising SalesJeff HoffmanFred Ullman

ASPPA Officers

PresidentBarry Max Levy, QKA

President-ElectDavid M. Lipkin, MSPA

Senior Vice PresidentKyla M. Keck, CPC, QPA, QKA

Vice PresidentRichard A. Hochman, APM

Vice PresidentMarcy L. Supovitz, CPC, QPA, QKA

TreasurerJoseph A. Nichols, MSPA

SecretaryAdam C. Pozek, QPA, QKA, QPFC

Immediate Past PresidentRobert M. Richter, APM

Plan Consultant is published quarterly by the American Society of Pension Professionals & Actuaries, 4245

North Fairfax Drive, Suite 750, Arlington, VA 22203. For subscription information, advertising, and customer

service contact ASPPA at the address above or 800.308.6714, [email protected]. Copyright

2013. All rights reserved. This magazine may not be reproduced in whole or in part without written permission of the publisher. Opinions expressed in signed articles are those of the authors and do not

necessarily reflect the official policy of ASPPA.Postmaster: Please send change-of-address notices for Plan Consultant to ASPPA, 4245 North Fairfax Drive,

Suite 750, Arlington, VA 22203.

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4 Plan Consultant | fall 2013

l e t t e r f r o m t h e e d i t o rPC

compromise solution to both the budget issue and the debt limit (likely to be a matching set of temporary fixes or extensions), the result would be a period (perhaps from mid-October through mid-December) during which Congress could work on a bigger, longer-term solution to both issues. This “grander solution” could also address concerns about the impact of the sequester and defense spending.

But here’s the rub: It could also include an expedited process for tackling the issue of tax reform. And that, of course, is where you come in. Anytime the issue of tax reform comes up, those of us in the retirement industry need to be prepared to raise our voices to protect the current tax incentives for retirement savings.

I suppose a cynic might look at the convoluted parade of events I just described and conclude that it’ll never happen.

But take it from a sports fan who’s seen his baseball team come back to win a seven-game series after losing the first three games: Yogi was right. It ain’t over ‘till it’s over.

was long on ideology and short on governance — “dead on arrival,” in the charming parlance you hear a lot in Washington. This was followed by the “sequester,” an automatic imposition of budget cuts mandated by a 2010 law no one took very seriously at the time. As it turned out, despite various sky-is-falling predictions about its impact, the sequester turned out to be a pretty effective tool for reducing the growth of federal spending just a little. On Planet Washington, this kind of small, nearly accidental change in the status quo qualifies as a promising development.

Granted, that’s a slim reed on which to hang one’s hopes. Currently, the positions of House Republicans and the White House on the key issues of cuts in government spending and higher taxes are diametrically opposed and seemingly intransigent, with Republicans insisting on more of the former and none of the latter, and the White House insisting on none of the former and more of the latter.

Best case: The various parties are able to work out a deal to fund federal government operations — which is actually likely, given nearly everyone’s stated desire to avoid a government shutdown — before Halloween. This would allow them to move on to the equally critical issue of raising the federal debt limit.

Assuming that there’s enough common ground to accommodate a

Welcome to the last quarter of 2013. If you’re a sports fan, this is a time

you look forward to all year. The major league baseball playoffs unfurl, seemingly in slow motion. This year MLB expanded its playoff system — meaning that now in 10 cities around the country, 8-year-old fans will be dreaming of their team’s World Series game seven victory as they nod off in the third inning of an 8:00 game on a school night.

In the football universe, the college and pro seasons will both reach their emotional peaks. Division champions will be crowned; the college bowl season — one of America’s great contributions to western civilization — will begin at last. In parking lots and bleachers, luxury boxes and living rooms, the hopes of faithful fans will spring eternal.

In the political universe bounded by the Washington Beltway, however, things are not looking quite as good as the last quarter of the year kicks off. It looks like we’re in for a political showdown over the federal debt limit, government spending, entitlement reform and taxes. Sound familiar? That’s because we started this year with a political showdown over the federal debt limit, government spending, entitlement reform and taxes — the “fiscal cliff.”

What’s happened since we fell off the cliff last winter? Not much, really. A White House budget proposal that

JoHn oRTMAn

eDiToR-in-cHieF

change, and Hope

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6 Plan Consultant | fall 2013

From the presidentPC

Donna Brewster for her continuing leadership of this task force.

In addition to being an advocate for TPA owners for a number of years, it has been my passion to look out for members of all ASPPA affiliates. As ASPPA and our affiliates have grown, we’ve added terrific professional staff at the national office to help manage this increasingly diverse organization. This year we’ve added a Chief Operating Officer, Michael Copp, and a director of non-credentialed education, Jim Apistolas. The addition of Jim’s position came together during a transition of our Education & Exams department. I thank Sue Perry for her insight and fortitude during E&E’s restructuring. While we miss Debra Davis, our assistant general counsel and director of government affairs, who left in the spring, we are very fortunate to have Ron Triche in that key position join us in our government affairs/advocacy efforts.

Government AffAirs And AdvocAcy

In the past year we’ve seen heightened recognition of ASPPA, not only in the industry press but in the popular press as well — largely due to our “Save My 401k” campaign. To date, more than 160,000 emails have been sent through the “Save My 401k” website (and related social media campaign) to our elected representatives on Capitol Hill. It can’t be overstated how important these emails are, both on an individual basis and in the aggregate. This is how Washington works — our legislators respond to their constituents’ expressed interests. We have an important and legitimate story to tell and a passion for protecting American workers

in redefining its duties and responsibilities. It went from a board that was involved with the operations of ASPPA to a strategic board. That decision to have a strategic board has led us to where ASPPA is today — an organization that makes an impact on educating pension professionals and speaks with a strong voice in Washington, DC.

focus on tPA membersWe are addressing the challenge

of managing ASPPA’s spectacular growth and assuring continued focus on our traditional members. During the years that I’ve been on the ASPPA Board, I’ve always been an advocate for TPA business owners, and I firmly believe that ASPPA has done a great job supporting TPA owners by providing a strong credentialed learning program through the years. Now we’re also addressing certificate education programs — those not necessarily leading to a credential. We’ve also supported business owners by having a very strong and effective advocacy effort.

To strengthen our commitment to TPAs, we are now addressing what TPA business owners need for their operations, through our TPA Business Owners’ Task Force. (We use the term “business owners,” but the task force is focusing on senior executives as well.) Throughout the last several months, the Task Force has kept the Board informed of its progress; as it has moved forward, the Task Force has continued to get the Board’s approval to keep working through this project. The Task Force is now nearing its final recommendation to the Board. We look forward to presenting this and providing other programs as we go into 2014. And thanks go to

t’s no secret that ASPPA has grown dramatically over the last few years. This year, however, the numbers have been especially significant. From August 2012 to August 2013, we grew from about 11,000 to more than 16,000

members. With such rapid growth and the changing dynamics of the organization, and with the NAPA and NTSAA affiliates, we now have two task forces tasked with reviewing our current structure and ultimately providing recommendations on the future structure and governance of ASPPA and the organization of all its affiliates. One task force is responsible for reviewing ASPPA’s traditional membership: actuaries, TPAs, consultants, platform providers, accountants and attorneys. The other task force is responsible for reviewing the bigger picture of all ASPPA affiliates, including the traditional ASPPA membership.

About eight years ago ASPPA’s Board made dramatic changes

I

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7www.asppa.org/pc

Both John Hancock Life Insurance Company (U.S.A.) and John Hancock Life Insurance Company of New York do business under certain instances using the John Hancock Retirement Plan Services name. Group annuity contracts and recordkeeping agreements are issued by: John Hancock Life Insurance Company (U.S.A.), Boston, MA 02210 (not licensed in New York) and John Hancock Life Insurance Company of New York, Valhalla, NY 10595. Product features and availability may differ by state. Plan administrative services may be provided by John Hancock Retirement Plan Services LLC or a plan consultant selected by the Plan. © 2012 All rights reserved.

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having more free time for my own business development and personal activities. ASPPA is in terrific hands, with a lineup of future leaders who will continue to provide leadership for the organization and provide our members with the services and advocacy they seek and desire helping Americans retire with dignity.

Barry Max Levy, QKA, is ASPPA’s 2012-2013 president. He is the president of Levy & Associates in Ft. Lauderdale, FL.

foresight and insight are invaluable. I thank him for his leadership, mentorship, friendship and selection of wines. I am also fortunate to have worked with an insightful and proactive Executive Committee and Board of Directors.

These final weeks of my presidency will be capped off with the annual conference at the end of this month. I hope to see you there. This year I’ll have a wonderful presidential suite with all the trappings — followed by next year, when I’ll probably have a room next to the elevator and behind the ice machine.

Throughout my involvement with leadership in ASPPA, I’ve been incredibly fortunate to be able to be involved with terrific leaders who have only helped make me better. Thanks to you all.

My run in ASPPA leadership has been a wonderful experience, and there remain some duties of the past president over the next two years. It has truly been an incredible run. I look forward to

as they strive to save for a dignified retirement.

thAnks Where thAnks Are due

I was very fortunate during my year as ASPPA president-elect to serve with Robert Richter as president — a critical thinker, a terrific leader and just a great guy to be around. I’m also fortunate that in my year as president I have David Lipkin as president-elect. Being an actuary, David is also a great critical thinker and a great guy to hang out with as well. His experience within ASPPA has been largely through our government affairs activity and ACOPA. As an actuary and TPA, David will continue to see the work of the Business Owners’ Task Force through.

We’re fortunate to have the talented leadership of our CEO and executive director, Brian Graff. ASPPA presidents come and go. But Brian has been here through thick and thin — and we expect him to remain here for quite some time. His

As ASPPA’s remarkable growth carries us forward, it’s critical to focus on business owners and advocacy.

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8 Plan Consultant | fall 2013

what that would mean to the micro market.

In the micro market, it’s well understood that 401(k) plans are not bought, they’re sold. The key point of being subject to the fiduciary rules is that if you’re an ERISA fiduciary, you basically cannot accept commission–based compensation. And in the micro space, that form of compensation is certainly more prevalent than it is in other segments of the 401(k) universe.

The policy concern is that if 401(k) plans in the micro market are sold, not bought; and if many of the folks who sell them get paid on a commission basis; and if the regulation says that you’re not allowed to get commission-based compensation any more if you’re

CEO, to get his take on the DOL’s effort and its potential impact on the retirement industry.

Q: What impact do you expect to see on the micro market?

GRAFF: If the regulation looks like we expect it to, in the context of 401(k) plans, it’s pretty much going to provide that all types of advice given to plan sponsors in the context of selecting an investment menu is going to be deemed ERISA advice. Currently, of course, if you’re selling a plan and you’re setting up a menu, that would not necessarily be considered a fiduciary act. This regulation would make all of that subject to ERISA’s fiduciary rules. And even though in large part the 401(k) plan marketplace is moving in that direction, one policy concern is

he DOL’s proposed regulation redefining what it means to be an ERISA fiduciary is coming soon — probably either later this year or the beginning of

next year. The regulation is likely to significantly disrupt the retirement industry marketplace in three major respects: � further constraining retirement

plan coverage in the micro market;

� restricting rollovers from 401(k) plans to an IRA of the same provider; and

� hurting investors with smaller accounts and lower incomes.Recently we sat down with Brian

Graff, ASPPA’s Executive Director/

Q&A:

RegulAToRy/legislATiveuPDATe

The Dol’s proposed fiduciary definition

regulation is on the horizon — what will it

mean to plan sponsors, participants and the retirement industry?

By JOHN ORTMAN

TDOL’s Fiduciary Standard Redefinition

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who can help them with investment information is going to be precluded because now IRAs are going to be subject to a strict ERISA fiduciary standard.

The result of this would be that a lot of people with relatively small accounts — $20,000, $30,000, $40,000 IRA accounts — who want to get information about investment options will not have access to that information anymore. This means that investors with smaller amounts and lower incomes are the ones who are going to suffer the most. They’re not going to have an opportunity to work with someone they might want to work with.

Sure, you can always hire a registered investment advisor and pay that person a fee for completely independent advice. But a lot of people are just never going to do that because they don’t have the wherewithal to do it. And this regulation is basically going to say, “We don’t care that these investors with smaller accounts and lower incomes are not going to have access to investment advice.” In fact, I think it takes an extreme paternalistic approach — it’s saying, “Not only do we not care that you’re not going to have access to advice, but we think you’re better off that way.”

Instead, ASPPA’s view is that what the government needs to do is provide consumers, investors and participants with information so they can make the best choices that suit their individual needs.

We believe that the best approach in the IRA sphere is disclosure. Currently there are no firm rules for IRA disclosures. There’s a need for such rules, as there is with respect to 401(k) plans. To the extent that there are perceived problems in the IRA market, that’s the place to start. But this extreme approach of essentially dictating or mandating how the marketplace must operate is going to result in investors getting less help and less advice. And that’s not good for anybody.

going to sell 401(k) plans — who’s going to distribute 401(k) plans in the micro market?

This is a significant policy concern because that’s the market that currently has the biggest lack of coverage. If, as we know, the critical component to being able to successfully prepare for retirement is having access to a plan at work; and if, as we also know, the micro market is the market segment that currently suffers the most from a dearth of workplace retirement plans, then the fact that this regulation would disrupt the main distribution channel for 401(k) plans to that market space would be very detrimental from a policy standpoint.

Now, of course, plan sponsors should be told how much the advisor is being paid and how they are being paid — that is, fee-based or commission. The ERISA 408(b)(2) disclosure should cover that. But the plan sponsor should also be told explicitly whether the advisor is acting as a fiduciary or not.

Q: Many participants want to continue to benefit from the advice of the plan advisor after they retire, especially if they plan to roll over their retirement account to an IRA. How would that relationship be affected?

GRAFF: In a situation where a plan provider or advisor is working with a plan sponsor and plan participants, there’s a strong possibility that the DOL’s proposed rule is going to preclude the ability of that provider or advisor to continue to work with participants as they move into retirement.

The basis for this is that if someone wants to roll over retirement money from a plan into an IRA, the fee structure is most likely going to be higher in the IRA than it was in the plan. This is pretty typical given the fact that the costs associated with an individual account are going to be different than the costs associated with a 401(k).

The consequence under the proposed rule would be that for example, if you have a provider that talks to a participant about a rollover opportunity and they’re going to charge as little as five basis points more, they could be precluded from having that conversation.

Our view is that that’s an absolutely absurd result. If you have a participant who has a trusted relationship with a plan provider or advisor, that person should have every right and ability to be able to continue that relationship as he or she moves into retirement. When people leave jobs, sometimes they just don’t want to see a statement from their old company, for whatever reason. Maybe financially or economically they would be better off leaving it in the plan, but they just don’t want to.

However, if they do want to continue to work with the provider of the plan or the advisor associated with the plan, they should be able to do so. Simply because the advisor or provider is charging a little bit more because it’s an IRA account versus a 401(k) account; the idea that that would prohibit them from being able to discuss rollover options with the participant is patently absurd, and we strongly object to it.

We think it makes much more sense to provide a disclosure to a participant — to say, “Okay, if you go to this rollover account, this is what you’re going to pay relative to what you are currently paying under your 401(k).” That’s good information that will let participants make choices that best suit their needs. The government shouldn’t — once again — be coming in and essentially dictating that that relationship cannot continue to exist.

Q: What impact do you foresee on investors with smaller accounts and lower incomes?

GRAFF: The regulation will apply to the approximately $5 trillion IRA market broadly. We have grave concerns that in effect, information that is currently available to participants by talking to someone

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10 Plan Consultant | fall 2013

ComPliAnCe

The Operational Assessment Understanding Your Organization from Within to Achieve Sustainable Success

By GREG CLARk

Photo by Thinkstock

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11www.asppa.org/pc

closing the gaps in your processes in order to serve your clients better is a great strategic move, and an operational assessment program can help you create a roadmap to achieve that goal.

� Are you aligned both strategically and tactically with other business lines in your organization?

� Do you have access to the right data and analytics to make the most informed decisions?

� Are you able to quickly and efficiently report on regulatory and compliance activities?

� Can you effectively cross-sell applicable products and services to existing clients?

technoloGy � Do your clients have a single

view of all accounts they have with you?

� Are you providing your clients with the latest tools to effectively engage with your firm?

� Do you have the right technology and tools to operate and transact efficiently while helping to manage your risks?

� Are there silos of data sources within your organization that cannot be easily accessed across business lines?

� Are your operating costs falling or at least contained?Operational assessments have

shown us that many record keepers are using large, legacy platforms that have proven to be operationally challenging, cumbersome and costly. They need to get more out of their core systems and they need less from their surround systems. By allowing a trusted partner to administer all or part of their core record keeping operations, record keepers have the opportunity to focus more time and capital on those areas that drive more value to their clients and new business to their platform.

Going forward, retirement solutions will need to accommodate industry changes that include lifetime income streams for retirees and new

realignment and modification, such as deciding whether to outsource parts and pieces of your record keeping administration. However, to realign your business and resources effectively, you must know where and how to apply modifications with some degree of predictability. In addition, any changes suggested should optimize operational performance, which is particularly important when involving possible budget and staff reductions. Properly aligning people, processes and technology with your business strategy helps you discover and create unique opportunities for growth.

PeoPle, Processes And technoloGy

You can begin your operational assessment by asking the following questions that touch on the three core components of your operational efficiencies: people, processes and technology. Your answers may be indicative of whether or not you are optimally positioned to attain sustainable success.

PeoPle � Does your team have the

knowledge and resources they need to be effective?

� Do you have a current succession plan in place?

� Are your people being effectively developed and cross-trained?

� Are you concerned about client and/or employee retention in this competitive market?

Processes � Do you feel your front- and back-

office processes are streamlined, with optimal workflows and checkpoints in place?

� Do operations align with your value proposition?

etirement administration professionals continue to face a multitude of growing market demands, ranging

from providing a superior client experience and keeping up with changing regulatory requirements to attracting and retaining the best possible employees. At the same time, challenges such as client retention, cost containment, business continuity and system integration can present an opportunity to gain a competitive advantage.

Assessing the current state of your operations can be an eye opening experience and a crucial step in driving both growth and profitability.

Business operational assessments are all about understanding your organization from within. By fully understanding your organization, you can: � identify opportunities for

improvement; � set realistic and strategic goals;

and � optimize your operations for

success. For comparison and measurement

of your operations, it does not matter whether you hire a consultant, adopt an industry standard, embrace other operational standards or combine all three. The key is to get started on establishing your operational assessment program to begin reaping the benefits to your organization — including growth, competitive advantages, streamlined processes and well-allocated resources.

AssessinG your oPerAtions

Operational assessments reveal opportunities for process

R

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12 Plan Consultant | fall 2013

also held the position of COO at national third party administration firms, trust companies and broker dealers, and was responsible for managing the institutional trust and retirement services business for a top-20 bank holding company.

and innovative ways to educate participants, as well as expanded plan advisor support, data analytics, reporting and benchmarking services. The challenge is that all of these things are expensive, yet drive minimal immediate revenue. As an industry — as we do at SunGard — we need to continue to invest in innovative tools, enhanced platforms

and expanded service capabilities to assist our clients in meeting these challenges.

Greg Clark is executive vice president and general manager at SunGard. He has more than 25 years of management experience in the retirement and financial services industries. He has

Assessing the current state of your operations can be an eye opening experience and a crucial step in driving both growth and profitability.”

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We Believe Your ClieNTS DeServe a BeTTer reTiremeNT PlaN

Which is why we’re committed to providing top-quality retirement plan services and solutions. Don’t just

take our word for it: Transamerica Retirement Solutions1 received a combined total of 84 “Best in Class”

Cups for sponsor and participant services in PLANSPONSOR® Magazine’s 2012 Defined Contribution

Survey.2 We are the Tomorrow Makers.SM

WHAT CAN WE MAKE WITH YOU?

Please give us a call at (888) 401-5826 Monday through Friday 9 a.m. to 7 p.m. Eastern Time, or visit us online at www.TRSretire.com.1 As of January 1, 2013, Transamerica Retirement Services and Diversified became Transamerica Retirement Solutions.

2 Transamerica Retirement Services received 56 “Best in Class” cups and Diversified received 28 “Best in Class” cups for sponsor and participant services in PLANSPONSOR® Magazine’s annual Defined Contribution Survey of retirement plans. The results of the Defined Contribution Survey were announced in the November 2012 issue of PLANSPONSOR® Magazine. The survey polled 5,930 clients of 37 defined contribution plan providers. “Best in Class” cups are awarded to plan providers who score in the top quartile of a specific category. See the November 2012 issue of PLANSPONSOR® Magazine for complete results. Transamerica or Transamerica Retirement Solutions refers to Transamerica Retirement Solutions Corporation.

TRSC 6519-0613

TSA113 Plan Advisor Ad Revisions v12.indd 1 3/4/13 6:51 PM

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14 Plan Consultant | fall 2013

ACTuARiAl

liability Driven investing gets the plan sponsor focused on what the true objective is for a pension plan — to provide what’s being promised in the plan.

By JOHN CiERzNiAk

A Pension Strategy Open to Any Plan (Not Just the Big Boys)

iability Driven Investing has largely come to light for U.S. pension plans over the course of the last 10 years. The main goal of this investment strategy is to limit volatility from a funding standpoint, or to simply limit the differences between assets

and liabilities over time. This is much different than the standard goal of earning as much return as

you can within reasonable risk parameters. A plan earning healthy asset returns could still fall behind the liability growth due to drops in interest rates. The LDI strategy is designed to better align assets with the movements of the liabilities.

the Pre-PPA dAysSo why is there now a big deal about

“matching” the assets with liabilities? And why

L

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passage of time, that discounting gets shorter and the present value marches upward. Now, if interest rates rise in between valuations, that doesn’t automatically mean that the liabilities will go down. That is because time keeps marching on, and the discounting period as a whole will be a bit shorter.

Assets also have time on their side through compounding, but that usually means to maintain a risk level that can jump up and put a bite into the portfolio. And in those times, an uphill and expensive battle for the plan sponsor would only just begin.

the ldi mindsetThe name “Liability Driven

Investing” aptly describes the focus of this strategy. Rather than targeting some asset-based benchmark with only the occasional glance at how the liabilities move, the plan sponsor needs to have a good understanding of the growth of the liabilities as well as their volatility. It does not mean, however, that the plan’s portfolio becomes pigeon-holed into one track. There are still challenges to face and risk to monitor. But utilizing LDI will bring a vital connectedness to the plan.

For LDI purposes, it’s key to know what the duration of the liabilities is. This is the cornerstone upon which the asset portfolio is built. What exactly is duration? It is the average time-weighted years of the future cash flows. In more useful terms, the duration gauges how much the liabilities will move given a change in interest rates. For example, if the liabilities duration measures 14 years, then the present value will change by 14% for a 1% change in interest rates in the opposite direction. (Remember, present values move in the opposite direction of the interest rates themselves.)

It should be noted that measuring the effects of interest rate changes is not quite as simple as that. The duration may change a bit given where the interest rates are at in

would be more market based. The large disconnect between funding rates and current market rates was ending.

liAbilities Get noticedBy having valuation interest

rates aligned more with the interest rates demanded by the market, there were two particular consequences that changed from the pre-PPA days. Liabilities were no longer valued at static, higher interest rates, and the seeming predictability of the movement of the pension liabilities was gone. Furthermore, this meant that a clear return hurdle for the asset manager was also gone.

For plans that kept going with the standard way of relying largely on the returns of equities, it became apparent that a good portfolio return for the year could still be beaten by the returns of the liabilities in a decreasing interest rate environment. PPA has essentially changed the investment return target from the old static valuation rate to the dynamic liability returns of the plan.

PlAn Assets vs. liAbilities With the Pension Protection

Act rules in effect, the liabilities have a volatility that rivals the assets themselves. Many plan sponsors — and even investment managers, for that matter — may not fully appreciate that the growth of pension liabilities has been quite difficult to match with asset returns. Moreover, there is a built-in bias that favors liability returns over asset returns.

Asset portfolios have ever-present fees. Maybe it’s “ just” 1% or perhaps larger, but it means that what a plan earns from the risk it takes is always a bit smaller. And that doesn’t even count other expenses the plan may pay out of the fund for actuarial services and administration — and now rising PBGC premiums as well.

The liabilities’ growth, on the other hand, is rather relentless. The liabilities are valued as discounted future cash flows. With the mere

wasn’t this the standard approach all along? To answer this question, it’s worthwhile to revisit the years leading up to enactment of the Pension Protection Act of 2006.

Before the PPA, funding valuation interest rates were usually kept the same year to year, and were often selected with a very long-term horizon. Having static and high interest rates resulted in liability values that seemed manageable and grew in a predictable fashion. Albeit, “current” liability rates also played a role in larger plans to ensure that funding requirements were not grossly understated. In any event, standard investment portfolios were constructed to at least meet the valuation interest rate, and comprised an asset mix mostly in equities.

Heading into the late 1990s there were signs of a disconnect between standard valuation interest rates and how the same liabilities were being valued in the market. This showed up in instances of paying out lump sums or purchasing annuities. The liability being funded for was considerably lower than what was needed to satisfy an annuity or lump sum payment. So a plan’s financial health could steadily decline, since actual dollar outflows were greater than the same liabilities represented in the valuation.

This bleeding of the asset portfolio meant a modest rise in contribution requirements but also a greater reliance on high investment returns that would not falter. The asset part of the equation did falter in a big way with the bear market of 2000-2002. With a large portion of the pension system weakening at this time, the PBGC was sounding alarm bells about the increasing stress on its program; a future government bailout of the PBGC might be the end result.

Lawmakers took notice, and a move to strengthen the pension system began in earnest that eventually took shape in the Pension Protection Act in 2006. One big change in the PPA was that the selection of valuation interest rates

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16 Plan Consultant | fall 2013

get a measurement of the liabilities that often. But by all means, it should be more often than once a year. While the actuarial valuation report is issued once a year, the actuary is able to apply basic projection techniques to update those liabilities during the year, whether on a semiannual, quarterly or monthly basis.

Key interest rates are published monthly for various purposes, such as for funding, FAS/ASC accounting, lump sum payouts or annuity purchases. LDI is mostly keyed toward the stability of funding, but the monitoring process can include the other measurements as well.

There will likely be some tracking error between the movement of an LDI portfolio and the liabilities it is to shadow. From a funding perspective, the recent MAP-21 legislation has complicated matters in that funding rates are now a 25-year average of rates. As such, tracking of assets should really be compared with liabilities utilizing interest rates without the MAP-21 smoothing — or better yet, measured from the full yield curve. Tracking versus a liability benchmark tied to the movement of current rates is essential to make adjustments to the portfolio along the way.

PrActicAl imPlementAtionFor the small and mid-size plan

market, which commonly has plan assets in mutual funds or commingled funds, it’s still possible to take the “fund” approach rather than buying bonds separately to customize the portfolio to the plan’s own targeted duration. A vital element in this type of portfolio building is knowing

duration for a typical plan. While the interest rate spread can fluctuate somewhat between U.S. Treasuries and corporate bonds, it is acceptable to also include various Treasury instruments in an LDI portfolio. This component does a better job at increasing the duration of the portfolio.

As a start, a portfolio that has a focus more on the bond side and includes both corporate and Treasury bonds will start to move in the same direction and general magnitude as the movement of the liabilities.

Is that all there is to it — move out of stocks and replace them with some bonds? Unfortunately, LDI is not a “set it and forget it” strategy. Just like an individual planning his or her retirement, monitoring is needed to track the efficiency of the strategy and make any necessary adjustments along the way.

monitorinG the strAteGyBy implementing an LDI strategy,

with its weighting on bonds rather than stocks, a plan sponsor will be limiting upside returns that one hopes to earn with a healthy exposure to the stock market. By giving up some upside, you definitely want to have in place a monitoring system to know that what you potentially sacrifice in absolute returns is gained in stable relative returns. LDI is not about absolute returns, but how the returns are performing versus the liability returns.

The very large plans using LDI frequently track the liabilities with the assets — sometimes just about every day. For the medium and small plan market, it is probably not practical to

the first place. This rate of change to the duration itself is referred to as “convexity” and just means that monitoring the liabilities is critical in the LDI framework.

settinG A PlAn for the PlAn

In order to take advantage of knowing the duration of the liabilities, you can build an asset portfolio with a similar duration. With matching durations, ideally the assets will move in lock-step with the liabilities, thereby limiting much of the interest rate risk that has become such a problem in the defined benefit world.

So what does a portfolio look like when you are focused on duration rather than the traditional diversification model? The main attribute is that the portfolio will be much heavier on the bond side and less so in equities. The reason for this is that bonds have measurable duration, while stocks at most have very low duration in empirical terms. Although changes in interest rates can affect a stock price (and more so for dividend-paying ones), there are still plenty of other factors that affect stock prices. So in the LDI portfolio framework, equities are considered to have minimal or no duration.

With the focus on fixed-income instruments, what are the best types of bonds to fill the portfolio? Due to PPA interest rates being tied to corporate bond interest rates, high-quality corporate bonds with sufficient duration are ideal to include in the portfolio. In the real world, however, it tends to be difficult to buy corporate issues with enough

LDi is not about absolute returns, but how the returns are performing

versus the liability returns.”

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flip side, as rates rise, there is more of an opportunity for them to go back down or at least level out. Interest rates are still difficult to predict.

trAnsition mAneuversRather than going into an LDI

strategy all at once, there are some good ideas for transitioning into it. One is to phase in according to funded status level. If a plan is, say, less than 80% funded, LDI is kept on hold in order to maintain a risk level to capture good upside moves in equities. As the funded status level improves and hits certain trigger points, LDI is partially implemented each time. By the time the plan becomes fully funded, LDI is fully in place.

Another transition strategy is similar to one based on funded status levels, but a plan can transition into LDI as interest rates rise to certain predetermined levels. In this manner, bonds are bought as their values are going down. This may mean having LDI partially implemented and staying that way for quite some time if all of a sudden rates stall or go back down. In this case, at least the plan is better hedged than before. A combination of these two transition ideas can be put into place as well.

A different type of a phase-in approach is to focus on the liabilities attributed to current retirees or participants nearing retirement. This is similar to a 401(k) plan offering target date funds, where a more conservative portfolio is geared toward older participants and a more aggressive one is geared toward younger participants. In this case, LDI is implemented for a portion of the near-term, mature liabilities, while the remaining portfolio includes more of the equity risk. As the plan matures, the portfolio will eventually resemble a full-fledged LDI portfolio.

the ldi messAGeLiability Driven Investing gets

the plan sponsor focused on what the true objective is for a pension plan

the duration that each fund carries. By weighting the holdings in the bond funds to be used, you can dial in to an overall targeted duration. There are also good bond ETFs in the marketplace that carry sufficient duration so that a mix of ETFs can be used — with the added benefit that fees will be at a minimum.

For added sophistication, interest rate futures contracts are available to anyone with a basic brokerage account. Since futures are bought on margin, you will have more liability hedging power for the amount of contracts that are actually bought. In this setup, the futures contracts act as an overlay to the portfolio providing the duration matching. Since only a small portion of the portfolio needs to be tied up in the contracts, the rest can be used for a portfolio that can capture some upside in the markets.

Just like a basic, bond-heavy LDI approach, monitoring is especially important, with an overlay strategy due to the margin employed in the portfolio. While large plans have dedicated internal staff to monitor the plan’s portfolio and the progress of any overlay strategy on a daily basis, small and mid-size plan sponsors do not have the same resources. With proper education and careful planning, a dedicated overlay can definitely work that is within the comfort zone of the plan sponsor.

the stAte of interest rAtes

It has been no secret that the low interest rate environment has been artificially orchestrated by various tactics employed by the Federal Reserve since the financial crisis in 2008. The investment community has been wondering how long rates can remain historically low — although there have been signs of interest rates creeping upward in recent months.

With rates seemingly on the rise, the timing of LDI implementation is not ideal in the minds of many plan sponsors. Why buy bonds when they are losing money right now? On the

— to provide what’s being promised in the plan. The characteristics of the liabilities nowadays can spring surprises that the traditional portfolio mix might fall behind quickly. Employing LDI in the pension plan process will help the employer gain control of the plan, better plan this important benefit to its employees and keep its energy and resources focused on where they should be — its business.

John Cierzniak is an Enrolled Actuary with The Nyhart Company, Inc. in its Indianapolis office, and is a

representative in Nyhart’s RIA arm, Nyhart Consulting, LLC. He has 25 years of experience in the pension field, mainly on the actuarial side, including a stint in the investment area with a large public pension fund. He holds an MBA in finance and the Chartered Financial Analyst designation.

The LDi strategy is designed to better align assets with the movements of the liabilities.”

Photo by Thinkstock

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18 Plan Consultant | fall 2013

1. Relative to their Morningstar indexes for Class R-6 shares since the series launched in 2007; data ending March 31, 2013. 2. Based on Class R-6 share results for rolling periods through December 31, 2012. Periods covered are the shorter of the fund’s lifetime or since the comparable Lipper index inception date.

Our intelligent allocation has a proven record of delivering risk-managed, higher returns.

Like all fund managers, American Funds seeks lower volatility as our Target Date Fund vintages mature. But that’s where the similarity ends. We believe achieving retirement plan objectives requires a more sophisticated approach. Our dynamic equity management gradually moves from growth to dividend-focused equities, contributing to a historically lower-volatility, higher-return glide path within a glide path — helping to address both market and longevity risk.

As the American Funds Target Date Retirement Series®* demonstrates, our strategy has clear advantages.

• Superior results: We have a history of above-average results with lower volatility.1

• Exceptional underlying funds: They have beaten their respective Lipper peer indexes in 93% of rolling 10-year periods.2

• A commitment to low fees: We strive to deliver superior results and service at a competitive cost.

• Lifetime investment needs: Crafted to address participants’ long-term goals of appreciation, income and preservation.

With clear differences among target date funds, the Department of Labor suggests plan fi duciaries periodically review whether plan options are keeping up with plan objectives. And when you do, consider the proven track record of success with American Funds’ dynamic equity management.

A typical static approach employs a single glide path, replacing equity with a relatively constant mix of growth and income through retirement. This simplistic approach can miss the opportunity to create low volatility income and may put retirement objectives at risk.

Our dynamic equity management gradually increases allocations to historically higher yielding equity funds. This secondary glide path, shown above, increases income potential while seeking to lower volatility.

© 2013 American Funds Distributors, Inc.

Inside our glide path is another great glide path.

americanfunds.com/targetdatefunds • (800) 421-9900, ext. 3

CONTACT US TO START THE CONVERSATION TODAY

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a fi nancial professional and should be read carefully before investing. *American Funds investment professionals actively manage each target date fund’s portfolio, moving it from a more growth-oriented approach to a more income-oriented focus as the fund nears its target date (the year in which an investor is assumed to retire and begin taking withdrawals) and continue to manage each fund for 30 years after it reaches its target date. Although the target date funds are managed for investors on a projected retirement date time frame, the funds’ allocation approach does not guarantee that investors’ retirement goals will be met.

AMERICAN FUNDS TARGET DATE RETIREMENT SERIES®

12TCG222_AFTDF_Sprd_TAd_PC_0913_FNL.indd 3 9/5/13 11:18 AM

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1. Relative to their Morningstar indexes for Class R-6 shares since the series launched in 2007; data ending March 31, 2013. 2. Based on Class R-6 share results for rolling periods through December 31, 2012. Periods covered are the shorter of the fund’s lifetime or since the comparable Lipper index inception date.

Our intelligent allocation has a proven record of delivering risk-managed, higher returns.

Like all fund managers, American Funds seeks lower volatility as our Target Date Fund vintages mature. But that’s where the similarity ends. We believe achieving retirement plan objectives requires a more sophisticated approach. Our dynamic equity management gradually moves from growth to dividend-focused equities, contributing to a historically lower-volatility, higher-return glide path within a glide path — helping to address both market and longevity risk.

As the American Funds Target Date Retirement Series®* demonstrates, our strategy has clear advantages.

• Superior results: We have a history of above-average results with lower volatility.1

• Exceptional underlying funds: They have beaten their respective Lipper peer indexes in 93% of rolling 10-year periods.2

• A commitment to low fees: We strive to deliver superior results and service at a competitive cost.

• Lifetime investment needs: Crafted to address participants’ long-term goals of appreciation, income and preservation.

With clear differences among target date funds, the Department of Labor suggests plan fi duciaries periodically review whether plan options are keeping up with plan objectives. And when you do, consider the proven track record of success with American Funds’ dynamic equity management.

A typical static approach employs a single glide path, replacing equity with a relatively constant mix of growth and income through retirement. This simplistic approach can miss the opportunity to create low volatility income and may put retirement objectives at risk.

Our dynamic equity management gradually increases allocations to historically higher yielding equity funds. This secondary glide path, shown above, increases income potential while seeking to lower volatility.

© 2013 American Funds Distributors, Inc.

Inside our glide path is another great glide path.

americanfunds.com/targetdatefunds • (800) 421-9900, ext. 3

CONTACT US TO START THE CONVERSATION TODAY

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a fi nancial professional and should be read carefully before investing. *American Funds investment professionals actively manage each target date fund’s portfolio, moving it from a more growth-oriented approach to a more income-oriented focus as the fund nears its target date (the year in which an investor is assumed to retire and begin taking withdrawals) and continue to manage each fund for 30 years after it reaches its target date. Although the target date funds are managed for investors on a projected retirement date time frame, the funds’ allocation approach does not guarantee that investors’ retirement goals will be met.

AMERICAN FUNDS TARGET DATE RETIREMENT SERIES®

12TCG222_AFTDF_Sprd_TAd_PC_0913_FNL.indd 3 9/5/13 11:18 AM

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20 Plan Consultant | fall 2013

RegulATions

By RONALD J. TRiCHE

ASPPA’s GAC Meets with DOL,

Treasury and IRS Officials

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21www.asppa.org/pc

stated they would take them into consideration. On July 22, DOL issued Field Assistance Bulletin (FAB) 2013-02, which provides a temporary, one-time, 18-month transitional relief period for the 404a-5 disclosures being distributed either in 2013 and 2014. In addition, the FAB states that DOL is “considering whether to revise the regulation’s timing requirement to provide reasonable flexibility to plan administrators on a permanent basis.” GAC intends to submit a comment letter in response to DOL’s request in the FAB.

� Service Provider Fee Disclosures. The first round of fee disclosures that service providers had to make to plans under ERISA section 408(b)(2) were due by July 1, 2012. GAC asked DOL whether — based on their experience with the disclosures they have been provided — they intend to issue any additional guidance regarding the information that is being provided in the disclosures. DOL stated that they have discussed the need for additional guidance with 14 organizations representing employers, service providers, etc. The vast majority of the organizations that responded stated that there was “guidance fatigue” at this time and that additional guidance was not currently needed. So it appears that additional guidance from DOL may not be on the immediate horizon.

� Form 5500 Schedule C Issues. Schedule C of the Form 5500 requires the disclosure of various forms of compensation paid to certain service providers from the

ach year, members of ASPPA’s Government Affairs Committee (GAC) meet with representatives of the Department of Labor, the Internal Revenue

Service and the Department of Treasury to discuss issues that are important to our members. This year’s meetings took place in Washington, DC on June 3. During the meetings, GAC members and representatives of the three agencies discussed various topics that affect the retirement plan industry. Following is a summary of the meetings.

dePArtment of lAbor � Participant Fee Disclosures. For

calendar year plans, the 2013 annual participant fee disclosures under ERISA section 404(a) (the 404a-5 disclosure rule) were to have been provided no later than Aug. 30, 2013. During the meeting, GAC discussed ASPPA’s April 22, 2013 comment letter requesting relief on the timing of the distribution of the notice. (ASPPA’s comments letters can be found under the Government Affairs tab at www.asppa.org.) Specifically, the comment letter requested that plan administrators be permitted to provide each annual notice at any time during the 18-month period following the date the previous annual notice was provided. As explained during the meeting, this would permit plan administrators to align the timing of the distribution of this notice with the distribution of other required notices (typically provided in November of each year). DOL understood our concerns and

plan, including direct and indirect compensation. GAC discussed the concern of ASPPA members that the current structure of the Schedule C is not providing DOL and other Schedule C users (like plan sponsors) with useful data regarding indirect compensation that is required to be disclosed under ERISA section 408(b)(2). DOL said they would be willing to review proposals submitted by GAC. On July 29, GAC submitted a comment letter with several proposals (including a draft of a revised Schedule C) intended to make the Schedule C more useful to DOL and other people who use it.

� Multiple Employer Plans (MEPs). Based on statements made by DOL in Advisory Opinion 2012-04A, it appears that — for purposes of ERISA — a separate Form 5500 should be filed on behalf of each employer that participates in a MEP. DOL stated during the meeting that historically (with few exceptions) Forms 5500 have been filed on behalf of each plan so that data regarding each plan can be analyzed. That objective is not attained if the data is reported on an aggregate basis for the overall MEP. GAC expressed its concern with DOL’s approach because the IRS — for purposes of the Internal Revenue Code — requires that only one Form 5500 be filed on behalf of the entire MEP. GAC requested DOL to work with IRS regarding the apparent differences in their MEP Form 5500 filing rules.

� Electronic Disclosures. Under current DOL regulations,

At this year’s annual meetings with the Dol, iRS and Treasury Department in June, members of ASPPA’s Government Affairs committee met with representatives of the three agencies to discuss various topics that affect the retirement plan industry.

E

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22 Plan Consultant | fall 2013

“pre-approved” plan document program). IRS stated that they are not opposed to the concept of including cash balance plans in the “pre-approved” plan document program. However, timing of moving them from the five-year determination letter cycle to the six-year opinion letter cycle could be an issue. In order to assist the IRS with its analysis, they asked GAC to provide them with sample plan document language that highlights the similarities and differences between cash balance and traditional defined benefit plans. GAC provided the requested language to IRS for their review on June 18.

� In-plan Roth Conversions. Beginning in 2013, participants can convert pre-tax account balances in an individual account plan to a Roth account without the need to be currently eligible to receive a distribution from the plan (prior to 2013, a distributable event was required to elect an in-plan Roth conversion). In a comment letter submitted on May 21, GAC requested guidance from IRS regarding several issues related to an in-plan Roth conversion, including whether non-vested amounts in a participant’s account can be converted to a Roth account. GAC expressed the need to receive either: (1) guidance from IRS regarding these issues prior to the end of this year so sponsors will know how to properly amend their plan documents to provide this feature to participants in 2013; or (2) a transition period to adopt amendments after the end of 2013, even though in-plan Roth conversions were permitted during 2013.

� Longevity Initiatives. GAC asked Treasury for an update on how the initiative regarding the qualified lifetime annuity contract (QLAC) regulations was

disclosures to plan participants and beneficiaries are provided — by default — in hard-copy format. GAC expressed the desire of ASPPA members to have the default method changed to electronic format (e.g., via email with a hyperlink to the disclosure). The reasons are two-fold: first, communications throughout the country (and the world) are leaning toward being in electronic format; and second, electronic disclosures would save participants and beneficiaries money (as the costs of distributing required disclosures are typically passed on to plan participants and beneficiaries). DOL expressed concerns about the ability of participants and beneficiaries to receive the disclosures in paper format. GAC responded that one requirement of the electronic format default could be a straightforward process for participants and beneficiaries to opt out of receiving electronic versions of the required disclosures. DOL also requested GAC to provide them with information regarding what other agencies (like the Securities and Exchange Commission, for example) are doing with regard to the default format of required disclosures. As of the drafting of this update, GAC is working on a response to DOL’s request.

� Lifetime Income Illustrations. On May 8, DOL issued an Advanced Notice of Proposed Rulemaking (ANPRM) regarding the possibility of requiring that lifetime income illustrations be included in plan participants’ quarterly benefit statements. While GAC expressed its support for the idea, it discussed with DOL issues that ASPPA members have regarding some of the projection assumptions the ANPRM includes in the proposed illustrations (e.g., salary increases and future employer

contributions). DOL stated that they felt that the projections would be incomplete if those assumptions were not included. However, they encouraged GAC to submit comments for their consideration. GAC submitted the requested comments (which also included other recommended changes to DOL’s proposal) on Aug. 7.

treAsury And irs � EPCRS Updates. The latest

version of the Employee Plans Compliance Resolution System (EPCRS) was issued in Revenue Procedure 2013-12. Included in the new EPCRS was a request by the IRS for comments regarding corrections for automatic enrollment, safe harbor notices, and designated Roth contributions. GAC discussed ASPPA’s proposals regarding these, as well as other, issues with IRS. IRS requested that GAC submit a comment letter with our proposals so they could consider whether an “interim update” to the EPCRS would be beneficial (as opposed to waiting to issue a completely updated version of the EPCRS). As of the drafting of this update, GAC is working on the requested letter.

� Preapproved Cash Balance Plans. Currently, there are just over 8,000 cash balance plans in existence, approximately 5,000 of which have fewer than 20 participants. However, these plans are not permitted to be included in the IRS’s “pre-approved” plan document program. Instead, each of these plans must be submitted individually for a favorable determination letter. GAC expressed to IRS its concern that this is a drain on resources and unnecessary, as many of the provisions of a cash balance plan are exactly the same as a traditional defined benefit plan (which is included in the IRS’s

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progressing. Treasury stated that while they are making progress on the QLAC regulations, other projects on lifetime income products are taking precedence.

� Defined Benefit Plans — Valuation Date Change. On June 1, ASPPA and the ASPPA College of Pension Actuaries (ACOPA) submitted a comment letter to IRS regarding, among other things, the need for automatic approval of the change in the plan’s valuation date from the end of the plan year to the beginning of the plan year in situations where a defined benefit plan is being terminated. GAC discussed this issue with IRS and Treasury during the meeting. They stated that they were working on the issue.

� Use of Forfeitures in Safe Harbor Plans. IRS takes the position that in order for any funds to be used as safe harbor contributions, qualified non-elective contributions or qualified matching contributions (collectively, “special contributions”) in safe harbor plans, such funds must be non-forfeitable “when contributed.” As such, the IRS interprets the Treasury regulations to mean that forfeitures cannot be used as special contributions in safe harbor funds because they were not non-forfeitable when originally contributed. GAC reiterated the position ASPPA took in its May 8, 2012 comment letter that instead of looking at the non-forfeitable nature of the funds when originally contributed to the plan, IRS should look at the non-forfeitable nature of the funds when they are allocated as special contributions. If that approach were taken, then the funds in the forfeiture account would become non-forfeitable when they are used as special contributions in the safe-harbor plan. IRS asked GAC to submit an updated comment letter, which

GAC did on July 8. Additionally, two bills pending in Congress include language that would override the IRS position on this issue.

� Mid-Year Amendments to Safe Harbor Plans. Currently, a safe harbor plan that is amended mid-year runs the risk of losing its tax-qualified status. This is true even if the amendment does not affect any plan provision that is the subject of the annual safe harbor notice. GAC discussed ASPPA members’ desire for changes to this rule. Specifically, if the amendment does not include any “safe harbor related” plan provisions, then the plan’s qualified status would not be affected by the mere fact that the amendment is adopted. IRS requested that GAC update its June 1, 2012 comment letter that was submitted on this issue. As of the drafting of this update, GAC is working on the requested letter.

GAc volunteers deserve All the credit

The annual meetings with the DOL, IRS and Treasury are truly a team effort. During the year that leads up to the meetings, many volunteers on the various GAC subcommittees donate their time and expertise to prepare the comment letters that are submitted to the various agencies with which GAC leadership meets. Without everyone’s hard work and dedication, these meetings (and the positive changes that can result from them) would not be possible. On behalf of the GAC leadership and the ASPPA Government Affairs team, thank you!

Ronald J. Triche, Esq., APM, is ASPPA’s Assistant General Counsel and Director of Government Affairs.

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24 Plan Consultant | fall 2013

Pension ‘De-Risking’ Passes First Test

legAl

By GEORGE M. SEPSAkOS

ver the last few years, U.S. corporations have faced increased scrutiny relating to pension liabilities owed to current and former employees. Plan sponsors have considered numerous strategies to reduce or eliminate the volatility and risk associated with pension plans. One strategy

is to transfer the risk to an insurance company in the form of an annuity. This article will focus on the first true challenge to a plan sponsor’s decision to “de-risk” its pension plan by purchasing annuities for plan participants in Lee v. Verizon Communications Inc.

bAckGroundMany decisions by plan sponsors to de-risk their

pension plans occurred in the wake of the 2008 and 2009

A federal district court rules in the first true challenge to a plan

sponsor’s decision to “de-risk” its pension plan by purchasing annuities

for plan participants.

OPhoto by Thinkstock

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unsuccessfully attempted to obtain an order from the U.S. District Court for the Northern District of Texas to enjoin the annuity purchase from being completed. The court refused to enjoin the transaction, reasoning that participants failed to provide a rebuttal to Verizon’s non-discriminatory reasons for defining classes of participants for purposes of the annuity contracts.

In June, the same court again considered arguments from participants whose accounts were transferred to Prudential (the “Transferee Class”) and participants who remained in the plan (the “Non-Transferee Class”). The Transferee Class first alleged that Verizon failed to disclose the possibility of an annuity transaction in the plan’s summary plan description. The court dismissed the SPD claim on the basis that the applicable DOL regulations do not focus on the source of the benefits, but rather on the benefits provided under the plan. Therefore, it did not matter that Transferee Class participants would receive benefits promised under the plan from Prudential rather than the plan itself.

The Transferee Class further alleged that Verizon breached its fiduciary duties and depleted the plan’s assets by amending the plan, executing the contract with

economic recession, as significant declines in pension plan asset values, combined with steep drops in interest rates, resulted in very significant increases in pension liabilities. Causing even greater concern at the time was that these economic adversities immediately followed the enactment of the Pension Protection Act of 2006, which contained heightened funding requirements for plan sponsors of defined benefit pension plans.

As a result of these factors, numerous plan sponsors have come to conclude that they can no longer tolerate extreme volatility and risk in their pension plan’s funding. This is because a company’s pension plan volatility may have an adverse impact on the plan sponsor’s cash flow and reported financial performance.

Plan sponsors have taken advantage of an improved economy and business results to more fully fund their pension plans. Plan sponsors may also choose to restructure their pension investments so that investment performance targets closely mirror the changes in the plan’s underlying liabilities, rather than simply seeking to maximize return. This type of investment strategy is commonly referred to as liability driven investing. (For more on LDI, see the Actuarial column on page 10.)

Many other plan sponsors have attempted to limit their pension liabilities by de-risking their pension plans — that is, by offering the payment of optional lump-sum distributions to certain participants or through the purchase of annuities covering some or all of the plan’s liabilities. These participants can include former employees with vested deferred benefits or even retirees currently receiving pension distributions from the plan. By engaging in these strategies, the plan sponsor also transfers the risks surrounding the current or future pension obligations to the participants, an insurance company,

or both.Notwithstanding the benefits that

de-risking may provide to pension plan sponsors, many within the participant advocate community have viewed pension plan de-risking with a wary eye. Concerns have included: � participants’ lack of understanding

about the benefits of lifetime income streams not available from lump sum distributions;

� the challenges for individuals in investing effectively;

� the potential for adverse tax consequences for current retirees who receive a lump sum after commencing retirement distributions;

� the absence of plan sponsor oversight and PBGC protection following distributions or annuity purchases; and

� the concern that insurance companies will not maintain adequate capacity to support a substantial growth in demand for annuities.

Lee v. verizon CommuniCations inC.

Among the companies attempting to limit the volatility and risk associated with its pension plan was Verizon Communications Inc. In October 2012, Verizon entered into an agreement with the Prudential Insurance Company of America under which the Verizon Management Pension Plan agreed to purchase a single premium group annuity contract from Prudential for approximately $7.4 billion of the plan’s liabilities for approximately 41,000 retirees. Participants and beneficiaries remaining in the plan numbered approximately 50,000.

To facilitate the transfer of liabilities to Prudential, Verizon amended the plan to provide that participant accounts that had begun receiving payments before Jan. 1, 2010, would have annuity contracts purchased from Prudential for the value of the participant accounts.

In December 2012, participants

The recent victories by verizon are certainly a boon for plan sponsors considering any de-risking strategy.”

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26 Plan Consultant | fall 2013

unreasonable compensation to complete the annuity transaction and that Verizon executed the transaction when the plan was less than 80% funded, in violation of ERISA and the tax code.

The court review declined to grant the Non-Transferee Class standing because it found that no harm resulted from the transaction at issue. The court reasoned that under a defined benefit plan, where the plan sponsor is responsible to pay benefits due to participants regardless of the funded status of the plan, the participants could not maintain a valid claim that the plan suffered losses as a result of the annuity transaction.

While the court granted Verizon’s motions to dismiss, it also granted the plaintiff’s option to replead. Upon what grounds the participants may seek to sue is anybody’s guess, but the recent victories by Verizon are certainly a boon for plan sponsors considering any de-risking strategy.

George M. Sepsakos is an associate in the Fiduciary Responsibility group at Groom Law Group,

Chartered. His practice focuses primarily on issues related to Title I of ERISA, including fiduciary responsibility and prohibited transaction issues.

Prudential and paying excessive and unreasonable expenses to complete the transaction.

In analyzing this claim, the court first determined that consistent with traditional ERISA jurisprudence, Verizon was not acting in a fiduciary capacity when they amended the plan. Alternatively, the Court found that the execution of the plan amendment was fiduciary in nature and reviewed the Transferee Class’ claims that the expenses related to the execution of the contract were unreasonable and that Verizon should have chosen more than a single annuity provider.

The court dismissed the fiduciary breach claim against Verizon because the Transferee Class did not allege which aspects of the $1 billion of expenditures associated with the annuity transaction were unreasonable and on what basis they were unreasonable. The court also found that the plaintiff’s criticisms that

Verizon selected Prudential as the sole annuity provider did not amount to allegations that Verizon breached its fiduciary duties in selecting Prudential alone.

Lastly, the Transferee Class argued that they were discriminated against when Verizon removed them from the plan and allowed other participants to remain in the plan. This argument was rebuffed by the court, which said that the plaintiffs “failed to show that Verizon had a specific intent to interfere with their rights under the plan and ERISA, or to rebut Verizon’s proffered legitimate, nondiscriminatory reason for defining the group of retirees for the annuity contract as it did.”

After dismissing all Transferee Class claims, the court turned to the Non-Transferee Class’ claims, which alleged that Verizon breached its fiduciary duties when it depleted plan assets by paying excessive and

Many within the participant advocate community have viewed pension plan de-risking with a wary eye.”

Photo by Thinkstock

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Round:

FMApprovAl DAte oK/WCApprovAl DAte oK/WCApprovAl DAte oK/WCApprovAl DAte oK/WCApprovAl DAte oK/WCApprovAl DAte oK/WCApprovAl DAte oK/WCApprovAl DAte oK/WCApprovAl DAte oK/WCApprovAl DAte oK/WC

Client: Wells FaRgo BankJob no.: WFl-CM-P13-260Description: WF IRT 2013 PRInTPick-up Job no.: WFl-CM-P12-186

Inks: Cyan, Magenta, Yellow, Black

Fonts: Archer (Book, semibold, Medium Italic), Minion Pro (Regular), Myriad Pro (Regular)

links: WFL-CM-P12.186.C.tif (CMYk; 528 ppi), WF_logo_cmyk.eps, Stagecoach_cmyk_Lrg.eps

notes: Document: WFl-CM-p13-260 plAN Consultant live: 7.5” x 9.875”

Date: 8-29-2013 10:16 AM DDB office: los angeles Printed at: 100%

Color(s): 4C Mech scale: 100%

trim: 8.5” x 10.875”

gutter: none Bleed: 8.75” x 11.125”

Publication: Plan Consultant MagazineInsertion Date: Fall

account Manager: Jackie R x1588 Project Manager: Maria D x1750 Creative Director: kevin M x1910 art Director: stewart W x1582 Copy Writer: none Production Manager: Paul n x1670 Pre-press: Toby F x1536 art Buyer: amy R x1530 Proof Reader: kim F. x1518 studio artist: stephen B. x1510 last edited by: Batchelor, Steve/Mittelstaedt, Mike

When you think about how many people are looking to you to help them achieve a financially secure retirement, it’s good to know you have a top-tier provider who is as dedicated to their success as you are. In today’s economic environment, having a knowledgeable resource by your side is more important than ever. By keeping an open dialogue we can develop a deep understanding of your plan’s needs and deliver options tailored to meet those needs. With the Wells Fargo Plan Health IndexSM, we’ll help define success and measure results so you always know how your plan is doing. We know how important it is for your plan to succeed, so we hold ourselves accountable for helping drive its success. Start a conversation with a Wells Fargo Retirement representative today at 800-690-9721.

Together I know we can build a successful retirement plan

Recordkeeping, trustee, and/or custody services are provided by Wells Fargo Institutional Retirement and Trust, a business unit of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company. Any information provided by employees and representatives of Wells Fargo Bank, N.A., and its affiliates is for educational purposes only and does not constitute investment, financial, tax, or legal advice. Please contact an investment, financial, tax, or legal advisor regarding your specific situation. © 2013 Wells Fargo Bank, N.A. All rights reserved.

Investment and Insurance Products: NOT FDIC-Insured NO Bank Guarantee MAY Lose Value

S:7.5”S:9.875”

T:8.5”T:10.875”

B:8.75”B:11.125”

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Readinessdesignby

How TPAs Help Shape the Future of Retirement in America

By DeBorah ruBin

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30 Plan Consultant | fall 2013

arly in my career, I worked as a retirement plan wholesaler, occasionally conducting enrollment meetings for new participants. One such meeting took place at a nursing home nearly 20 years ago, where the 7:00 a.m.

session was very lightly attended. However, I had the undivided attention of a young nursing assistant named Emily who asked to speak with me afterward.

Emily explained how she was from a humble background and was the first in her family to go to college, paying her own way by working nights at the nursing home. I was truly inspired by her work ethic, enthusiasm about what I had to share, and the genuine spark I saw in her eyes when I explained the simple yet staggering effects of compound earnings. I left our meeting confident that Emily would be successful in her chosen career — and a successful life-long saver.

Over the years, my brief meeting with Emily has stayed with me, though I tucked it away in the back of my mind. But lately, I think of her often as the news reminds us nearly every single day about our national retirement savings shortfall. In fact, a recent Senate study pegs the overall retirement savings deficit for Americans at an astronomical $6.6 trillion,1 which means the average person is far from having an adequate nest egg. So, now I think about the millions of “Emilys” out there and what we can do as an industry to help improve their retirement outcomes.

Currently, I work closely with many TPAs across the nation. And because they work mostly with smaller plans, I believe TPAs can make a significant impact on retirement readiness. Their small-plan clients are the “boots on the ground” at their companies; they don’t have large HR departments on which to rely.

Sponsors at small companies spend only a fraction of their time working on their retirement plans because they have so many other responsibilities. More times than not, they are looking for guidance from their TPA. I wondered what TPAs are currently telling their plan sponsor clients, and how open they would be to starting the retirement readiness conversation. So I reached out to a few of my trusted TPA partners to discuss retirement readiness from their unique perspective.

strAiGht tAlk from the tPA

“We need to better educate the plan sponsor. I think we have to start shifting our conversations with sponsors to focus a little less on the compliance testing and a

little more on improving overall retire readiness,” says Michelle Marsh, QKA, president and owner of Retirement Plan Concepts & Services, Inc.

This is exactly why TPAs are best positioned to influence retirement plan sponsors. “Employers looking to start a new retirement plan don’t have a preset idea of what they want, they’re open to suggestions about every aspect of plan design, including the automatic features,” says Tommy Horst, vice president at ERISA Services.

The same goes for existing plans, no matter how long they’ve been in place. “We can improve retirement readiness if we work with our plan sponsors on plan design, whether that means installing a new plan or reviewing the design of an existing plan,” says Theresa Conti, APR, QKA, who is president of Sunwest Pensions. “We have such incredible tools at our disposal now, such as automatic enrollment and automatic escalation. We need sponsors to offer a matching contribution because it will drive participation, not just so they pass discrimination testing.”

If TPAs across the country can work closely with plan sponsors to drive up participation rates using automatic enrollment and automatic escalation, then participant deferrals increase, and as a result, the small business owners will be able to contribute more as well.

However, there’s definitely still resistance out there. “Ten years ago auto enrollment was a fiasco for vendors and TPAs,” says Marsh. We need to bring up the topic again and again with sponsors who might’ve written it off as infeasible. Marsh continues, “The obstacles that were there in the beginning are still perceived to be there today — but I know as a practitioner, they’re not.”

E

1 Senator Tom Harkin, Chairman, US Senate Committee on Health, Education, Labor & Employment’s report “The Retirement Crisis and a Plan to Solve It.”

There’s definitely still resistance out there.”

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31www.asppa.org/pc

“The truth is, auto enrollment makes some sponsors squirm. In five years, this is going to be the norm, so you need to be on the front end of this,” adds Horst.

is ‘Auto’ the AnsWer?Making these automatic features

the norm sounds like an excellent start, but we need to address sponsor concerns. The three primary objections from sponsors are that auto features are too complicated, or too costly, or the penalties are just too daunting. But TPAs can lead the way for sponsors as part of the hands-on guidance they already offer.

Horst describes the change he’s seen since he has started focusing his client discussions on participant outcomes: “I’m having much more success when I help sponsors understand not only the cost and design of a plan, but the importance of defining how their retirement plan fits in with their the overall goal of running a successful business — the plan is there to benefit their employees’ retirement readiness. And, of course, a good plan can also help with employee attraction and retention.”

There’s also what I like to call

the “3% problem.” Most plans with automatic enrollment top out at just 3%, which is a start, but may not be enough to get the average employee prepared for retirement. The 3% threshold was used as an example by the IRS in its regulations governing the default auto enrollment rate. And without other guidance, this 3% figure just stuck. However, there is nothing in the regulations that mandates a 3% contribution rate; it was just an example. Now, financial advisors and TPAs are having difficulty convincing plan sponsors it’s insufficient.

“I have a big construction company [as a client] that adopted auto enroll about six or seven years ago, at 3%. Nobody opted out and it was a huge success. However, because the plan is successful at 3%, they’re hesitant to raise it in fear that people might begin opting out,” says Conti.

desiGn chAnGes to Promote retirement reAdiness

Let’s look at an example where the TPA recommended their plan sponsor make just a minor adjustment to their plan that resulted in a serious difference for employees. “A client

of mine which is a doctor’s office had a cross-tested 401(k) plan with a 3% safe-harbor contribution and a 2% profit-sharing contribution, both non-elective,” says Horst. “So they were essentially giving employees 5% without requiring them to contribute anything. As a result, the contribution rate was almost nonexistent because participants didn’t have any skin in the game.”

To address this problem, Horst spoke to his client about retirement readiness and how they could best help their employees. “I encouraged them to add a matching contribution of 25% up to 4% of pay, and auto enrollment at 4%,” he relates. “So now, employees need to save 4% to get the full company match, and when they do that’s now a total of 10% savings versus the 5% being saved before. It did cost the employer an extra 1%, but they understood what a huge impact they could have on helping their employees retire with dignity down the road. They wanted to help make that happen.”

mAkinG retirement reAdiness A reAlity

TPAs can influence retirement outcomes when they convince plan

Three Things TPAs Can Do to Drive Retirement Readiness1. Work with your financial advisors and

plan providers to talk to your clients and prospects about participant retirement readiness and the purpose of their plan.

2. encourage plan sponsors to design a plan that rewards participants for saving with matching contributions.

3. Suggest incorporating automatic enrollment and automatic escalation in all your plans. Aim for a total employee deferral rate of 10%.

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32 Plan Consultant | fall 2013

sponsors of the best course of action to take, but only to the extent that the law and plan regulations allow. Will there be any new legislation tilting the scales in favor of retirement plan participants? I sure hope so. In fact, my company, Transamerica Retirement Solutions, has already reached out to the U.S. Department of Treasury in January of this year to let them know our thoughts about retirement reform (see sidebar).

I also asked the TPAs what they thought could be done to drive change from a regulatory perspective. “Add another safe harbor, one that’s 50 cents on the dollar up to 8% of savings,” suggests Horst. “I think it’s essential, because how much sponsors match isn’t as important as the match cap.”

Conti adds: “I think the ‘top heavy’ rules have become a big issue that’s only getting bigger — they discourage a lot of small companies from having plans,” he says.

Marsh sums it all up: “The whole mindset has to change entirely, but I do believe that with a change in messaging over every aspect of the process the result will be there, but the result will be very slow over time.”

Deborah Rubin, CFP, AIF, is Senior Vice President and National Practice Leader—TPA and PRPA (professional

retirement plan advisor) Distribution at Transamerica Retirement Solutions.

Suggestions for Improving Automatic Enrollment Utilization in Retirement Plans

in January 2013, Transamerica Retirement Solutions sent a letter to the u.S. Department of Treasury providing our perspective on the administrative and fiduciary challenges associated

with the utilization of automatic enrollment and escalation features, with an overall premise that: • Penalties for non-compliance with “auto” provisions are high relative to the impact of the

compliance error, but

• Deterrents to automatic enrollment and escalation can be easily resolved.

Proposed remedies fall into two categories:• Regulatory remedies, which would be addressed by the iRS.

• Plan design and education remedies, which would be addressed by retirement plan service providers.

Regulatory remedies would:1. establish a corrective option that equitably resolves the error of missed deferrals, but does

not deter utilization of automatic enrollment.

2. limit the maximum period for which companies would have to make corrective contributions.

3. extend the current “brief exclusion period” under ePcRS from three months to six months.

4. Simplify the “missed earnings” calculation.

Plan design and education remedies would:1. Make the identification of eligible employees simpler and streamline the plan entry

process.

2. Define matching formulas that encourage participants to defer at higher percentages but do not cost the plan sponsor more with increased plan participation.

3. Provide education and diagnostic materials that enable plan sponsors and participants to better understand:

» the seriousness of the retirement savings shortfall in the united States;

» participation statistics that define a “healthy” retirement plan;

» the actual health and performance of their own plan; and

» why automatic enrollment/escalation is beneficial and generally welcomed by the majority of employees.

Making automatic features the norm sounds like an excellent start, but we need to address sponsor concerns.”

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BPAS, Inc., which includes Harbridge Consulting Group and Hand Benefits & Trust, is a national provider of retirement plan administration, actuarial, consulting, collective investment fund administration and VEBA / HRA services to a di-verse array of clients spanning the United States and Puerto Rico. We service over 3,500 retirement plans and 300,000 plan participants in total, through partnerships with a wide array of financial intermediaries. BPAS service offerings also include automatic rollover and post termination loan administration services. With nine offices and 240 employ-ees, BPAS has the depth of professional and technology resources to deliver value-added services to all employee benees, BPAS has the depth of professional and technology resources to deliver value-added services to all employee ben-efit stakeholders. At BPAS, we are committed to participant-based outcomes.

Specific services of BPAS include: actuarial and consulting services for pensions and other post retirement benefits; health care consulting; full service administration for the full range of DC plans (401(k), 401(a), 1081, 403(b), 457, ESOP, kSOP, Multi and Multiple Employer plans, Prevailing Wage, etc.); administration of Collective Investment Funds; and the administration of VEBA / HRA and flexible benefit plans.

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34 Plan Consultant | fall 2013

Growing a third party administration firm has many challenges, but none is as difficult as attracting, developing and retaining qualified staff for the work that needs to be done.By JJ MCkiNNEy

Building Pension Administrators

ADminisTRATion

hether it’s for an entry level position or an opening for an experienced plan administrator, training is a long, unending road — from learning the fundamental rules to applying them to solve problems; from software differences to process and procedural variances; and from one firm to W

Photo by Thinkstock

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35www.asppa.org/pc

the next. Exploring some of the challenges can help us arrive at appropriate educational approaches and opportunities for building and growing service provider professionals.

Learning the fundamentals of pension administration is more challenging than it sounds. Firms often struggle with meeting the day-to-day workload rather than taking the time to exercise the benefits of a solid introductory education in ERISA. The divergence occurs most often when hiring replacements versus hiring for future growth. When replacing a lost employee, the employer is most concerned with keeping deadlines. Optimally, the employer hires for future growth so that established training methods and proper order may be used for all new hires.

Firms should provide employees new to the industry with an educational foundation to build their future careers. Whether using in-house programs or courses like Retirement Plan Fundamentals sponsored by ASPPA, new employees need an introduction to the rules and regulations central to constructing and operating qualified plans — or any plan types the firm may service. Subjects like eligibility, vesting, contribution and distribution types, investments, plan types, plan documents and government oversight should be explored at a level to provide a broad stroke of the industry influences and complexities. Without a general understanding, the employee loses sight of the overriding principals and is unable to see past daily minutiae.

Seasoned administrators are not immune to the loss of foundational concepts due to their work-related focus on particular plan types or overexposure to common plan provisions. Options available under the law are often confined or narrowed in the typical volume submitter or prototype document that many administrators are accustomed

Similarly, a low-volume shop cannot afford to neglect these individuals and have any hope of retaining clients for long-term relationships.

Pension administrators changing careers — in either direction — will have a difficult time adapting to the new environment given their previous experience. The level of pension knowledge could be on par with expectations, but the ability to meet the demands of relationship management will require some retraining. Using a survey or questionnaire similar to a temperament sorter can provide the employer with the proper perspective. Using open-ended, scenario-based

to using. Practitioners with years of experience become so engrossed in the limitations of their typical plan that the underlying regulations begin to fade. Either revisiting a class on fundamentals once a year or having experienced staff teach fundamental courses for trainees may help maintain a sharp understanding of the rules.

Credentialed administrators attend conferences and seminars, but will usually skip the fundamentals for more advanced topics. Or they focus their time on changes in the law that will affect their own jobs. Advanced and up-to-date knowledge is essential as well, but the basics need revisiting to make professionals whole in their practice. The phrase “iron sharpens iron” has particular significance in training — using mentorships or apprenticeships within a practice can teach up-and-comers the career skills they need and provide the perspective and expectations necessary for the job that classroom learning cannot.

How firms interact with plan sponsors, participants, advisors and vendor partners can differ as much as software selection. Some bundled providers establish a “do it yourself” approach for plan sponsors who have the wherewithal to manage the plan themselves while providing a website and call center for participants. Traditional TPAs often communicate primarily with the plan sponsor representative and have little contact with others involved with the plan.

Consultative service providers will consistently communicate with investment consultants, work through team transitions with vendors and provide participant and plan sponsor custom communication solutions. Every one of these types of firms has employees who are experienced in plan administration, but at varying levels of the service model spectrum.

Service models are based on volume and cost of doing business. A high-volume shop cannot afford to have plan administrators spending hours on the phone fielding calls from participants and plan advisors.

The phrase ‘iron sharpens iron’ has particular significance in training.”

Photo by Thinkstock

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36 Plan Consultant | fall 2013

case studies and informal discussions to work through similar issues or discover new ones. Sharing knowledge by training others or using speaking or writing forums to disseminate experience are necessary for professionals. Volunteering and advocating on behalf of the industry also fill holes in a professional’s experience. Opportunities outside of the day-to-day job provide exponential growth opportunities in knowledge that can be shared with other employees. Writing and speaking require research, for example, building a depth of understanding that does not come from sitting through the same presentation.

Building pension administrators is a task we should all take seriously. The knowledge and experience we share ultimately helps American workers retire. Our career is a vocation to give back to the workforce that helps our daily lives function. Together we provide retirement paths for architects and builders, physicians and technicians, farmers and food retailers, clothiers and cobblers and a host of people who provide the comforts of life we enjoy. Without a firm foundation in pensions and the wherewithal to continue learning, we cannot serve the public who employs us.

JJ McKinney, CPC, ERPA, QPA, QKA, is a Principal and COO of Retirement Strategies, Inc., a service

provider for employer sponsored retirement plans of varying sizes and types. Plan consulting, education and advocacy for the private pension system are his professional passions.

questions asked in several different ways can help the employer establish which areas of service need retraining while setting expectations as early as the interview process.

Beyond the service aspect, the trainee may be learning new software. Specific-use software training is essential for an efficient work force. Our firm’s trainer is often heard telling trainees, “If it takes you more than five minutes (or some other task-appropriate time frame), come and get me.” She reiterates this statement time and again because software was invented to make work efficient. Without proper training on software capabilities, employees are left to discern on their own how best to tackle a project.

Basic “Office” suite programs are fairly universal, but usage is not. Microsoft Excel is a good example of software that could involve everyday use as simple as sorting and basic mathematical functions to daily use that includes macros, pivot tables and multi-tiered formulas for complex plan designs. The resumé for both levels of experience could read “Proficient in Microsoft Excel” but represent very different uses.

Many software companies provide “quizzes” to test proficiency for relatively low cost. The quiz provides the employer a snapshot of proficiency, thus presenting training opportunities for the new hire.

Another factor to consider in training is the work pace of a particular firm. ASPPA introduced the Daily Valuation course several years ago to help the traditional balance-forward world understand the needs in a daily world. Traditionally, pension administrators were

accustomed to deadlines throughout the year; however, a “daily” shop must operate with deadlines throughout the day. The day may begin with trade confirmations from the previous day, balancing cash and units daily as well as deadlines toward the end of the day to meet trade posting deadlines for various platforms.

A knowledgeable pension administrator may experience a severe shock to the system when confronted with the pace of a daily environment. Training a seasoned administrator to process like an entry level employee helps gain understanding of the daily needs and all of the steps it takes to accomplish one procedure. The knowledge of the process also helps quality assurance when reviewing the work prior to trades posting or asset disbursement.

Another side benefit is an appreciation for the work that support staff performs on a daily basis. Often, high-volume work or fast-paced environments breed departmentalization of tasks. Again, training all “pension” employees on the processes and procedures creates some fluidity as individuals advance in their careers, but A-to-Z administrators often struggle with a transition to functionalized environments, and vice versa.

As professionals we often become distracted with the demands of our jobs. Education must be a constant throughout a career in any industry, especially when laws change the landscape every couple of years. Attending seminars is not sufficient to foster growth as a professional.

Peer mentorships and relationships with other firms provide comparative

High-volume work or fast-paced environments breed

departmentalization of tasks.”

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38 Plan Consultant | fall 2013

FeATuRe

Photo by Thinkstock

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Fiduciary Challenges of Target Date Funds

available under the 401(k)’s core menu of investment selections.

Under the regulations, a fiduciary that selects any one of the three options as the plan’s default investment option should be protected from allegations of a breach of fiduciary duty, even if the investments experience losses.

TDFs emerged as the most popular QDIA. In 2011, the Government Accountability Office reported that TDFs grew from 42% in 2005 to over 80% in 2009, as a default investment in 401(k) plans. And then the market crashed in 2008. In the wake of the crash, a wave of retirement-eligible workers discovered, to their surprise, that their plans to retire were dashed when investments in their TDFs suffered significant losses. What happened? These vehicles were supposed to provide a safe glide path to retirement, appropriately adjusting to less risky investments as a participant’s retirement date drew closer.

bAsic structurAl fActs About tdfs

Target date funds, as their name implies, are an investment solution where theoretically the asset mix is supposed to become more conservative as the target date (usually retirement) approaches. In theory, a participant chooses a single portfolio based on his or her age that is supposed to rebalance itself to a more

t’s no secret that employers have moved away from defined benefit pension plans and replaced them with

participant-directed 401(k) plans. This trend has given rise to concerns that the average participant does not have the wherewithal to make good investment choices. Often, participants just leave their money in the plan’s default option because they just don’t know what to do.

Plan fiduciaries historically have been reluctant to select a default option that might place any principal at risk for at least two reasons: • fear of being sued if the investment

loses value; and • fear of losing ERISA §404(c)

protection because they exercised investment discretion over participants’ accounts. ERISA §404(c), of course, is the provision that allows plan fiduciaries to insulate themselves from liability if a participant’s investment choice loses value through no fault of the plan fiduciaries.

In response to these and other concerns, Congress enacted the Pension Protection Act of 2006. The PPA added a new §404(c)(5) to ERISA, which accomplished three things: 1. Encouraged employers to include

automatic enrollment of employees in the 401(k) plan.

2. Created Qualified Default Investment Alternatives (QDIAs) to provide plan fiduciaries a safe harbor balanced risk default option.

3. Provided an investment solution to participants that might otherwise leave their account balances in a money market account. A key feature of the PPA was

the creation of the “safe harbor” default options that would offer a better rate of return than a money market account and give plan sponsors protection from lawsuits if the default fund lost value. In addition to target date funds, DOL’s PPA regulations designated two other types of investment vehicles that would qualify as a QDIA: balanced funds and managed funds.

All three provide asset allocation services but in different ways. Balanced funds are risk-based funds offering a different mix of assets to reflect the risk appropriate for a group with a similar tolerance level for risk. Managed funds require the plan fiduciary to retain the services of an investment manager that applies generally accepted investment theories to a series of diversified portfolios available under the plan with various levels of risk. The investment manager may or may not restrict the investments used to populate the managed fund to those

By TESS J. FERRERA

I

Target date funds remain challenging investment vehicles for fiduciaries to properly evaluate and monitor.

Photo by Thinkstock

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40 Plan Consultant | fall 2013

According to the DOL, however, §404(c) does not mean that plan fiduciaries can ignore ERISA’s exacting standards of care and loyalty under ERISA §§404(a)(1)(A) and (B). In a footnote in the preamble to the §404(c) regulations, the DOL took the position that selecting the menu of investment options is subject to ERISA standards of fiduciary care. [See DOL 404(c) Regulations, 57 Fed. Reg. 46,906, 46,924 n.27 (Oct. 13, 1992).]

In general, courts have agreed with the DOL’s position and further noted that the fiduciary also has a duty to monitor the selections to ensure that they continue to be suitable investment choices for the plan. [See, e.g., Lingis v. Motorola, 33 F.2d 552, 567 (7th Cir. 2011) (holding that selecting the menu of investment options is a fiduciary act that is not protected by §404(c)); DiFelice v. U.S. Airways, 497 F.3d 410, 417–18 n.3 (4th Cir. 2007); Tittle v. Enron Corp. (In re Enron Corp. Sec. Derivative & ERISA Litig.), 284 F. Supp. 2d 511, 578 (S.D. Tex. 2003). See also Franklin v. First Union Corp., 84 F. Supp. 2d 720, 731–32 (E.D. Va. 2000) (plan fiduciaries are responsible for selecting and monitoring the investment options in a participant-directed 401(k) plan).]

Thus, irrespective of the difficulties with benchmarking in the TDF context, fiduciaries will be required to show they engaged in a prudent process when they selected the fund as part of the broader 401(k) menu or as the plan’s default under the QDIA rules. They will also be

conservative mix as the participant ages.

At the time DOL issued its QDIA regulations, TDFs were relatively new and the variety of investment philosophy among them was not well understood. The investment philosophies among TDFs, however, can vary significantly. Some TDFs are established as a mutual fund in a funds-of-funds structure, but the investments among TDFs with this type of structure may vary dramatically. Others are structured to invest in collective investment trusts or bank-administered pooled accounts; and still others may be customized using existing plan options. In general, the asset mix of TDFs is intended to be broadly diversified, but that does not mean there is no risk; based on historic performance, some have more risk than others. This point, however, may have been lost to participants who were nearing retirement age and saw their nest eggs dwindle in the 2008 crash.

The variation in the asset mix is tied to the TDF’s glide path — that is, the assumptions used to determine the allocation to equities, fixed income and cash as the TDF approaches the target year of age 65. TDFs with a steep glide path arrive at the target date with extremely conservative investments because, in general, the managers assume that the participants will want to take all of their money out of the 401(k) plan at retirement age or shortly thereafter. Theoretically, the goal of TDFs

with steep glide paths is to avoid the possibility of large losses as retirement age nears. Other TDFs have a more graduated glide path, with a higher allocation to equity as retirement age nears. In general, the managers of TDFs with this type of philosophy assume that the retiree will want to leave his or her money invested past the date of retirement.

In any event, the combination of the investment structure and glide path variations make TDFs very difficult to benchmark — and therefore a challenge for a fiduciary to understand which TDF to include in the 401(k) menu.

fiduciAry concerns still APPly to the selection of tdfs

Participant-directed plans are subject to special rules with respect to fiduciary liability. In general, ERISA §404(c) provides that if a participant exercises control over his or her investments, then no fiduciary shall be liable for any loss or breach which results from the participant’s decisions. The DOL has issued very involved regulations under §404(c) that can protect a fiduciary from liability for investment losses stemming from a participant’s investment choice. To assert §404(c) protection, the plan, among other things, as the regulations require, must give participants meaningful investment choices that vary in the level of risk and allow participants to exercise control in making those selections.

in general, the asset mix of TDFs is intended to be broadly diversified, but that does not

mean there is no risk.”

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41www.asppa.org/pc

the performance of a TDF, it is necessary for the fiduciary to understand the underlying investments, to the extent possible, even if benchmarking is challenging, and to understand the glide path.

� Review the fund’s fees and investment expenses. This is also a fundamental fiduciary obligation in a multitude of contexts. Periodic review of the TDF’s expenses may be necessary because as the asset mix changes along the glide path toward the

impossible. However, this is a goal that fiduciaries should attempt to attain.

� Establish a process for the periodic review of selected TDFs.

� Understand the fund’s investments — the allocation in different asset classes (stocks, bonds, cash) and individual investments, and how these will change over time. This tip is connected to the two previous tips. In order to effectively select and monitor

required to show that the TDF’s fees are reasonable and that the fiduciary will, just like they do for all other plan investments, be responsible for monitoring the performance of the TDFs.

dol tiPs for fiduciAriesUnderstanding the difficulties

that exist with respect to TDFs, in February 2013, the DOL published “Target Date Retirement Funds – Tips for ERISA Plan Fiduciaries,” to assist fiduciaries in how to select and monitor TDFs in 401(k) plans. The tips apply basic fiduciary principles to the selection of a TDF, and suggest that fiduciaries do the following things when selecting and maintaining TDFs in a plan: � Establish a process for

comparing and selecting TDFs. This is a fundamental fiduciary obligation to demonstrate procedural due diligence in any context. Because of the difficulties with TDF benchmarking, establishing a tight procedure may prove very challenging, if not

The combination of the investment and glide path variations make target date funds very difficult to benchmark.”Photo by Thinkstock

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42 Plan Consultant | fall 2013

remain challenging investment vehicles for fiduciaries to prudently evaluate because the advisor community continues to have difficulty identifying a good method for benchmarking TDF performance and risk. Retaining expert assistance in the selection and monitoring of any TDF is advisable given the complexities of TDFs. While it’s tempting to “select and forget,” a TDF offering in a 401(k) plan should be reviewed with the same or more rigor as any other investment in the plan’s menu.

Tess J. Ferrera is a partner in the Washington, D.C., office of Schiff Hardin LLP and leader of the firm’s ERISA

Litigation Group. Her practice focuses on counseling and litigating matters involving fiduciary obligations under ERISA. Tess is the principal author of the ERISA Fiduciary Answer Book and a senior editor of the Journal of Pension Benefits.

retirement date, the expense ratios of the TDF may change and fiduciary action may be required.

� Inquire about whether a custom or non-proprietary TDF would be a better fit for your plan. According to the DOL, the underlying investments in many vendors’ TDFs exclusively include the vendors’ proprietary funds. Fiduciaries should ask questions about whether there are other more appropriate non-proprietary selections and compare expense ratios for any other alternatives.

� Develop effective employee communications. Given the inherent problems with TDFs, it is critically important that employees understand that TDFs are not risk-free investment vehicles. While it’s challenging to get participants to read materials, a fiduciary should explain the risk characteristics of the selected TDF default option in as much detail as possible and

explain the glide path. Participants should also be told that they have the option to make a different selection if they do not want to keep their funds in the TDF default option.

� Take advantage of available sources of information to evaluate the TDF and recommendations you received regarding the TDF selection. Fiduciaries that select TDFs as part of their 401(k) menu should stay informed with respect to new developments in the industry.

� Document the process. This is critical in order to demonstrate that the fiduciary engaged in procedural due diligence and also a basic fiduciary obligation. The DOL’s tips can be found

at http://www.dol.gov/ebsa/fiduciaryeducation.html.

conclusionTarget date funds have become a

popular QDIA in 401(k) plans. They

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43www.asppa.org/pc

CE F E x A D

ASPPA RETIREMENT PLAN SERVICE PROVIDER CERTIFICATION

Assessments are performed by CEFEX, Centre for Fiduciary Excellence, LLC.

The following � rms are certi� ed* within the prestigious ASPPA Service Provider Certi� cation program. They have been independently assessed to the ASPPA Standard of Practice. These � rms demonstrate adherence to the industry’s best practices, are committed to continuous improvement and are well-prepared to serve the needs of investment � duciaries.

For more information on the certi� cation program, please visit: http://asppa.org/home-page/rkcert.aspx or call 416.693.9733.

Actuarial Consultants, Inc.

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Intac Actuarial Services

July Business Services, Inc.

Kidder Bene� ts Consultants, Inc.

Moran Knobel

National Bene� t Services, LLC

North American KTRADE Alliance, LLC

Pension Financial Services, Inc.

Pension Plan Professionals, Inc.

Pension Solutions, Inc.

Pinnacle Financial Services, Inc.

Professional Capital Services, LLC

QRPS, Inc.

Retirement Planning Services, Inc.

Rogers Wealth Group, Inc.

RPG Consultants

SI Group Certi� ed Pension Consultants

SLAVIC401K.COM

Summit Bene� t & Actuarial Services, Inc.

Tegrit Retirement Plan Services

TIAA-CREF

TPS Group

Warren Averett Bene� t Consultants, LLC

As of September 16, 2013

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44 Plan Consultant | fall 2013

FeATuRe

Traditionally, alternative investments have been the exclusive domain of sophisticated investors, but now more and more of them are finding their way into participant-directed 401(k) accounts.

The Expanding Alternative Universe in 401(k) Plans by steven sullivAn

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“We throw around the term ‘alternative’ a lot,” says Wilson, who prefers the term satellite investment to alternative. “In the investment world there are really only two things that are truly alternative investments: hedge funds and private equity,” he says. “We don’t use either of those in 401(k) plans, primarily because they’re usually limited partnerships, they typically have big ongoing lockups anywhere from two to 10 years. In addition, they have very high management fees. In a 401(k) you have to have liquidity.”

The problem was that these investments and the hedge funds that used them weren’t readily available to the common investor, the people who save for retirement in 401(k)s and other defined contribution retirement plans. They were restricted to wealthy individuals and institutional investors such as corporations, pension funds, banks and insurance companies.

Then, a couple years ago, all that changed.

“There was a test case with PIMCO [one of the largest global fixed-income managers in the world],” says Craig Phillips, managing partner and CEO, Client 1st Advisory Group, Clearwater, FL. “The IRS didn’t allow futures and commodities in a ‘40-act’ mutual fund. PIMCO challenged that and built a mutual fund that had commodities in it. That opened up the door to asset classes that were available only in more expensive limited partnerships and to accredited investors who had a high net worth. It basically democratized the ability to diversify your portfolio. Overall I think it’s been a very positive thing for our industry. We feel any investor can benefit from a more diversified portfolio, no matter how big or small.”

“Any size company can benefit from alternatives,” says Michelle Mabry, Phillips’ partner at Client 1st Advisory Group in Hattiesburg, MS. “Diversification is greater and

he plain vanilla nature of most 401(k) lineups has traditionally been their main advantage for the ordinary investor. Equities provide high yield, but

they’re more volatile; bonds are more stable, but their return on investment is lower. When you’re young and aggressive, you can afford to invest more in the former; when you’re older and close to retirement, your portfolio should begin to favor the latter. But whatever the proportions, any 401(k) portfolio should always be a judicious mix of both asset classes. In other words, it should be diversified.

Still, no matter how diversified you are, whenever the market goes up, you win; when it goes down, you lose. It’s just a matter of degree and there’s no getting around it.

Or is there?For years, hedge funds have

been diversifying their portfolios by investing in asset classes that are either negatively correlated — they go up when the market goes down and vice versa — or market neutral, which means they have nothing to do with what the market is doing. These asset classes are commonly known as alternative investments.

“What drives return on a portfolio is where you’re getting your risk from,” says Chad Wilson, director of investment consulting at PSA Financial in Hunt Valley, MD. “When we look at the world and figure out how to allocate our participants’ assets, we want to make sure we have asset classes that derive their risk from different sources.”

The basic definition of alternative investments is fairly simple: anything that’s not stocks, bonds or cash. It’s a wide asset class that includes precious metals, managed futures, commodities, hedge funds, real estate, TIPS, currency, emerging markets, debt and equity — even art and valuable coins.

T

by steven sullivAn

Photo by Thinkstock

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46 Plan Consultant | fall 2013

futures. In addition to the obvious diversity, managed futures have the advantage of being inversely correlated to the stock and bond markets.

“We recommend managed futures mutual funds,” says Michelle Mabry. “In a period like 2008, if you had exposure to alternatives like managed futures or hedged equities, you wouldn’t have lost as much money as you would have in a stock fund. But they weren’t available to 401(k) plans in 2008.”

She adds: “It’s important to educate participants on how alternatives fit into their plan. If you hear the stock market is up 15% and your managed futures fund is up only 2%, that doesn’t mean you should get rid of it. It wasn’t designed to track the stock market.”

High-yield TIPsTreasury inflation-protected

securities increase with inflation and decrease with deflation, so they also have nothing to do with the markets. When they mature, you’re paid either the adjusted principal or the original principal, whichever is greater.

“There are two components of most bonds,” explains Chad Wilson. “You have the coupon payment which is a rate set when it’s issued, and then you have par value. Let’s say the coupon is based on a $1,000 par value and a 10% coupon, which would be astronomically high — an annual coupon payment of $100. A TIP adjusts the par value that the coupon is calculated on for inflation

be taking away potential asset classes in other areas that may be more meaningful, such as international or bonds. Besides, that exposure is typically already represented in many of the other stock-based asset classes. The S&P 500 is made up of 25% technology stocks as it is, so a technology sector fund can actually be redundant.”

Emerging Market FundsThese are mutual funds or

exchange-traded funds that hold assets in the financial markets of developing countries that are considered promising: Eastern Europe, Africa, the Middle East, Latin America, the Far East and Asia. As you might imagine, these, too, can be particularly risky.

“I like using international debt, typically with an investment that’s unhedged,” says Wilson, “which means we’re getting the currency exposure. And also one that has a fairly significant allocation in emerging markets so we’re not just Euro- and U.S.-centric debt holders; I like to have the sovereign debt of emerging market companies.”

Managed FuturesThese accounts are managed

by professional commodity trading advisors (CTAs) and consist of long or short futures contracts in grain (corn, soybeans, wheat), metals (gold, copper, silver), equity indexes (Dow, S&P, NASDAQ), commodities (cotton, coffee, sugar), foreign currency, and U.S. government bond

investment performance isn’t just tied to stocks and bonds, which decreases volatility and downside risk.”

AlternAtives AmonG the AlternAtives

Even so, no one is advocating that plan sponsors should boldly go into this expanding universe at warp speed. These investments are complex and often difficult to understand. And even though their judicious use can improve stability and decrease volatility, too much can cause trouble. So what alternative investments are suitable in a 401(k)? Among the options are:

Real Estate Investment Trusts (REITs)Pretty much what they sound

like, publicly traded REITs invest in actual real estate (equity REITS), mortgages (mortgage REITs), or a blend of the two, and they trade on the open market like stocks. They have the advantage of being very diverse and highly liquid — nowhere near as risky or costly as investing in individual pieces of real estate.

Funds based on other sectors of the economy — natural resources, utilities, finance, health care, technology, communications — can also be used to add diversity to a portfolio. But they have a downside.

“The risks associated with sector-based funds are often quite high and they need to be understood,” says Darin Gibson, president and owner of Burnham Gibson Financial Group in Irvine, CA. “And if a portfolio has a sector fund, that means it may

No one is advocating that plan sponsors should boldly go into

this expanding universe at warp speed.”

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participants, they’ll sometimes ask about a technology fund or a health care fund. Usually it’s in step with whatever is doing well at the time. Then the common question is, ‘Why can I buy it through my brokerage account but I can’t access it through my 401(k)?’”

Gibson explains that a 401(k) plan is meant for long-term savings and covers the entire organization across all levels of knowledge and sophistication. Unlike their direct brokerage account, in which they can buy anything they want any time they want, a 401(k) platform typically and prudently offers anywhere between 12 and 20 investment options specifically designed to cover a multitude of asset classes to provide diversification. The risks associated with sector-based funds are often quite high and they need to be thoroughly understood.

“In our wealth management practice,” Gibson continues, “when we’re dealing with sophisticated investors, we may use alternatives as a diversifier. But that’s because we’ve spent the time and energy to understand their goals and objectives, educated them on how the portfolio mix works, and what the risk-to-reward ratio is. We’ve had numerous discussions. With a 401(k) participant, we don’t take that role. We take a 3(21) fiduciary role with our plan sponsors and advise them on the investment selections within the plan, but it’s up to the participants to make their own decisions. More important, the

funds off the broad-based alternative indexes, such as the HFRX Global Hedge Fund Index. It’s a benchmark that’s a mix of everything from domestic to international, managed futures, foreign currency, long/short, equity. You can benchmark a manager of a particular slice or you can index the entire multi-strategy fund. All the benchmark software packages have them readily available now.”

stArtinG the conversAtion

Alternative investments still aren’t a common occurrence in 401(k) plans and they’re not always widely understood by plan sponsors or participants. But sooner or later, somebody reading The Wall Street Journal or Forbes or Kiplinger’s is bound to ask about them.

“More than any area, I’d say alter-natives are probably the area invest-ment committees and participants ask the most questions about, primarily because it’s new,” says Gary Price. “Obviously most 401(k)s are plain vanilla, which is a good way to invest, but they don’t usually have alternatives. So from pure novelty and the need for education, we get the highest number of questions in that area because they’re the least understood.”

“Typically the question will come from someone on the investment committee, ‘Hey, what about a gold fund?’” says Darin Gibson. “If we have an education meeting with

or deflation. So if there is inflation, instead of having $1,000 par value, maybe it goes up to $1,005. The 10% would now be applied to that $1,005. So you get a higher coupon payment on an annual basis and your investment keeps up with inflation.”

Multi-strategy FundsMulti-strategy funds pull together

a diverse mix of managed alternatives into a kind of one-size-fits-all vehicle. They tend to work well if the advisor or sponsor wants to add diversity to the lineup while keeping the number of investment options limited. They’re increasing in popularity and more and more of them are becoming available all the time.

“Multi-strategy funds provide tremendous diversification,” says Gary Price, CEO of Strategic Capital Group in Gig Harbor, WA. “In that one fund you’ll have 10, 12, 15 sub-advisors, each with his own specific focus. You might have two or three managed futures managers, a couple market neutral managers, fixed income arbitrage, some long/short, and then some timing tactical managers. By the time you mix them all together, they end up giving you a return that’s pretty trackable to the broad-based hedge fund or alternative index, which tends to have lower volatility.”

Chad Wilson has reservations, however, mostly centered around benchmarking and cost. “Be careful if you’re considering adding an all-in-one satellite portfolio,” he cautions. “If it’s a custom-built package of satellite asset classes, there’s not going to be a readily available benchmark. The provider will have its own benchmark, but I like independent benchmarks. Also, multi-strategy funds tend to have very high fees. It’s rare for me to use an investment that has a ratio over 1%, and I try to get significantly below that. All of these investments that I’m aware of are fairly dramatically above 1%.”

Price disagrees, at least about the benchmarking. “We benchmark these

As products proliferate, the array can be bewildering, the learning curve high.”Photo by Thinkstock

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48 Plan Consultant | fall 2013

be bewildering, the learning curve high. It’s not a decision that should be entered into lightly or quickly. Advisors and TPAs should work closely with investment committees and follow established due-diligence procedures, as they would when adding any new investment to the lineup. This means they should look for appropriate transparency, diversification, controls on leverage, investment performance, quality of managers, cash flow and redemption rates, and reasonable fees. And seek outside, independent assistance if they need it.

“If advisors aren’t doing alternatives now, they should be,” says Phillips. “I can see a time in the near future when the term ‘alternative’ will be obsolete.”

Steven Sullivan is a freelance writer in Baltimore, MD.

participant’s impetus may not be real diversification but rather, ‘Hey, I just read in the paper that gold is doing really well.’ That’s the reason we get concerned with having them in a 401(k) plan because we don’t want to expose the plan sponsor to undue liability.”

“In any participant group, there are basically two groups: engaged participants and disengaged participants,” says Chad Wilson, who sees target-date funds as a constructive answer to questions about alternatives in 401(k)s. “Disengaged participants compose about 90% of participants, and they’re best served by target-date funds. They provide a broadly diverse portfolio — not just cash, stocks and bonds, but somewhat exotic asset classes as well. Most of them have emerging markets exposure, emerging market debt, commodities, TIPS, high-yield, real estate. Those unsophisticated investors are really getting a very sophisticated asset

allocation. And, if the advisor’s doing his job right, at a reasonable price.”

“TPAs and advisors should educate sponsors about the value of alternatives as a way to diversify portfolios,” says Michelle Mabry. “You can do analytics on them just as you can on any mutual fund, but the track record can be a little difficult because they haven’t been around that long. But a company that’s been operating in that space previously in a limited partnership structure can be analyzed. So you’re vetting the manager, not just the structure.”

According to Craig Phillips, TPAs and plan sponsors may have to modify their investment policy statements to even allow them. The investment committee at one of his clients, a hospital in Clearwater, FL, recently modified their statement to allow up to 20% in alternatives. Before that they were strictly in stocks, bonds and cash.

Clearly, alternative investments are on their way into 401(k) lineups. As products proliferate, the array can

A L YR LRETIREMENT

FOR

Save the Date!

Join us for our March on Capitol Hill!

ASPPA Annual ConferenceThe Gaylord National Resort & Convention CenterNational Harbor, MD • October 27-30, 2013

October 29, 2013

Don’t miss our Hill Rally on Monday, October 28!

Sign up at www.asppa.org/hillvisits

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Whether you are just entering the defi ned benefi t arena or have been practicing for years, ASPPA offers education to help you grow and succeed.

ASPPA’s Defi ned Benefi t Educational Offerings

FOR THE NOVICE:

Administrative Issues of Defi ned Benefi t

Plans (DB)

FOR THE DB PLAN ADMINISTRATOR

AND ERPAS:

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FOR THE PLAN CONSULTANT:

Cash BalanceConsulting Module

FOR THE ACTUARY:

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50 Plan Consultant | fall 2013

Pension Risk Transfer Solutions

By GEOFF DiETRiCH

FeATuRe

ension risk transfer (PRT) is a term that is quietly incubating within the U.S. pension marketplace. A close cousin of terminal funding (a term which may be more readily familiar to asset-liability practitioners), pension risk transfer involves the use of institutional annuity products to reduce and/or eliminate pension risks.

PRT solutions are differentiated from terminal funding in that their utilization is not relegated to being part of a

plan termination process. Rather, PRT solutions are a new guaranteed asset

PAdding guarantees to the defined

benefit fixed income conversation.

Photo by Thinkstock

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of 90% it is likely that they may be able to comfortably afford to annuitize some portion of their plan liabilities. This strategy concentrates on annuitizing retiree liabilities that can be most efficiently priced by insurers (typically less than 110% of GAAP liability value) and reducing the plan’s cash flow/benefit payment expense burden. For plans which may be waiting for rates to eventually rise, this approach may be preferable to an alternative settlement approach of issuing voluntary lump sums to terminated vested participants, in that a future rise in interest rates will have a more dramatic liability reduction impact on the long-duration liabilities associated with younger terminated vested participants.

buy-in AnnuitiesBuy-in annuities are a

relatively new approach to pension

class for pension sponsors to consider as they evaluate their overall fixed income investment portfolio. The objective of this article is to provide a high-level outline of the pension risk transfer solution spectrum, and challenge pension stakeholders to consider the utility of these products as part of the fixed income universe of pension investments.

tAilored Annuity buy-outs

Annuity buy-outs are the classic product used to support the terminal funding needs of pension sponsors who are terminating their pension programs. Buy-outs are viewed as the product that most frozen pension plan sponsors want but few can afford. But is this really the case?

Recent history has led the buy-out annuity product to be primarily deployed in conjunction with a plan termination. This “all or nothing”

approach to settling plan liabilities may not be optimal, especially in light of the emerging best practice of dynamic asset allocation, where fixed income allocations are increased as funded status rises to phase in the interest rate hedge.

I believe the same wisdom should apply when thinking about how to settle the pension liabilities. By tailoring or calibrating the annuity purchase, working in close collaboration with the consulting actuary, a plan sponsor can mitigate any negative impacts (funding, accounting or PPA restrictions) and overcome the inertia of waiting to settle all liabilities as part of a plan termination.

The chart illustrates how a plan’s ability to “afford” annuitization is to some degree a function of its funded status and the proportion of plan liabilities it annuitizes. Thus, for plans funded in excess

HIgH LEvEL ImPACT of PARTIAL AnnUITy BUy-oUT on REmAInIng PEnSIon PLAn

* Annuitization assumes retired life liabilities are settled at 110% of accounting liability value

Annuities Less Attractive Retiree Obligations Annuitized*/ Total Pension Obligations

Annuities More Attractive 60% 50% 40% 30% 20% 10%

Pension Plan Funded Status %Pre Annuity Purchase Pension Plan Funded Status %: Post Annuity Purchase

70% 10.0% 30.0% 43.3% 52.9% 60.0% 65.6%

75% 22.5% 40.0% 51.7% 60.0% 66.3% 71.1%

80% 35.0% 50.0% 60.0% 67.1.9% 72.5% 76.7%

85% 47.5% 60.0% 68.3% 74.3% 78.8% 82.2%

90% 60.0% 70.0% 76.7% 82.9% 85.0% 87.8%

95% 72.5% 80.0% 85.5% 88.6% 91.3% 93.3%

100% 85.0% 90.0% 93.3% 95.7% 97.5% 98.9%

105% 97.5% 100.0% 101.7% 102.9% 103.8% 104.4%

110% 110.0% 110.0% 110.0% 110.0% 110.0% 110.0%

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52 Plan Consultant | fall 2013

come to market that is designed to be a turnkey, bundled LDI solution. This investment contract guarantees that a plan’s expected cash flows will be valued equal to the prevailing rate of the same pension discount curve the plan uses to value its liabilities. This approach essentially allows a plan sponsor to invest in a contract (asset) whose value is equal to the liability. That is a powerful proposition for sponsors interested in de-risking their plan and increasing allocations to fixed income to protect their funded status.

The primary advantage of using investment contracts as a PRT solution is that the terms can be customized to cover as few or as many cash flows as the sponsor is comfortable with. While an investment contract approach does not provide protection against mortality risk, it does allow a sponsor to diversify its fixed income investment by employing a guarantee. Additionally, an investment contract based approach to PRT allows a sponsor to engage an institutional insurer in a relationship in advance of more fully annuitizing its liabilities via a buy-out or buy-in solution. The advantage of being an existing client of an institutional insurance provider can potentially be a significant factor when it comes time for that carrier to evaluate its annuity pricing for a plan’s liabilities. Based upon our

contract provides a turnkey benefit payment financing investment.

When considering a buy-in, it is particularly important to collaborate with the sponsor and its advisors to understand issues related to the contract valuation, revocability and monitoring of the insurance company’s financial strength. This new pension risk management tool is a useful solution that sponsors should investigate as they look to de-risk their plans.

investment contrActsWhile each of the PRT

solutions described above involve life-contingent, mortality-based guarantees, investment contracts offer a more pure play on leveraging an insurance company’s fixed income investment capabilities. Insurance companies can structure an investment contract in a variety of different ways. Some carriers offer fixed crediting rate products that may fit nicely as a component of a larger more diversified fixed income portfolio. Other carriers can structure a contract to cover expected monthly plan cash flows for a defined period of years (i.e., two to five years). This approach allows a plan sponsor to essentially purchase a bond-like investment that is designed specifically to defease its unique expected pension cash flows.

A new PRT product based on investment contracts has recently

annuitization that has recently crossed the pond from the U.K., where pension buy-ins are a multi-billion dollar annual marketplace. The U.S. witnessed its first buy-in transaction in May 2011.

Buy-in annuities are contracts that are held by the plan as an investment where the obligation of the insurance company is to issue monthly, life-contingent payments to the trust in bulk. The plan trust then issues payments directly to its pensioners. Like buy-outs, this approach is most effective when covering retiree obligations that are most efficiently priced by the institutional insurance marketplace.

The primary advantage of a buy-in annuity is that it avoids the funding status and accounting impact that would be otherwise associated with a buy-out annuity for an underfunded plan. Thus, a sponsor can engage a custom solution that provides a precise hedge against the plan liabilities, which, in turn, require monthly cash flow to issue benefit payments. This is a particularly attractive benefit for many pension sponsors who may not have the scale to access customized fixed income investment strategies from separate institutional account money managers. Too many pension sponsors are funding benefit payments by selling invested assets in an ad-hoc manner to meet monthly cash flow needs. A buy-in annuity

Buy-in annuities are a relatively new approach to pension

annuitization that has recently crossed the pond from the U.k.”

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experience, we believe that in certain instances this “existing client effect” could result in a cost savings of 1-2%. 

A full sPectrum of GuArAnteed fixed income Products

The customized insured pension solutions detailed above are all similar to each other in that they are all built on a guaranteed group annuity contract chassis and leverage the fixed income investment capabilities of some of the largest fixed income asset managers. That said, the array of different solutions allows for a consultative approach in which PRT can be discussed with pension clients in a product-agnostic way.

PRT solutions can be delivered at all points on the fixed income yield curve, offering an effective

alternative to short, intermediate, core or long-duration fixed income funds (see chart). The customization offered in these products may be particularly attractive to mid-sized plan sponsors who typically rely on mutual and collective funds, which are more benchmark-driven and are not customized to the specific cash flow needs of the pension plan.

 conclusion

Pension risk transfer solutions come in many different shapes and sizes, but all employ powerful financial guarantees backed by the some of the largest, best-capitalized life insurance companies. The ability to customize the PRT structure to employ an optimal mix of covered guaranteed cash flows (based upon investment and funding objectives) provides pension sponsors with a compelling alternative to traditional

fixed income mutual or collective funds.

While the benefits of PRT solutions are clear to professionals who have experience working with these institutional insurance products, the fact is that these products are not part of the broader pension investment conversation, which relies on more traditional market valued (non-guaranteed) investment products. This fact presents both a challenge and an opportunity for the PRT market and its products.

 

Geoff Dietrich is vice president of Dietrich and Associates, Inc. He has nearly 15 years of experience in the PRT marketplace working with plan sponsors and their intermediaries.

A plan’s ability to “afford” annuitization is to some degree a function of its funded status and the proportion of plan liabilities it annuitizes.”Photo by Thinkstock

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54 Plan Consultant | fall 2013

mARkeTing

catch the one That Got Away

Photo by Thinkstock

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catch the one That Got Away

Here’s how to land new clients by investing in financial advisory relationships.

By W. JEFFREy zOBELL

you should offer or facilitate and which types of solutions are getting results in attracting prospects. With the financial advisor as your line to the underlying client, you can create new sales and upsell opportunities by educating them on their role and equipping this group with techniques and solutions that yield the best results.

According to Mesirow Financial’s 2012 retirement plan survey report, 72.6% of all retirement plans surveyed utilized a financial professional. Of those not currently using an advisor, almost half were either in the process of adopting one or were considering doing so. According to Cerulli Associates’ fourth quarter 2011 report, plans with less than $50 million dollars in assets represented approximately one third of all assets, 90% of all plans and about 40% of all plan participants.

fActors And oPPortunities

Clearly the advisor should be an increasingly important part of your marketing efforts. So what are some of the factors driving the advisor further towards the center of the consulting relationship and how can you turn these into opportunities to potential clients?

Service and Fee Review ProcessThe DOL began requiring

As a young man, I remember my Scoutmaster teaching me many important things.

Always be prepared. Carry extra water. “Leaves of three, leave them be.” (Poison oak makes lousy toilet paper.) But it was his secret to fishing that I remember most distinctly. As he revealed after several fruitless days at the river: You just have to “fish where the fish are.”

Being young, I dismissed this obvious advice and went out and tried what I thought would work. I did not take the time to learn which parts of the river were more likely to be inhabited, what the fish were attracted to or which techniques would yield the best results. I certainly got a few nibbles, but nothing like I had hoped for. My Scoutmaster explained that in order have a successful strategy as a fisherman, I needed to understand more about the environment and which bait was likely to work best, and to make sure I had the right equipment.

While most of us would grab a reel any time we can, we often find ourselves in different waters and facing different challenges when it comes to landing new business. Many of the same lessons I learned years ago, however, can be utilized when dealing with marketing your third party administration services. It’s necessary to see which conditions are influencing the types of services

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56 Plan Consultant | fall 2013

Provide your advisors with an easy-to-use benchmarking solution for fees, services and returns.”

conversations being held today, and how can TPAs utilize them to craft the solutions we market?

Health Care ReformThe Patient Protection and

Affordable Care Act (PPACA) was signed on March 23, 2010. Most of the major impact to employers will be felt beginning on Jan. 1, 2015, when employers will need to decide whether to expand insurance coverage or face a penalty for non-coverage. Originally, this was to take effect Jan. 1, 2014, but a one-year extension was granted on July 2, 2013.

This issue has dominated the benefits conversation for many employers and will continue to do so. So why is it relevant? Discussions about benefits must consider health and wellness costs and their impact on other benefits programs, including retirement plans. Plan sponsors clearly benefit from partners that can provide guidance in these areas and aggregate services. Sponsors who may be reluctant to talk about their retirement plans are being drawn into the discussion from the health side. Our organization is seeing some very large institutional providers who are leading with their health care consulting and using it to leverage this open door into a retirement plan discussion.

There are two other ways we see firms marketing and benefiting from this trend: � This is a natural conversation

starter for any providers offering welfare plan administration services such as flexible spending/125 plans, health savings accounts or health reimbursement accounts, since these plans help consumers save on direct health care expenses and help sponsors save on payroll tax and insurance costs.

� A TPA could partner with financial advisors or health insurance brokers who either specialize in pay-or-play analysis or sell health insurance

two new disclosures beginning in 2012: the 408(b)(2) plan sponsor level disclosure and the 404(a)(5) participant level disclosure. Advisors can now benefit from the legacy of these disclosures, and should develop techniques to deal with them proactively.

Fee Analysis and BenchmarkingThe DOL’s expectation is that

plans will evaluate the services being received for reasonableness on a routine and ongoing basis and will document the findings. This analysis includes the costs of investments as well. Provide your advisors with an easy-to-use benchmarking solution for fees, services and returns. Providers should look beyond the disclosure itself and develop and educate advisors on a suggested process for evaluating, documenting and managing third party disclosures. The idea is to build a routine way to fulfill this ongoing obligation with you included.

Keeping a client can be much

more cost effective than finding a new one. Let your capabilities to handle any inquiries be known. The DOL has hired about 1,000 new agents to assist in auditing and enforcing these disclosures. Position yourself or your advisors as experts with a defendable process or as a dependable resource in an audit.

Fiduciary StatusThe disclosures require a clear

statement of fiduciary status. The DOL has made it clear that it will be revisiting the definition of fiduciary. This could mean a sea change in the way many institutions do business. The fact that some advisors and broker-dealers cannot, or will not, accept status as a fiduciary will create huge opportunities. When you look at how this can benefit an administration firm from a marketing perspective, there is a place for you to pair up those providers and products that can provide different degrees of fiduciary protection with those who cannot, or will not, accept those roles.

Market PerformanceIn addition to the cost of the

investment products, the required DOL disclosures deal with historical investment performance. Weak market performance has created an uptick in the number of advisors looking to utilize professional asset management, allocation strategies and target date funds to keep returns high. Opportunities also exist to allow advisors to utilize ETFs, collective trusts and other alternative investments to deal with investment cost and strategy concerns. Developing open architecture custody or record keeping processes to facilitate these alternatives — and making sure your advisor partners know how they work — can separate you from the competition and open up new pools of prospects.

issues And solutionsSo what are some of the

issues that are influencing benefits

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services. There are significant opportunities to build new lines of business internally or in conjunction with your top advisors.Unfortunately, many financial

professionals do not focus on these programs simply because there is not a lot of direct income potential for them. Be the advisor’s specialist or help facilitate one. Having health care solutions as part of your advisor’s offering can differentiate them from their competition, make retirement and welfare plans more sticky, and keep the sales door open for you.

IRA Rollover MarketAccording to Cerulli Associates’

fourth quarter 2011 report, estimated IRA assets topped $4.817 billion at the end of 2011. As thousands of new retirees become eligible for distributions each week, the need for advisors to assist in the distribution process and provide general wealth management and income services increases.

Educate your financial advisors about the fiduciary concerns of the Department of Labor and assist them in establishing a best practice solution for their particular structure. TPAs that can also offer record keeping solutions for IRA accounts should be able to see substantial growth by partnering with advisors who will act as fiduciaries on those accounts. Consumers will be drawn to TPAs that can provide scalable solutions. Refine your firm’s ability to provide information and lead time on those participants who are in pay status.

Tax ReformThe steep fiscal challenges

facing the federal government have resulted in scheduled increases in personal and business taxes — saving money is always a great motivator. Legislation has been proposed to limit contributions and deductions associated with qualified plans, and in-plan Roth conversions are now allowed.

Educate advisors about these changes and the types of plan design solutions that exist. Encourage the development of strong relationships with their clients’ tax professionals in order to provide the holistic advice they need as tax rates change.

Many of the proposed regulations focus on defined contribution plans. Be sure your advisors are aware of the benefits of traditional defined benefit and cash balance designs, which do not seem to be under as much scrutiny and can have substantially larger contributions and consequent deductions. Many administration firms are looking to expand their actuarial services, or partner with outside firms, to capture these opportunities. These plans, in particular, can be a great solution to another area of influence: longevity concerns.

outlivinG retirement sAvinGs

Recent research by Allianz showed that among people age 44 to 75, 61% stated that they fear outliving their assets more than they fear dying. Make sure your firm highlights common solutions to your advisors, such as auto enrollment or auto escalation capabilities. Here are a few other ways to address the longevity issue.

Defined Benefit and Cash BalanceAs mentioned above, these plans

can provide for a lifetime income stream for participants since they offer an annuity as a form of payment. While the focus has primarily been on 401(k) plans for the last couple of decades, defined benefit plans have not had much attention or marketing support. Bolster the training and marketing materials you provide, including sample illustrations that can show the power of these designs and how they can be paired with existing 401(k) plans.

AnnuitiesIn response to these concerns,

we have seen an uptick in the number of annuities being offered in all plan types, either while in the plan or at the point of distribution. As a record keeper, make sure you can accommodate these types of investments. In addition, significant marketing opportunities may result from partnering with specialists in this area and creating synergies between advisors.

Accumulation/Decumulation ServicesAnother way to lure new business

and address lifetime income is to equip your advisors with tools to identify accumulation shortfalls through a gap analysis or similar evaluation of retirement readiness. The DOL announced their intent to require new disclosures on benefit accumulation in the near future. Administration firms can promote their capabilities to analyze and improve on participant outcomes.

Additionally, structured distribution services are a frequently overlooked way to generate business on existing clients and attract new ones. These strategies allow for greater control over taxable income for participants, and can allow for longer revenue streams for record keeping and distribution services.

conclusionMarketing may not be as much

fun as fishing, but it can certainly be rewarding if you land a trophy client. By leveraging the forces affecting benefits discussions and educating advisors about new techniques to drive those conversations, you can use your targeted solutions to land new relationships and build on existing ones.

W. Jeffrey Zobell, QPA, QKA, is the CEO of Alliance Benefit Group—Rocky Mountain. He serves on the

National Board of Managers and is Marketing Committee Chairman for Alliance Benefit Group National.

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58 Plan Consultant | fall 201358

invesTmenT ADvisoR

Game changers: How Advisors (and Record Keepers) can enhance Retirement Readiness

Despite plan sponsors’ apparent sense of

responsibility, there is a steady and

increasing stream of studies concluding

that employees are not prepared to retire. What role can advisors, who

are a major force in the industry, play in

the retirement readiness solution?

By WARREN CORMiER

Ready, or not?A phrase that’s heard with increasing frequency in both the

defined contribution and HR worlds is “retirement readiness.” In the 2012 Defined Contribution Participant (DCP) Plan Sponsor survey of 2,800 comp and benefits directors, for example, 82% said they feel it is their “responsibility as a plan sponsor to make sure that their employees are tracking towards a comfortable retirement (i.e., retirement readiness).”

Furthermore, in a BRG/BlackRock study, 72% of plan sponsors said they agreed that it is their responsibility to “help employees get through retirement, not simply reach it.” Yet despite plan sponsors’ apparent sense of responsibility, there is a steady and increasing stream of studies concluding that employees are not prepared to retire.

So what can be done? And just as importantly, what role can advisors, who are a major force in the industry, play in the retirement readiness solution?

We all know a major hindrance to retirement readiness for millions of DC plan participants is leakage, in the form of cashing out their DC account balances when they change jobs or retire. Plenty of data are readily available on the magnitude of the problem at the DC level. But these industry-wide numbers on the amount lost due to leakage are so ponderously large, they actually tend to desensitize and discourage us from taking action.

Ultimately, the leakage problem will be solved one plan sponsor and one participant at a time. So let’s look at the impact on an individual participant’s retirement readiness.

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labor markets, in addition to creating retirement readiness.)

Given the impact of cash-outs on their participants’ retirement readiness, and the fact that the problem persists, one wonders whether plan sponsors know the magnitude of the cash-out problem and/or if they are concerned about ex-employees who are cashing out.

Interestingly, in the 2013 version of the DCP Plan Sponsor survey, about half (53%) said they do not know what percentage of terminated or retired participants who took the money out of their DC plan cashed out their balances. Those who could give an answer cited an average 33% cash-out rate (actually pretty close to national norms). But furthermore, about four in 10 plan sponsors (39%) say they “are concerned about their employees’ cashing out.” This is fairly high, given that half of plan sponsors don’t even know the magnitude of their plan’s cash-out problem.

GAme chAnGers On a macro level, it makes

financial sense for advisors to help solve

the cash-out problem. That is, if the cash-out rate can be cut in half, $1.3 trillion will be retained in the DC/IRA system over a 10-year period, according to EBRI. That’s almost $400 billion that will potentially stay in the advisor channel.

On a micro level, there is also a substantial opportunity for advisors (and/or record keepers) to help their

clients in a meaningful way to making progress in retirement readiness. First, consider that, according to the 2012 DCP, plan sponsors have a low satisfaction rate with the record keepers’ education for departing participants regarding their withdrawal options and the financial ramifications of each option. The advisor — either alone or in collaboration with the record keeper — could step in and play a meaningful role in educating the participant and the plan sponsor. In fact, this is one of those rare cases where sheer information will change participant behavior.

Secondly, consider the fact that, according to the 2012 DCP, only half (52%) of plan sponsors are “very satisfied” with (bundled) record keepers’ retirement readiness initiatives offered to their participants. The advisor can easily help the plan sponsor establish or outsource systems that assist employees in rolling over their balances to their next DC plan or to an IRA. (Most, but not all, systems and procedures available today actually make cashing out far easier for participants than rolling over the assets, our 2013 DCP Participant Study found.) Assistance in rolling over the balances is a highly valuable but low-cost (or no-cost) employee benefit. It is particularly valuable if it is “marketed” to participants at enrollment and throughout their time with the plan sponsor, since it is a benefit that virtually everyone will utilize someday.

These two steps alone will add substantial value to the advisor in the plan sponsor’s view by tangibly, inexpensively and effectively enhancing progress toward the key goal of retirement readiness, by keeping the sponsor’s benefit spend focused on its intended long-term purpose.

Warren Cormier is the president and CEO of Boston Research Group and author of the DCP suite of

satisfaction and loyalty studies. He also is co-founder of the Rand Behavioral Finance Forum, along with Dr. Shlomo Benartzi.

If a participant at age 30 cashes out $1,000 and nets $700 (which is probably spent quickly), he or she will forego a lump-sum value of $5,516 by age 65. That participant could have enjoyed $9,403 in total retirement income (“readiness”) from that single $1,000 by age 85 had it remained in the DC or IRA system.

If that participant cashes out $1,000 three times over the course of a career — let’s say at ages 30, 40 and 50 — the total loss of readiness is approximately $18,000. The same analysis for $5,000 cash-outs at ages 30, 40 and 50 shows the lost retirement readiness nears $100,000. (These are simply hypotheticals, but the projections are likely conservative, as EBRI estimates American workers will change jobs an average of 7.4 times in a 40-year career.) (See the table below.)

benefit sPend, or sPent?These numbers are certainly

troubling for the participant. But the equally troubling point is approximately 30% of these “lost dollars” are contributed to the

participant’s DC account by the employer, whose sense of responsibility is to increase their participants’ retirement readiness directly and through market appreciation. Unfortunately, cashed-out benefit dollars leave the DC and IRA system and are rarely applied in other forms to retirement readiness. (It is, of course, recognized that DC plans are often offered to be competitive in

Effects of Low-Balance Cash-Outs on Retirement Assets and Income, By Age

Measure Age 30 Age 40 Age 50

$1,000 Cash-Out Proceeds $700 $700 $700 Lost Value at age 65 $5,516 $3,386 $2,079Lost Retirement Income $9,403 $5,877 $3,609

$5,000 Cash-Out Proceeds $3,500 $3,000 $3,500

Lost Value at age 65 $27,580 $16,932 $10,395Lost Retirement Income $47,877 $29,393 $18,045

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60 Plan Consultant | fall 2013

CREDITS BET WINNER PAID

No LemonsBy ya n ni s P. K ou m a n ta r o s a n d

a d a m C . P o z e K

TeChnology

Photos by Thinkstock

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No Lemons

This cheap tech won’t necessarily help you earn more bread, but it could save your bacon.

Lemon Wallet is part Passbook and part CardStar, mixed together and improved. Basically, it allows you to use your smartphone camera to store pictures of your ID, credit cards, membership cards, rewards club cards — heck, even your library card. For some, it recreates the barcode for easier scanning; for others, it enhances the photo to show a clear image of all the information on the face of your cards. With bank-level security and encryption, your data is safe.

A few weeks ago, I was headed out of town and arrived at the airport only to realize I had left my wallet at home. Although the images I had stored in Lemon Wallet were not enough to get me past the TSA, the airline used the picture of my driver’s license to rebook me on a later flight. I was able to use the picture of my Visa to re-charge my Starbucks card so that I could grab breakfast and coffee while I waited for my wife to arrive with my wallet. (She only gave me a little bit of grief for it.)

The basic version of Lemon Wallet is free, but you can upgrade to the premium version for $39.99 per year to link directly to your banks’ websites to manage your accounts, export transaction data to Excel or, in the event your actual wallet is ever lost or stolen, have Lemon Wallet automatically cancel and replace all of your credit cards for you.

Lemon Wallet • [www.Lemon.com]

My guess is that you have a pretty good idea what your current credit score is, right? Us too.

However, do you really know how certain elements of your day-to-day life affect your credit score, and what factors drive your score up or down?

CreditKarma entered the marketplace for one solid purpose — accessing all of your finances, all in one place, all for free. Sponsored by advertisers, all of us as consumers get this application for free! The premise is simple — CreditKarma pulls a soft inquiry from the credit bureau every time you log in, runs an algorithm on historical data and makes an educated guesstimate — accurate to about 99% — of your credit score.

The free credit monitoring is a huge bonus because you can actually have CreditKarma push notifications to you anytime someone pulls a hard inquiry on your credit or opens up a new account, or when you hit a certain threshold on your credit utilization percentage. This application really hits a home run, and should be downloaded on all smartphones.

CreditKarma • [www.CreditKarma.com]

There’s a lot of information out there on the Interwebs these days. Some of that info would be great to pass

along to plan sponsors or participants if only there was a way to package it to look a little more polished than simply forwarding a link or copying and pasting the text. Behold, we give you FlipBoard.

After starting out as a social newsreader, FlipBoard evolved to allow users to create their own electronic magazines from content they curate from around the Internet. Create as many magazines as you want on as many different topics as you want. You choose the content. Need some editorial assistance? No problem. FlipBoard’s “Invite Contributors” feature lets you, well, invite others to contribute to your magazine.

Once you’ve created your masterpiece, simply click a button to share via Twitter or Facebook. You can also grab a URL to share via text message or email, or to copy and paste anywhere you want. Like, say, an article on Cheap Technology — at http://flip.it/7h8h3 — created in about five minutes. And oh, yeah … it’s free!

FlipBoard • [www.FlipBoard.com]

There’s cloud storage; there’s social media; there are myriad other online locales where you might

have to sweep away the virtual dust bunnies to find your information lurking. But before you can think about sharing any of it, you have to be able to find and manage it. That’s where JoliDrive comes in. Via their website, you can manage accounts and access data from across the Internet.

Cloud storage? Yep. JoliDrive includes preconfigured links to DropBox, Box.net, Google Drive, SkyDrive and SugarSync, just to name a few. Social media? Check. There are links to Facebook, Google+, YouTube, Instagram and Flickr. Need more? Try SlideShare, Tumblr, Scribd and Instapaper.

Simply click the icon for the service you want to add, enter your login credentials and presto — you have a mission control dashboard that would make NASA jealous. And one of the best parts is that it won’t cost you a penny.

JoliDrive • [www.JoliCloud.com]

Yannis Koumantaros, CPC, QPA, QKA, is a shareholder with Spectrum Pension Consultants, Inc. in Tacoma, Wash. He is a frequent speaker at national conferences, and is the editor of the blog and

newsroom at www.spectrumpension.com.

Adam Pozek, ERPA, QPA, QKA, QPFC, is a partner with DWC ERISA Consultants, LLC in Salem, N.H. He is a frequent author and speaker, and publishes a blog at www.PozekOnPension.com.

Adam and Yannis are always on the lookout for new and creative

mobile applications and other technologies. If you have any tips or

suggestions, please email them at adam.pozek@dwcconsultants.

com and [email protected].

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62 Plan Consultant | fall 2013

Business PRACTiCes

The Dol and plaintiff firms will be evaluating the 2012 audit results for trends and vulnerabilities among RPFs and cSPs for targeting Dol audits and plaintiff litigation activity in 2014.

By DAviD J. WiTz

408(b)(2), Tussey v. ABB and Time The anxiety over distributing 408(b)(2) disclosures by July 1, 2012

now seems like a distant memory. Covered Service Providers (CSPs) of all sorts prepared disclosures that either identified

expenses for services not previously disclosed or they prepared disclosures that referenced documents previously distributed.

What was intended to provide a Responsible Plan Fiduciary (RPF) with “comprehensive information about the services that are provided to employee benefit plans, and the cost of those services”1 may have met the letter of the law, but has it helped an RPF “satisfy their fiduciary obligations under ERISA section 404(a)(1) to act prudently and solely in the interest of the plan’s participants and beneficiaries?”2 At this point,

The clock is Ticking:

1 77 FR 5632 (Feb. 3, 2012). 2 Id.

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an auditor takes, the DOL and plaintiff firms will be evaluating the 2012 audit results for trends and vulnerabilities among RPFs and CSPs for targeting DOL audits and plaintiff litigation activity in 2014. The clock is ticking!

tussey v. aBB settinG neW stAndArds

Last year we saw a landmark trial order issued on March 31, 2012, in Tussey v. ABB. The implications of this decision, the second case subject to a bench trial, affects not only RPFs in the 8th Circuit,5 it also affects the risk mitigation strategies for any plan sponsor nationwide. At this point, to ignore Judge Laughrey’s conclusions is a risky proposition.

There are three distinct conclusions that can be drawn from the decision that impact future fee disclosure for RPFs that utilize revenue sharing to pay all or a portion of their CSP’s fees: 1. While fees on the whole may

be reasonable, a RPF must determine if fees for each component are reasonable.6

2. If revenue sharing is captured to subsidize fees for services rendered, it must be evaluated in dollars even though 408(b)(2) and the Schedule C accept a formula.7

there seems to be more consternation on the part of CSPs than RPFs who are concerned that their disclosures may be found to fall short. For most RPFs, 408(b)(2) is old news with little fanfare, but for the CSP community, concerns remain. Will our disclosures carry the day if they are tested in court?

it’s Audit seAson This CSP anxiety is magnified

in anticipation of the 2013 audit season and the potential obligations imposed by Judge Laughrey’s decision in Tussey v. ABB. Regarding the audit season, there is a debate over the legal specificity imposed on auditors regarding their role and responsibility to report 408(b)(2) violations. According to the AICPA Audit and Account Guide for Employee Benefits Plans:

“ERISA requires that all transactions with parties in interest (excluding any transactions exempted from prohibited transaction rules) be disclosed in the supplementary schedule without regard to their materiality. Only those party in interest transactions that are considered prohibited by ERISA, regardless of materiality, should be included on the Schedule G, Part

III- Nonexempt Transactions.”3 (Emphasis added)Based on the Audit Guide,

materiality is a non-issue when it comes to a prohibited transaction regardless of amount. One significant reason is because a prohibited transaction gives rise to a plan receivable.4 Although the audit community continues their debate with the Department of Labor’s Chief Accountant and among themselves regarding their 408(b)(2) reporting role and responsibility, some auditors have decided to take a deeper dive — at an additional cost to the RPF — to determine if disclosures are complete and fees are reasonable.

However, other auditors are requesting evidence that a documented process exists. This may become the impetus for the RPF to retain an outside consultant to assist with the assessment. And finally, another position held by some auditors is that evidence that disclosures exist with a verbal confirmation by the RPF that they are complete and fees are reasonable is sufficient, even if the auditor knows that the RPF lacks the knowledge, skill and expertise to draw a reliable conclusion.

Regardless of which approach

3 AICPA Audit and Accounting Guide ¶ 11.19, page 224 ( Jan. 1, 2011). 4 AICPA Audit and Accounting Guide ¶ 5.117, page 146 ( Jan. 1, 2011). 5 The decision is currently on appeal to the 8th U.S. Circuit Court of Appeals, which will issue a decision that is binding on all employers in the states covered by the 8th Circuit including Missouri, Arkansas, Nebraska, Iowa, Minnesota, North Dakota and South Dakota. 6 Judge Laughrey emphasized that focusing exclusively on the total cost as a percent to the exclusion of the cost for each service does not provide the fiduciary with the information needed to make a prudent decision, “the expense ratio does not show how much revenue is flowing from the investment company to the recordkeeper.” Doc. 623 (W.D. Mo.) – Trial Order, page 19 (Mar. 31, 2012). 7 In several instances Judge Laughrey references a lack of dollars to assist with the evaluation of reasonable fees. For example, “First, the expense ratio does not show how much revenue is flowing from the investment company to the recordkeeper.” Page 19; Second, because it failed to calculate how many dollars would be or had been generated by revenue sharing for Fidelity Trust, ABB could not analyze how revenue sharing would benefit the Plan… Doc. 623 (W.D. Mo.) – Trial Order, page 30 (Mar.31, 2012).

Fees may be reasonable but if the disclosures are not complete, the

exemption is lost.”

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64 Plan Consultant | fall 2013

8 Judge Laughrey repeats the need to compare fees and since fees were primarily paid from revenue sharing it is necessary to compare the revenue sharing from different funds or even different platforms. For example, “Second, it does not show what the competitive market is for recordkeeping fees for comparable funds.” Doc. 623 (W.D. Mo.) – Trial Order, page 19 (Mar. 31, 2012). 9 For purposes of completing a Schedule A supplement to the annual 5500 form, an RPF is permitted to exclude non-monetary compensation of insubstantial value. Insubstantial means the gift, meal or gratuity is valued at less than $50 and the aggregate value from one source in a calendar year is less than $100. In addition, it is possible to allocate the value of non-monetary compensation on a pro-rata basis among ERISA and non-ERISA assets as well as among all retirement plans providing a basis to exclude such compensation from being reported even though the gross amount paid to exceeds the entire fee paid by the plan sponsor. FAQs about the 2009 Form 5500 Schedule C.,” #34 ( July 2008); However, according to the Department of Labor, the value of a gift is not reportable compensation for purposes of the Schedule C if neither the amount of the gift nor the eligibility to receive the gift is based, in whole or in part, on the recipient’s position with one or more ERISA plans, or the amount or value of services provided to or business conducted with one or more ERISA plans. Supplemental FAQs about the 2009 Form 5500 Schedule C,” #3 (Oct. 2010); Finally, compensation as defined under 408(b)(2) is anything of monetary value (for example, money, gifts, awards, and trips), but does not include non monetary compensation valued at $250 or less, in the aggregate, during the term of the contract or arrangement. 29 C.F.R. § 2550.408b-2(c)(1)(viii)(B) and see 77 FR 5646 (Feb. 3, 2012).

given to moving to a platform that is cooperative in providing a full disclosure of all indirect fees; otherwise, the RPF could become liable for a prohibited transaction initiated by the CSP by the RPF failing to take steps to remedy the situation. The clock is ticking!

este PArAtus (be PrePAred)

Has anyone ever called you “a Boy Scout”? If so, it was probably a compliment. A Boy Scout conjures an image of a selfless individual always prepared to help. The Scout motto is este paratus: Latin for “be prepared.” With regard to 408(b)(2) compliance, it is a motto every RPF would be prudent to embrace, since relief from a prohibited transaction is conditioned on meeting the disclosure requirements.

To be prepared to defend a conclusion that disclosures are complete, an RPF should follow the Department of Labor’s recommendation outlined in the preamble to the final regulation:

The Department does not believe that responsible plan fiduciaries should be entitled to relief provided by the class exemption absent a reasonable belief that disclosures required to be provided to the covered plan are complete. To this

3. If revenue sharing is captured, it must be compared.8

Comparing revenue sharing by fund against different platforms is not an easy task. With the exception of PlanTools, there is no commercially available computer application that permits an RPF to compare the revenue sharing payments by each investment alternative against many different platforms. In one recent analysis conducted by PlanTools on a plan with $137 million in plan assets, the revenue sharing ranged from $250,000 to $610,000 for the same exact funds when comparing 22 different platforms. This difference could be attributable to any of the following reasons:1. Some platforms may be better at

negotiating revenue sharing than others.

2. Contracts may have been negotiated at a time when a particular platform was aggressively pursuing new business.

3. Some of the revenue sharing may have been negotiated as an annual flat dollar payment in order to circumvent reporting the amount as indirect or as non-monetary compensation.9

4. There may be a hold-back of a part of the revenue sharing by the platform.

It is our position that is it impossible to determine if the amount a plan is receiving is reasonable without conducting a comparison between platforms. At the same time, just because one platform pays out more revenue sharing on a particular fund versus another platform, that does not mean the services rendered are any better or that their base fees paid with revenue sharing are any lower than the competition’s.

In spite of the need to provide complete fee transparency, several platform providers continue to vehemently protect this information from becoming more broadly available so that a prudent assessment of reasonableness can be conducted. Granted, much of this information is readily available via Form 5500 filings and their corresponding attachments for plans with 100 or more participants, but that fact does not stop some platform providers from taking steps to suppress the ability of plan sponsors to compare and contrast revenue sharing.

If your platform provider is not willing to make this information publicly available or if they take steps to suppress the public’s broad access to this information, this should raise a red flag that they might be hiding something. Should this be the case, consideration should be

‘Process’ is a key to defending a claim of fee reasonableness, and documentation is the

elixir which proves that process exists.”

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10 77 FR 5648 (Feb 3, 2012).

end, responsible plan fiduciaries should appropriately review the disclosures made by covered service providers. Fiduciaries should be able to, at a minimum, compare the disclosures they receive from a covered service provider to the requirements of the regulation and form a reasonable belief that the required disclosures have been made.10 (Emphasis added)In short, an RPF that is prepared

to defend its claim to the prohibited transaction exemption will have taken the necessary steps to compare the disclosures received to the regulation to form a reasonable belief disclosures are complete. To accomplish this task, a RPF can either: � conduct a comparison of the

disclosures to the regulations without assistance, or

� retain the services of a professional to conduct the analysis on their behalf.Due to the complexity of

conducting this assessment, it is unlikely that many RPFs have the knowledge, skill and expertise to prepare this analysis without professional assistance. However, the RPF can take steps that can reduce the cost of this analysis by taking the following steps in advance of the engagement:1. Assemble all 408(b)(2) disclosures,

including all contracts, service agreements and documents referenced in each 408(b)(2) disclosures.

2. Send a letter to each CSP requesting any missing information and written confirmation that everything the CSP was obligated to provide has been provided in a complete format.

3. Inform the CSP in writing that you have retained a professional to conduct a 408(b)(2) compliance assessment and that they have your permission to release any information to your consultant that

is requested with a copy provided to you directly. Sending a letter to each CSP

requesting information and identifying your consultant is an important step in the assessment process. The purpose of the letter is to help you:1. Establish a documented process

to confirm the disclosures are complete.

2. Request information needed or confirmation of facts from each service provider.

3. Reduce liability for the RPF by providing a documented trail of prudent activity.

4. Obtain a response from the service provider that can be relied upon in good faith.If a CSP fails to respond to the

RPF’s request for information within 90 days, the RPF has 30 days to report the CSP to the DOL. Failure to report a CSP, even if the CSP provides the required information during the 30 days following the 90-day grace period, causes the RPF to become jointly liable for the prohibited transaction. Unfortunately, this requirement leaves a RPF no choice but to report their CSP to the DOL to avoid liability for a prohibited transaction. The clock is ticking!

conclusionIt is important to emphasize

that fees may be reasonable but if the disclosures are not complete, the exemption is lost. Once a determination is made that all disclosures from each CSP are complete, a determination must be made whether fees are reasonable for services rendered. This requires a two-step process: 1. Compare fees, including revenue

sharing.2. Document the reasons you believe

fees are reasonable.To conduct a proper comparison,

the RPF must either engage in a comparative analysis that would result

in a formal request for proposal (RFP) process and/or a fee benchmarking analysis. Of the two options, benchmarking is certainly the most efficient, unbiased, conflict-free and cost-effective approach, assuming the data is from an independent source.

Preparation of the benchmarking report can be conducted by any incumbent service provider as long as the incumbent service provider does not have discretionary authority and control to: � retain itself, � determine its fee, or � declare that its fees are reasonable

without independent confirmation by another unaffiliated fiduciary. Finally, with the benchmarking

report in hand, the RPF must document why it believes fees are reasonable. The documentation does not have to be meticulously detailed, but it must be sufficient to establish that the RPF believes fees are reasonable for services rendered. Keep in mind that reasonableness is not defined as the lowest or even average fees. Instead, the RPF has the right to make a subjective decision based on objective facts.

Remember, “process” is a key to defending a claim of fee reasonableness, and documentation is the elixir which proves that process exists. By taking the appropriate steps to evaluate and monitor fee reasonableness for services rendered according to a documented process on an annual basis, an RPF can rest assured that time is not its enemy!

David J. Witz, AIF, GFS, is the managing director of Fiduciary Risk Assessment LLC (FRA) and PlanTools,

LLC, a consulting and technology firm. His 32 years of industry experience, including as as an expert witness in numerous prominent cases, have fueled the development of PlanTools’ benchmarking, compliance, fiduciary governance, advisor qualification assessment and RFP system, revenue sharing modules and target-date analyzer.

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66 Plan Consultant | fall 2013

eDuCATion

to me was to ask how he wanted to be communicated with. And the answer he gave me was not what I expected. Think about how often that happens in our business: We fire off emails or leave voicemails requesting information, asking detailed questions and delivering complex information without ever asking how our clients want to receive that information.

Takeover plans — which represent a large part of our business these days — are especially vulnerable

Facebook me,” he said, in answer to my question about the best way to reach him. I

stared in astonishment. This was not my college sophomore son, but my 80-year-old father. Seeing my wide eyes, he went on: “Look, you know I’ve never liked talking on the phone. I reserve email for my students, and I keep Facebook open on my iPad so I can chat with my grandchildren. Facebook is the way I like to communicate.”

While I was surprised, his answer made sense. As a law professor, he was used to dealing with Millenials and their electronic communication preferences. I had just never thought to ask him about how he wanted me to communicate with him, and it explained why he was slow to return my calls.

How does my octogenarian Gen Y-loving father figure into the retirement services profession? All I had to do to get him to respond

Plan conversion, no matter how we thin-slice it, is a detailed and complex process. Don’t underestimate the importance of communication in it.

By SARAH SiMONEAUx

conversion communication in a commoditized World

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changes to improve flawed processes and bad customer service.

Knowing how to communicate well with clients and advisors should be a key skill for takeover plan associates. However, these employees are often put in this position because of their attention to detail and their qualified plan knowledge, and they may have limited customer service skills. They may also be struggling to balance conversion with a caseload. As a result, curt and rigid client communication is likely to be the first impression of the company. While soft skills training can help break the communication logjam, consider adding a conversion team member with a limited or no caseload who can build relationships among clients, providers and advisors.

Remember that successful communication strategies have these five ingredients: 1. Find out how people want

to communicate and stick to that method.

2. Use the “rule of two.” 3. Remember that you are building

relationships and not just gathering data.

4. Train everyone on “soft skills.”5. Make sure you are

communicating the values and objectives of the firm. Effective communication fosters

human connections in an increasingly technological and commoditized retirement services world.

Sarah Simoneaux, CPC, is president of Simoneaux Consulting Services in Mandeville, LA, and a

principal of Simoneaux & Stroud Consulting Services. She is a former president of ASPPA and previously served on the Education and Examination Committee as a Technical Education Consultant. She is the author of the textbook, Retirement Plan Consulting for Financial Professionals, which is used for the PFC-1 course in ASPPA’s QPFC credentialing program.

to communication missteps. Service providers ask for list after list of required items and then hand the plan off to another staff member who may or may not be aware of what has happened in the initial conversion process. It’s a recipe for turning a consultative service provider into a commodity. Meaningful communication and teamwork should be at the core of our business, especially when clients first encounter the services staff with their takeover plan.

first contActThe first impression of a service

firm is the key to winning and keeping clients. Malcolm Gladwell, in his book Blink, describes how people use “thin-slicing,” or quick first impressions, to form lasting opinions of others. Gladwell profiles Dr. John Gottman of the University of Washington, who is able to predict with 90% accuracy whether or not a couple will stay married for the long term by watching their conversation about a mundane topic — for less than one minute.

Clients and advisors will be forming lasting impressions of services staff in this first minute of communication. Which question would leave a better impression of the company: “We need your signed plan document, last year’s testing reports, this year’s census and your employees’ enrollment forms” or “Before we get involved in your plan’s details, how would you like us to communicate with you?” Listen to the answer and then stick to that communication method. Don’t assume what the answer might be — remember my Facebook-loving dad’s response to me.

troubleshootinGWhat do you do when you find

the requested way of communicating isn’t working? First, apply the “rule of two.” If you have to send two emails about the same topic, pick up the phone. If you have to call a second

time, ask when would be a convenient day and time to set up a call.

Second, ask a question rather than reciting a list: “What can we do to help you provide this information?” These tips may be intuitive to salespeople and business owners, but conversion specialists and administrative staff are likely not to have been trained in these important communication techniques.

Regardless of how intuitive or well-trained everyone is in communicating, things will go wrong. Ross Shafer, a keynote speaker a few years ago at The ASPPA 401(k) SUMMIT, points out in the book The Customer Shouts Back that 88% of customers would stay with the firm after being badly treated if they felt that their complaints were heard and problems were fixed.

foster communicAtion skills

Malpractice insurance companies will give premium discounts to doctors who go through communication training. Why? Their research shows the highest probability that a physician will be sued is not for making mistakes, but instead when they have poor relationships with patients and staff. A services firm should foster an environment where employees can face reality and take responsibility without placing blame on others, as well as having the freedom to suggest

Meaningful communication and teamwork should be at the core of our business.”

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68 Plan Consultant | fall 2013

eThiCs

Any meaningful, positive change in the ethical conduct of our industry can only come about if you are willing to accept a greater leadership and stewardship role.

By DONALD B. TRONE

For a number of years, magazine editors have approached me with requests to write a column on ethics. Until now, I have politely refused because I

have never considered the subject to be foundational to my research on fiduciary responsibility, nor have I ever wanted to be labeled as an ethereal ethicist — an “ethics cowboy” who is all hat and no cattle.

The events of the past six years have caused me to spend more and more time augmenting my research on fiduciary responsibility with stories on leadership, stewardship, character and integrity. A cornerstone to all these subjects is ethics — or at least it should be. Unfortunately, I am discovering more instances of unethical behavior and finding that these ethical breaches are being masked by legal devices or hidden by obtuse regulations. A person’s word; a firm handshake; an agreement in principle; even contracts and agreements no longer seem to matter — what matters is what legal counsel can help you get away with.

What we are witnessing is the decay of ethical discernment.

When I first entered the industry 26 years ago, experienced professionals all shared the same advice — your reputation is everything; don’t do anything to soil it. Sadly, this no longer is the case. In some circles a reputation for unethical behavior, or even a willingness to be unethical, is considered a plus. Reputation is no longer sacred; today it is just another expendable asset — as expendable as long-term employees and loyal customers. Consider the following: � When SAC Capital Advisors was hit with charges of

insider trading, it actually witnessed net inflows of $1.6 billion.

The importance of inspiration

The Decay of ethical Discernment:

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� In 2012, a survey of 500 professionals by the law firm of Labaton Sucharow revealed that 30% of the respondents felt that their compensation or bonus plan created pressure to compromise ethical standards.

� In 2012, Ernst & Young conducted a survey of 400 CFOs; 47% responded that they could justify unethical practices if it could be demonstrated that it would help their organization survive the current economic downturn. The same can be said about the

typical code of ethics — most are now codes of conduct. A code of ethics is based on principles; a code of conduct is based on rules. When a code begins with the words, “Thou shall not…”, then it’s a code of conduct, not a code of ethics. The advantage of a code of conduct is that you don’t have to think — you don’t have to judge wisely and objectively — you just have to follow the rules. And when the rules become a problem, you often can find ways to bend them with a legal device, such as using a dense disclaimer filled with legalese to cover up a conflict of interest.

the Point of insPirAtionWhat’s the difference between

motivation and inspiration? Are people in the financial services industry motivated or inspired? Often the words are used interchangeably, but that’s a mistake, particularly as it relates to ethics.

Motivation is something we do to other people. When we motivate people, we are attempting to control their behavior; often to serve our own purposes, not theirs. Motivation always comes with a price: When it is about “me” at the expense of “you,” the result is often resentment, lack of trust and reprisal. — Lance Secretan, author of The Spark, The Flame and The TorchOur industry is motivated by fear,

greed and ego — we reward the sale of a product or the gathering of assets, but we do not reward stewardship. We send people off to leadership conferences

because of their revenue production, not because they are genuine leaders.

A restoration of ethical discernment can only come about through inspiration — which is the opposite of motivation. The fallacy of the Dodd-Frank Act, and similar legislation and regulations which are meant to restore the public’s trust, is that more rules will never translate to better ethical behavior. Never in the history of civilization has imposing more rules improved the character of citizens. If ethics is the cornerstone to leadership, stewardship, character and integrity, then inspiration is the keystone.

For example, how inspiring is 408(b)(2)? Everyone was expecting that 408(b)(2) would be a game changer; that we would see an asset flow tsunami as plan sponsors considered the impact that fees and expenses had on their plan. Instead, there has been barely a ripple. The regulations, which were intended to bring greater transparency to the industry and, in turn, provide a wider view of potential conflicts of interest, have not had a meaningful, positive impact on the industry. The reason: There’s nothing inspiring about 408(b)(2).

Consider also the PBS Frontline program, “The Retirement Gamble.” Much has been written about the program, so I’m only going to add my thread as it relates to this column. What the producers missed is that this is a crisis in leadership and stewardship. Excessive fees and the lack of uniform professional standards are the symptoms; the disease is the lack of inspiration.

Start with participants — they have been poor stewards of their retirement assets. Why? Because they haven’t been inspired to save more. Participants cannot be expected to rise above the level of enthusiasm or engagement of the plan sponsor. Leadership flows from the top down. If an organization does not inspire greatness, it will not have a great plan. If participants perceive management as being uncaring, they are not going to have a great deal of faith in the retirement plan. If leaders

don’t care, you can bet their followers won’t either.

Speaking at a Retirement Advisor University session at UCLA in early May, I made the comment that advisors should suggest to plan sponsors that rank and file employees should be permitted to serve on the investment committee. One of the advisors immediately shot up her hand and said, “But most plan sponsors don’t trust their employees to provide meaningful feedback on the plan.” My point exactly — if a sponsor doesn’t trust or respect their employees, there isn’t a snowball’s chance of finding a point of inspiration.

Legal devices and obtuse regulations have become the prosthesis for what we once considered ethical discernment. Ethics has been displaced with a check-box mentality — if you can find reason to check the box, it must be okay.

Any hope of restoring ethical discernment must come from inspiration. Any hope of improving participant outcomes must come from inspiration. And any hope of improving a plan sponsor’s procedural prudence must come from inspiration.

Where do we find such points of inspiration? Where do we start? It has to start with you — in the eyes of your clients you have to be the point of inspiration for moral, ethical and prudent decision-making. Any meaningful, positive change in the ethical conduct of our industry can only come about if you are willing to accept a greater leadership and stewardship role.

Donald B. Trone, GFS, is the president of the Leadership Center for Investment Stewards, and the CEO/chief

ethos officer of 3ethos. He is the former director of the Institute for Leadership at the U.S. Coast Guard Academy, founder and former president of the Foundation for Fiduciary Studies, and principal founder and former CEO of fi360.

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70 Plan Consultant | fall 2013

WelCome neW and reCently Credentialed memBersMSPADonald E. Fuerst, MSPAGary A. Kasper, MSPA, QKA

CPCVincent Bocchinfuso, CPC, QPA, QKAPatricia C. Jones, CPC, QPA, QKAJoshua E. Kaplan, CPC, QPA, QKATom A. Krusic, CPC, QPA, QKAKimberly K. Lekki, CPC, QPA, QKAEllen E. Moll, CPC, QPA, QKACourtney N. Montijo, CPC, QPA, QKAJared K. Scott, CPC, QPAReid T. Yamamoto, CPC, QPA, QKAJaney Y. Yim, CPC, QPA, QKAGalina A. Young, CPC, QPA, QKASteven R. Zajac, CPC

QPAKatrina E. Alarcon, QPANathan B. Alexander, QPA, QKAJacqueline S. Allison, QPARoman V. Androsov, MSPA, QPABradley S. Babcock, QPA, QKATroy W. Bender, QPA, QKAKate A. Blake, QPA, QKAKarla G. Bomgardner, QPA, QKAStephanie L. Broncatello, QPA, QKADanielle S. Brown, QPA, QKAKim W. Burdette, QPADonald A. Calcagni, QPAYoshua V. Casey, QPA, QKAElizabeth A. Cecconi, QPA, QKAMadalyn D. Clark, QPA, QKA, TGPCRita F. Croft, QPA, QKABruce Crow, QPA, QKAValeri R. Dedich, QPA, QKACharlene A. DeMartini, QPA, QKA, TGPCBriana L. Duckworth, QPA, QKAKurt P. Fraczkowski, QPAChris D. Griess, QPA, QKA

Michael Allen Griffin, QPA, QKAEric A. Grzejka, QPA, QKACaroline S. Gwyn, QPA, QKASusan E. Hargrove, QPA, QKAPeter Reed Harrington, QPA, QKALynn M. Hasegawa, QPA, QKACasey A. Herron, QPA, QKA, QPFCRebecca L. Hodges, QPA, QKASusan M. Huttenbrauck, QPA, QKAPatricia C. Jones, CPC, QPA, QKAMandi R. Keller, QPA, QKAMiriam B. Killiany, QPA, QKAJulie Kiwada, QPASteven P. Kunze, QPA, QKAJanet H. Le, QPADiana M. Leeke, QPAMichael G. Marsh, QPA, QKALisa M. Merchan, QPA, QKAJosef A. Mirante, QPAEnid M. O’Donnell, QPA, QKAPaula C. Peeler, QPAJesse W. Piercy, QPA, QKAFrances G. Ramos, QPA, QKAJames R. Reid, QPADouglas D. Rino, QPA, QKAAshley N. Ritter, QPA, QKAJoAnn M. Ross, QPA, QKAHenrik C. Sandberg, QPAErik W. Schait, QPA, QKAJared K. Scott, CPC, QPAAltay R. Seymen, QPA, QKADebra S. Sharp, QPAAmy L. Sklar, QPA, QKADaniel J. Small, QPAJavier A. Smith, QPA, QKAKimberly H. Soppel, QPA, QKAMatthew W. Stewart, QPA, QKAJeffrey D. Stringer, QPAKathy R. Stuffmann, QPALeona Le Nga Tran, QPAAmy L. VanDerhei, QPA, QKAJordan L. Welte, QPA, QKASusan K. Westby, QPA, QKALeakhena C. Wilber, QPA, QKA

Jake J. Williquette, QPA, QKABlake R. Willis, QPAMelissa L. Yoder, QPA, QKA

QKAJennifer L. Abbott, QKAJeremy K. Akerstrom, QKAAlbina A. Akhmedova, QKANathan B. Alexander, QPA, QKAChase D. Anderson, QKAEileen A. Baldwin-Shaw, QKAErin E. Beattie, QKATroy W. Bender, QPA, QKAHeidi B. Benton, QKAAja L. Betts, QKAHarry C. Betz, QKAMisty D. Blair, QKAErica Bonet, QKARachel Bosworth, QKAWilliam K. Braunlich, QKAMichael J. Broekelmann, QKATeresa L. Brown, QKASebastian T. Cash, QKASuzanne Chouljian, QKAKristin E. Conkle, QKASarah E. Curry, QKALindsay M. Dawson, QKAChristine M. DeCaria, QKALisa D. DiFerdinando, QKAMegan K. Dudley, QKANicholas C. Fankhauser, QKAKristopher D. Farrin, QKAAnnette R. Fayad, QKAJenna N. Ferranti, QKAHeather M. FitzGerald, QKAStefanie A. Folck, QKABetsy A. Foss, QKABarbara J. Goguen, QKABrian K. Gregov, QKAHarry D. Haverkos, QKAJean A. Hazlett, QKAPer Gunnar Heden, QKA, TGPCChristopher J. Heisterkamp, QKASharon R. Helman, QKA

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71www.asppa.org/pc

Beth K. Herman, QKACasey A. Herron, QPA, QKA, QPFCDonta L. Houston, QKAAmanda C. Johnston, QKAPatricia C. Jones, CPC, QPA, QKATraci L. Judziewicz, QKAGary A. Kasper, MSPA, QKADiane D. King, QKAKenneth W. Kramer, QKATammie K. Kuhn, QKACathleen Lewis, QKAAhila D. Maheswaran, QKAJames E. McDowell, QKADaniel McNamara, Esq., QKAKelli F. McNamara, QKAAshley C. Meagher, QKAJuliette C. Meunier, QKAMeredith B. Moore, QKAJennifer A. Nau, QKARichard Newton, QKASara D. Nipple, QKATimothy W. Pariseau, QKABeth A. Parkinson, QKAHolly A. Perez, QKAJesse W. Piercy, QPA, QKADenise M. Pletz-Bersch, QKALisa Huo Quan, QPA, QKAHeather R. Ray, QKASyed Raza, QKAAngela S. Ritter, QKAChristiane L. Roloff, QKASuzanne M. Romsa, QKAErik W. Schait, QPA, QKAMichael Schleelein, QKADawn C. Schoch, QKARobert J. Seidel, III, QKA, QPFCMichelle R. Shanahan, QKATina M. Sharp, QKADanielle C. Sieverling, QKARebecca M. Smith, QKAAnita J. Strainick, QKAMichael D. Stuebe, QKA, QPFCAngela C. Swanson, QKA

Jarrod K. Timmer, QKAVikki T. Tipton, QKAJonathan A. Treadway, QKABrandy B. Turner, QKAAmy L. VanDerhei, QPA, QKAHeidi J. Wade, QKAGerard Waggett, QKALaura O. Witte, QKAStephanie L. Wright, QKAAlison B. Yakubik, QKA

QPFCNicholas E. Austin, QKA, QPFCColleen F. Baltis, QKA, QPFC, TGPCTravis G. Barnes, QKA, QPFC, TGPCSara K. Burnette, QPFCDaniel J. Chavayda, QPFCDennis G. Dailey, Jr., QPFCMichael B. Hahn, QPFCMark L. Hedquist, QPFCNeal R. Hoppe, QPFCDouglas M. Inglee, QPFCMichael S. Johnson, QPFCLawrence M. Kavanaugh, Jr., QPFCDiane W. Kolvek, QPFCRobert A. Mays, QPFCScott McMurdie, QPFCPaul J. Merz, QPFCKenneth S. Mongeon, QPFCBrian C. Perkins, QPFCJoseph M. Reese, QPFCLouis M. Ressler, QPFCWalter J. Selby, IV, QPFCKent T. Sirrianna, QPFCSpiro J. Theodorakakos, QKA, QPFCJeffrey D. Walsh, QPFCMarc F. Zarro, QPFC

TGPCTravis G. Barnes, QKA, QPFC, TGPCGennaro M. Cicalese, QPA, QKA, TGPCCharlene A. DeMartini, QPA, QKA, TGPCPamela S. Ernsting, QPA, QKA, TGPCSteven B. Grist, TGPCSheila M. Heid, TGPCVicki M. Keffer, TGPCWilliam C. Leitner, TGPCAndrea M. Mausser, TGPCJill A. Snyder, TGPCBruce D. Walker, QPA, QKA, TGPC

APMRoxanne Marvasti, APMDeborah P. Snapp, APMRonald J. Triche, Esq., APM

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72 Plan Consultant | fall 2013

A busy time for ASPPA’s Government Affairs staff, from capitol Hill to state capitals.

the simplification of the interim amendment adoption process. In addition, ASPPA’s proposal regarding multiple employer plans (MEPs), which can be found under Comment Letters section of the Government Affairs tab, was also included in the SAFE Act.

Of course, we would not be able to get the issues that are important to our members included in proposed legislation like this if ASPPA didn’t have a reputation on the Hill for being a well-respected and trusted partner. Thanks to the leadership of

Means Committee’s Pensions and Retirement Tax Reform Working Group. The proposals can be found under the Government Affairs tab at www.asppa.org. As you may recall, Sen. Orrin Hatch (R-UT) introduced the Secure Annuities for Employee Retirement Act of 2013 (the SAFE Act) on July 9, 2013. We were very pleased that most of our proposals were included in the SAFE Act, including the “starter 401(k)” wage deferral-only safe harbor plan; the ability to adopt a new plan up to the due date of tax filings, and

As I was writing this update on a cross-country flight to the Western Benefits Conference

in San Diego (a five-hour flight that was delayed five hours, by the way), I realized that I have been working at ASPPA for three months. The Government Affairs department has accomplished so much in those three months that it seems more like six months … but in a good way!

In April, we submitted comments, along with ASPPA’s Proposals to Enhance the Private Retirement Plan System, to the House Ways and

Government Affairs updateBy RonAlD J. TRicHe

Photo by Thinkstock

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Charting

for a Healthy Retirement

Coursethe

The 2013 Western Benefits Conference

Scott C. Albert, QPAAvaneesh K. BhagatRichard A. Block, MSPAJason K. BortzSherrie M. BoutwellJulie H. Burbank, Esq., APMTimothy S. Callender, Esq.Melanie K. CurticeMark A. Davis, QPFCLawrence Deutsch, MSPAMichael DevlinKevin J. Donovan, MSPA, CPAJoseph C. FaucherIlene H. Ferenczy, Esq., CPC, APAAndrew W. Ferguson, FSA, EABrian H. Graff, Esq., APM

Craig P. Hoffman, Esq., APMRobert HolcombR. Bradford Huss, Esq.Michael IachiniRobert M. Kaplan, CPC, QPAThomas R. KmakBarbara Lewis, MBAW. Waldan LloydCharles D. LockwoodMichael J. Malone, CPC, AIFAMichelle McCarthyLori McKenziePamela C. Means, EA, MSPA,

MAAA, QPA, QKABrian A. Montanez, CPC, QPA,

QKA, QPFC, TGPC

Helen H. MorrisonMarc NathanGlenn O’BrienRenee W. O’RourkeMarc S. PesterAdam C. Pozek, ERPA, QPA, QPFCMichael B. Preston, MSPA,

MAAA, EAMary Ann Rocco, EA, MSPARick Rodgers, AIFAKenneth W. Ruthenberg, Jr., JD,

LL.M. (Tax)Marc S. SchechterHenry A. Smith, IIISheldon H. Smith, Esq., APMVirginia Krieger Sutton, QKA

CariAnn J. Todd, CPARobert J. Toth, Jr., Esq.Ronald J. Triche, Esq., APMMichael VogelChristopher J. WalkerS. Derrin Watson, Esq., APMJanice M. Wegesin, CPC, QPA

PlatinumCharles SchwabFerenczy + Paul LLPLPL Financial

GoldOgletree, Deakins, Nash, Smoak & Stewart PCTrucker Huss, APCVanguard

SilverADP Retirement ServicesAmeritas Life Insurance CorporationDrinker, Biddle & Reath LLPQDRO Counsel Inc., A Professional Law

Corporation Stoel Rives LLP

ExhibitorASCASPPABCG Terminal Funding Co.BPASCastle Rock Innovations, LLCCastlight HealthChang Ruthenberg + LongCircle Technology, Inc.Creative Bene� t StrategiesDATAIR Employee Bene� t Systems, Inc.Guardian Life Insurance Company of AmericaHCC Surety GroupING Retirement ServicesJensen Investment ManagementJP MorganMassMutual

Matrix Financial Solutions (A Broadridge Company)

Millennium Trust Company Newkirk Products Inc. OneAmerica PenChecks, Inc. Pension Live, LLC Prudential SunGard T. Rowe Price Wells Fargo Institutional Retirement & Trust Wolters Kluwer Law & Business WP&BC

2013 WBC Sponsors & Exhibitors

2013 WBC Speakers

Thank you!

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74 Plan Consultant | fall 2013

participating in non-ERISA 403(b) plans receive the same disclosures regarding fees as those provided to participants in ERISA-covered plans. To accomplish this, we have submitted a request to the SEC for a “No-Action Letter” that would permit this information to be provided to non-ERISA 403(b) plan participants without having to file the disclosures with the SEC or FINRA.

In addition, we’ve added a new member to the Government Affairs department, Ray Harmon, Government Affairs Counsel, who will work on state issues.

I’m sure the next three months will bring just as much activity and excitement as the last three months. I truly enjoy working with this fantastic team of professionals. I know the work we do at ASPPA and our sister organizations benefits not only our members, but every American who wants a secure retirement.

Ronald J. Triche, Esq., APM, is ASPPA’s Assistant General Counsel and Director of Government Affairs.

Brian Graff, Executive Director/CEO, Judy Miller, Director of Retirement Policy and Craig Hoffman, Director of Regulatory Affairs, we have been able to forge positive and long-lasting relationships with key members of Congress, as well as the various governmental agencies that regulate the retirement plan industry.

You will get a chance to contribute to ASPPA’s influence on the Hill if you attend this year’s ASPPA Annual Conference in Washington, D.C. We are hosting the biennial March on Capitol Hill on Tuesday, Oct. 29, 2013 (go to http://asppaannual.org/hill-visits/ for more information). Members who sign up to participate in the March on Capitol Hill will be able to meet with members of Congress and their staff and discuss issues that are of utmost importance to the retirement plan industry. Make sure to join us for this memorable event and see the results of all the hard work Jim Dornan, Political Director, and Alisa Wolking, Grassroots Assistant — as well as former Government Affairs

Coordinator Tamika Scott — have put into it this year!

If you want to keep up with what is happening in Congress, then you should read the “Congressional Update” that Andrew Remo, Congressional Affairs Manager, sends out on a weekly basis. To join the list of members who receive this important and timely update, you can join the General Subcommittee of ASPPA’s Government Affairs Committee by contacting Alisa Wolking at [email protected]. You’ll also be invited to participate in quarterly calls for updates on GAC activity.

While most of our efforts in the Government Affairs department are focused on federal-level issues, we also deal with state-level issues — primarily related to public school 403(b) plans, but including a handful of proposals for state-run plans for private employers. The National Tax Sheltered Accounts Association (NTSAA), ASPPA’s sister organization, has been working hard to ensure that public school employees

Notice of Public RePRimaNd

In accordance with the Disciplinary Procedures of the American Society of Pension Professional & Actuaries (ASPPA), on April 10, 2013 the Discipline Panel considered the findings from the Actuarial Board for Counseling and Discipline (ABCD), and agreed with the recommendation to publically reprimand James W. Jacobson for materially failing to comply with Precepts 1 and 3 of the Code of Professional Conduct for Actuaries.

Mr. Jacobson materially violated Precept 1 by signing actuarial valuation reports for two retirement systems in 2003 despite knowing that the reports contained coding errors resulting in material understatement of the liabilities. Mr. Jacobson materially violated Precept 3 by failing to disclose, in accordance with Actuarial Standard of Practice No. 23, his reliance on data supplied by others, even thought that data reflected material actuarial analysis performed by a third party.

Based on the foregoing, Mr. Jacobson is hereby publically reprimanded.

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75www.asppa.org/pc

It was a big step getting your QKA. What’s next?

QPAFor Administrators who work with the technical and administrative

functions of quali� ed plans.

For more information:asppa.org/qpa

QPFCFor new business team members

or marketing/sales staff who assist with new plan sales, conversions

and takeovers.

For more information:asppa.org/qpfc

You’ve Still Got Growing To Do

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76 Plan Consultant | fall 2013

Photo by James Tkatch

with clients. He is actively involved in the profession and has been asked to speak on a variety of topics, including the professional responsibilities of the actuary. He has published numerous articles in professional publications, and has been selected by the U.S. Department of Labor to serve as an “Independent Fiduciary” for many orphan/abandoned plans.

Lipkin was elected to ASPPA’s Board of Directors in 2005, and served as a co-chair of ASPPA’s Government Affairs Committee from 2006 until 2010.

Troy L. Cornett is the director of human resources and the Board of Directors liaison for ASPPA. He is also the associate editor of Plan Consultant and 403(b) Advisor. Troy has been an ASPPA employee since July 2000.

In August, ASPPA’s Board of Directors elected David M. Lipkin, MSPA, as ASPPA’s

president for the 2013-2014 term. His term begins at the close of the annual business meeting at the 2013 ASPPA Annual Conference in October.

After receiving a B.A. in Mathematics from Hamilton College, Lipkin began his career in 1977 with Aetna Life and Casualty. In 1983, he moved to William M. Mercer, in Pittsburgh, where he served on the actuarial committee and acted as senior actuary and consultant to a variety of clients, including a number of Fortune 500 companies. He founded Metro Benefits, Inc. in 1986. Metro’s commitment to provide clear, comprehensive and worry-free service has made it one of the region’s fastest growing companies in the field.

Lipkin continues to spend a significant amount of time working

other ASPPA officers for 2013–2014 are:

President-electKyla M. Keck, cPc, QPA, QKA

senior vice PresidentJoseph A. nichols, MSPA

vice PresidentSusan H. Perry, cPc, QPA, QKA

vice PresidentAdam c. Pozek, QPA, QKA, QPFc

vice PresidentMarcy l. Supovitz, cPc, QPA, QKA

Treasurer/secretaryRichard A. Hochman, APM

immediate Past PresidentBarry Max levy, QKA

David M. lipkin elected 2013-2014 ASPPA PresidentBy TRoy l. coRneTT

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Speak up!

Join ASPPA’s Government Affairs Committee (GAC) Today!Let your voice have an impact on retirement policy.

www.asppa.org/gac

GAC WANTSYOU!

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78 Plan Consultant | fall 2013

For the first time in over a decade, ASPPA has revised its code in order to keep its members current with accepted practices in the employee benefits field and evolving societal expectations concerning professional ethics.By lAuRen M. BlooM

will take to satisfy this section of the Code will differ depending on the situation. It will normally be important, though, for the ASPPA member to consider not only the technical aspects of an engagement, but how to communicate findings, conclusions and recommendations in order to comply with the revised Code.

Employee benefit plans are highly regulated, and employee benefit professionals are often required to satisfy various codes of conduct that are sanctioned by governmental entities (for example, codes of professional conduct for lawyers that are approved by state bar associations). There was some concern that ASPPA members might not understand how applicable laws, including regulations and IRS pronouncements like Circular 230 or governmentally sanctioned codes of conduct, interact with the revised Code. Ordinarily, ASPPA members should be able to satisfy the Code while meeting the requirements of employee benefit laws and governmentally sanctioned codes. However, in case of a conflict, the section on Compliance has been revised to make clear that law and governmentally sanctioned codes take precedence over the ASPPA Code.

Conflicts can arise when clients change professional advisors or fail to pay their advisors’ fees. The section on “Courtesy and Cooperation” was significantly revised to clarify ASPPA members’ obligations in these

Effective July 1, 2013, ASPPA’s new Code of Professional Conduct went into effect. This

is the first time in over a decade that ASPPA has revised its Code in order to keep its members current with accepted practices in the employee benefits field and evolving societal expectations concerning professional ethics. The newly revised Code is the product of many hours of thoughtful work by a special, multi-disciplinary task force of ASPPA members as well as the careful consideration of the ASPPA Board of Directors. This article explains how the new Code differs from its predecessor, clarifies the application of the new Code to ACOPA members, and describes how the new Code will affect ASPPA members in their daily practice.

summArizinG the chAnGesThe new ASPPA Code is formatted

differently from its predecessor in three respects: 1. To eliminate any perception that

some sections of the Code might be more important than others, several sections of the Code have been reordered alphabetically (with the exception of a section titled “Additional Obligations” that is described in greater detail below).

2. A list of definitions was added to clarify the meaning of especially important terms used in the Code.

3. The Code was carefully edited to

make it clearer and more consistent.When it comes to understanding

whether members are required or simply encouraged to comply with a code of conduct, clarity is always important. Lest there be any question about the mandatory nature of the ASPPA Code, a new preamble was added. The preamble explains that the Code is intended to identify the professional and ethical standards that ASPPA members must meet to fulfill their responsibilities to ASPPA, their colleagues and the public. In short, compliance with the Code is not optional; as the preamble states, “Members are required to adhere to the high standards of conduct, practice, and qualification set forth in this Code.”

Employee benefit professionals sometimes fail to recognize when their communications contain challenging concepts or technical language that others may find difficult to fully comprehend. The revised Code contains a new section on communications to clarify members’ responsibilities. Members are not required to communicate perfectly, nor are they required to ensure that the people who receive their communications understand them. However, the revised Code does require members to “take appropriate steps” to ensure that their professional communications “are clear and appropriate to the circumstances.” The exact nature of the steps members

ASPPA’s new code of Professional conduct

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79www.asppa.org/pc

challenging situations. In particular, this section now requires all ASPPA members to return any and all of a client’s records that are necessary for the client to comply with federal tax law, and the existence of a fee dispute with the client usually does not relieve a member of this obligation except to the extent permitted by state law (typically laws governing business contracts). This obligation applies regardless of whether the member would be subject to Circular 230 or not, effectively imposing this Circular 230 obligation on ASPPA members to whom it might not otherwise apply.

Some employee benefits professionals have been criticized in the recent past because their fee and compensation disclosures were deemed to be less than adequate. In order to address this matter, the section that requires disclosure of sources of compensation received in relation to an assignment has been strengthened.

Finally, the section titled “Additional Obligations” (formerly “Collateral Obligations”) has been revised in two respects. First, this section formerly required ASPPA’s actuary members to abide by the actuarial Code but was silent as to the obligations of ASPPA’s non-actuary members. The revised Code makes clear that all of ASPPA’s members have a comparable obligation to abide by the Codes of Professional Conduct or other similar rules of the various professional bodies to which they belong. Second, this section has been revised to clarify ASPPA members’ duty to respond to inquiries from ASPPA regarding a member’s possible violation of the ASPPA Code in order to ensure that

ASPPA’s discipline process will operate effectively.

WhAt the revised code meAns for ActuAries

ACOPA members are required to follow the actuarial Code of Professional Conduct, and may be concerned that the revisions to the ASPPA Code will impose additional or conflicting obligations upon them. In most instances, an actuary who satisfies the actuarial Code will also satisfy the revised ASPPA Code. The two Codes do have one apparent difference. Precept 10 of the actuarial Code allows the actuary to refuse to consult or cooperate with a prospective new or additional actuary based on a compensation dispute with the client if the actuary and the client have a pre-existing agreement to that effect. However, the revised ASPPA Code incorporates Circular 230’s requirement to return any and all of a client’s records that are necessary for the client to comply with federal tax law regardless of the existence of a fee dispute, except to the extent permitted by state law. It might appear to the actuary that the revised ASPPA Code limits his or her ability to withhold documents in case of a fee dispute when the actuarial Code would permit it.

In fact, though, the difference between the two Codes is more apparent than real. The actuarial Code, like the revised ASPPA Code, states that it is superseded by applicable law, which would include Circular 230. Actuaries are among the employee benefit professionals to whom Circular 230 applies, so their ability to withhold documents from their non-paying

clients is already limited, not by the actuarial Code, but by Circular 230 itself. Actuaries can still withhold documents that do not fall under Circular 230 for non-payment if they have a pre-existing agreement to that effect, and the revised ASPPA Code would not prohibit them from doing so.

WhAt the revised code meAns for you

The changes to the ASPPA Code reflect careful consideration by the task force and ASPPA’s Board of Directors. They are intended to help ASPPA members act professionally and in a way that is consistent with societal values and expectations. ASPPA members are wise to carefully review the changes and consider whether and how they might adjust their practices. Making compliance with the revised Code an integral part of daily practice will help all ASPPA members contribute to the credibility of ASPPA’s Code as well as the public trust and respect that ASPPA and its members deserve.

Lauren M. Bloom, J.D., LL.M., is the founder and CEO of Elegant Solutions Consulting, a consulting firm dedicated to helping professionals, business and association management executives build trust with their clients, customers and members by “walking the ethics talk” in their daily practices. She spent more than 14 years as General Counsel of the American Academy of Actuaries, and played a pivotal role in the development and enforcement of the U.S. actuarial profession’s code of conduct and standards of qualification and practice.

The revised Code contains a new section on communications to

clarify members’ responsibilities.”

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The ERISA Outline Bookby Sal L. Tripodi, J.D., LL.M.

PRINTThe ERISA Outline Book is both

a reference book and a study

guide on qualified plans,

presented in outline format and

fully indexed. It’s also the

recommended study resource for

the IRS Enrolled Retirement Plan

Agent (ERPA) program.

12-MONTH ONLINE SUBSCRIPTIONThe ERISA Outline Book-Online

Edition is a fully searchable and

cross-referenced Web site,

containing the same information

included in the print edition. The

Online Edition is available as a single

subscription or multiple-use license.

2013 HIGHLIGHTS

• Final service provider fee disclosure

• American Taxpayer Relief Act

• Revised EPCRS Procedure

regulations

• MAP-21 statutory changes and IRS and

PBGC guidance

• Updates on multiple employer plan rules

and latest DOL opinions

• Longevity initiatives from the IRS

• Important changes to the determination

letter process

• Form 8955-SSA guidance

• New IRS practice rules in Circular 230

• Latest guidance for 403(b) plans

• Guidance for governmental plans

• Latest court cases and

IRS/DOL/PBGC guidanceEOBE R I S A O U T L I N E B O O K

Visit www.asppa.org/eob for more details or call ASPPA Customer Support at 1.800.308.6714.

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Page 83: Readiness by Design - American Society of Pension ... · Readiness by Design How TPAs Help Shape the Future of Retirement in America By DeBorah ruBin 28COVER STORY FAll 2013 Cover

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The trusted experts at Wolters Kluwer Law & Business have taken an innovative approach with ftwilliam.com to the restatement process. Not only have we improved the user interface of our Plan Document Software for easier navigation, but we’ve also built a tool within the software that allows you to automatically batch restate your client’s plans in seconds! Plus, if you add the ftwPortal Pro module you can seamlessly batch deliver restatements and supporting documents to the web-portal, collect e-signatures, and use our workflow grids to track e-signatures and delivery status with just a few clicks.

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