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Monday, August 06, 2007Proposed Disclosure Regs - Who's Defining the Rules?
New regulations around service provider disclosure of conflicting relationships and sources for revenue have been put on hold as a new bill was introduced, the Retirement Security Act of 2007. My main concern is when these bills are proposed, Congress fails to realize the level of confusion their good intentions creates for the participant, as none of these disclosures have been effectively written for the average American. It’s simply industry legal jargon written in long disclosure documents, that the majority of recipients won’t even read. According the ASPPA, retirement plans have over 100 participant notification requirements, all of which have been ineffectively communicated, now we will have one more.
What continues to be unaddressed is what the important information for participants is and how can we communicate this information in a simple manner that everyone will understand quickly. Everyone is caught up in making things more complicated, not making them easier. We have investment reporting standards, prospectuses, disclosures, and notifications required by regulatory agencies that are handed out daily in this business, most are either thrown in the trash or in a filing cabinet and never reviewed. This is because all of this stuff says nothing to the participant but requires a ton of time to read. The bottom line, Congress doesn’t understand the way these things really work in the field and have not taken the time to develop that understanding; they just continue to release more legislation with hopes that it will have a positive impact on participants.
The other concerning issue with this Act is that Congress gets their information from lobbyists, which are service providers and associations lobbying on behalf of service providers. Do you really believe that the service providers are going to properly advise Congress on legislation that could potentially expose the industry’s darkest secrets? This industry is one that commonly practices in an environment full of conflicting relationships and financial “arrangements”, which have been the root of most of the issues faced by both plan sponsors and employees today.
It is absolutely necessary that service providers fully disclose all conflicts of interest and sources for revenue to reveal the significance of the conflicts and true plan costs to the participants. However, more importantly, huge strides must be made to prevent critical conflicting situations from occurring at all because service providers have a way of “spinning” negative issues and distracting plan sponsors with creative marketing and sales strategies.
For example, financial advisors working for large broker dealers commonly represent themselves as retirement plan specialists and consultants who will perform vendor searches for plan sponsors. However, these “searches” are not independent at all – they are limited to the vendors that have partnered with their broker dealer to market their products. These vendors pay huge undisclosed fees to the broker dealer just to be in their system and then when a plan is sold, they pay different amounts according to which investments were placed in the plan. These advisors then advise the client as to which vendor to choose (each vendor pays a different revenue stream to the advisor, which plays heavily into their recommendation), and the vendor advises the advisor as to which investments must be chosen for the proposed pricing to hold, the advisor then presents the suggested investment line up to the plan sponsor and then offers to provide ongoing “independent” monitoring of those investments which is oftentimes really provided by the vendor behind the scenes for the advisor to review periodically with the client. All of this is done without assuming any liability for the suitability of that advice or by stepping in as a Fiduciary as stated in ERISA once the advice line is crossed, because the client signed an agreement letting them off the hook as a Fiduciary. This is possible because the financial services industry has figured out that by effectively wording their disclosures and packaging their solutions to appear tangible while they really are just “illustrations” that may or may not be accurate (no one is liable for accuracy either), they can get off the hook for being accountable for their advice.
This example is one that is commonly practiced every day in this business; however, plan sponsors have failed to understand the impact of these situations. New regulations need to be passed that better govern the service provider side of the industry, this tradition of putting all of the responsibility on the shoulders of the plan sponsor to determine which situations and relationships are appropriate and which ones are not is far more responsibility than any of them are qualified to take on. Even if we require the vendors to provide 10 million additional lines of fine print to disclose conflicts and revenue sources, Congress is still saying that the plan sponsor must determine from all of the disclosures if the vendor relationships are appropriate – instead of just putting a stop to the conflicts of interest all together. If these vendors are not suitable, then why are they in the business, selling products?
Why aren’t the regulatory agencies doing a better job governing these massive financial institutions themselves instead of putting it all off on business owners? The corporate trustees that sit on the plan committee are liable for every decision they make around their retirement plan and are forbidden to participate in conflicting situations; however, we permit the “industry experts” to enter into any relationship they wish, create products that are not suitable for retirement plans, sell services that are simply “illusions” of real solutions, and give advice they are not qualified to give without calling it “advice”, while packaging this whole thing in a highly misleading manner, placing incredibly damaging language in their contracts, and then transfer all of the consequences to the plan sponsor. This is the real issue at hand lobbyists have just done a phenomenal job distracting everyone from these facts.
After operating in the retirement plan industry professionally for over 10 years, I have watched each of these recent pieces of legislation pass and have seen first hand that very little of it has done anything positive for participants. I think its time for a new voice in Congress’s ear, that’s the voice of the participant and the plan sponsor.
It’s not fair for regulatory agencies to permit inappropriate business activity to occur and then blame the plan sponsor for not realizing it was harmful. How long are we going to continue to put our head in the sand?
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Show All » New Regulations » What Plan Sponsors Need to Know
Monday, August 06, 2007Target Date & Risk Based Funds - Best Interest of Participants or Service Providers?
I think a key point to note regarding the provision of qualified default investments under the Pension Protection Act that I’m surprised to see isn't mentioned more, is the biggest issue with the majority of asset allocation funds:
Almost all of the major providers releasing these model funds do so using a portfolio of their proprietary underlying funds. Unfortunately, I’ve yet to see in my career, an investment management house that is great in every category. Instead, most fund families have one fund that’s their claim to fame (if they’re lucky), and few have many more than that on a consistent basis. Of course, somewhere along the way, we’ve all been brain washed into believing that 90% of investment returns over time can be solely attributed to proper asset allocation and the “efficient frontier” whatever the heck that is; however, I’ve tested this “theory” (which means it’s NOT factual, a point rarely made in seminars) at least a 100 times, and never found one instance where it holds true. There is no replacement for quality investment management, regardless of how you allocate your portfolio.
Furthermore, these investments tend to be ridiculously expensive just to provide allocation into other funds of the family. With our entire industry moving towards a 100% canned asset allocation fund approach for most plans (which is where I see this thing going one day given the sales pressures of the industry’s finest presenters), then why do we need advisors? I mean what do they really do anyways? They show up to a few meetings with the plan sponsor to either review a print off of some Morningstar data or a report straight from the provider themselves, don’t provide any advice – illustrations only, not meant to be the basis for any decisions, refuse to accept any accountability for their guidance as they will not become fiduciaries as they should according to ERISA, and then charge some insane fee to provide an illusion of service. More importantly, no one wants to step up to the plate and implement a “real” solution, by designing allocation models made up of quality underlying investments from multiple families, because everyone’s afraid of “liability”. Or maybe their just lazy, I’m not confident as to which issue is really holding them up from using their brain.
The plan providers are thrilled that the advisor community has refused to become too closely involved with investment guidance because they now have open season on the marketplace. They get to dump assets into their funds and charge additional fees to do so through some model fund. Providers have put constant pressure on Congress over the recent years to produce some legislation around the use of these funds, so they can better support their sales efforts. As they are constantly being forced by consultants and plan sponsors to sprinkle a few outside funds into the plan (which they only do so in the categories that see the least amount of assets), something they fight during every sales meeting, but now they can ensure that their funds will see almost everything…how perfect, now everyone’s problems are fixed.
This whole new idea about automating everything from contributions to investments, works perfectly for providers, and does help make sure that people at least get into the plan, so we can all feel warm and fuzzy about the fact that our overall participation numbers increased. However, this is not the end all answer it is marketed to be, this is the easy way out. Bottom line, I have yet to see an asset allocation fund from a major provider out perform custom designed models of the same allocation using quality investments. If this is true, and I’m right, then how can we demonstrate we are making all decisions in the best interest of participants and their beneficiaries, is it in their best interest to earn lower returns? Year after year, RFP after RFP, plan sponsors continue to rely on the advice of the provider for determining what is in the best interest of participants, why don’t they just ask the fox what’s in the best interest of their chickens and see what he has to say? This new legislation has created a golden opportunity for providers…I’m not so sure this is true for plan sponsors and employees.
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Show All » New Regulations » What Plan Sponsors Need to Know
Sunday, August 05, 2007New 403(b) Regs - Not Exactly Industry Reform
In July 2007, Lawmakers released new regulations around the defined contribution plan of choice for most school systems, government entities, and non profits - 403(b) plans. While they have accomplished the need for a centralized plan document and improved recordkeeping so 403(b) plans can be managed in the same consistent basis as their 401(k) cousins, they failed to address the most pertinent issue of the traditional 403(b) offering. This area of the retirement plan industry is by far the most abused by service providers and once again these enormous financial institutions (in the case of 403(b)s these institutions consist primarily of insurance giants) have managed to distract Lawmaker attention away from the biggest issues facing participants and on to the issues faced by providers and regulatory agencies.
No new rules were created around the obvious need for improved fiduciary procedures to effectively oversee the multiple insurance vendors plan sponsors routinely endorse to sell products to their participants as required by ERISA. The monitoring practices currently used by non profit plan fiduciaries are almost non existent, even in the largest of plans. The vendors and products that dominate the 403(b) industry are unheard of on the 401(k) side where far more participant class action cases against fiduciary negligence have taken place.
These insurance giants commonly put the plan sponsor in an awkward conflicting situation when they make considerable donations to endowment funds, foundations, and political campaigns. These generous “charitable contributions” ensure the vendor will secure long term access to sell high commission, high fee, highly restricting, and low performing products to unsuspecting employees. The products offered in 403(b) plans would never be acceptable in 401(k) plans. How can this go on? There is far more scrutiny on private sector employers than public and non profit sectors. There are often so many vendors for each employer, that even if the entity has the capacity to monitor the offerings, they cannot effectively implement the practices for all vendors. These vendors typically offer the 403(b) investment vehicle as only 1 part of there total sales package. Similar to the broker dealers who place advisors inside large corporations to provide “401(k) plan education”, the 403(b) vehicle is the means to sell additional products. So in the rare instances when a plan sponsor is actually monitoring the 403(b) vehicles and investments, they are still missing the bulk of what is actually being sold to their employees. In addition, in my professional experience, in the case where a plan sponsor does wake up and realize that a vendor is abusing their employees, they tend to look the other way once they are reminded of the financial relationship between the vendor and fiduciaries. I’ve seen this happen in almost every dealing with 403(b) plans following my fiduciary audit services.
These normal practices on the non profit, public education, and government side of the world would be considered criminal in the private sector.
These small changes to 403(b) plans are not the “reforming” rules we hoped for, and we still have a long way to go to effectively serve these participants. In the mean time, millions of Americans will continue to be subjected to the inappropriate fiduciary activity that is prominent amongst 403(b) plan sponsors and these insurance giants will continue to report record earnings year after year.Eventually, the 403(b) industry will be forced into change it just may take longer than expected as Congress seems to be focusing their efforts on the private sector 401(k) side of the fence.
Plan sponsors who want to be ahead of the slow evolution of 403(b) regulatory requirements, and who do seek to do the right thing and stand beside their employees to protect them from the damaging financial repercussions of inappropriate investment and financial guidance, need to find help from untraditional sources. These sources should operate completely independent of the existing service providers and have the capacity to conduct audits and develop appropriate fiduciary standards of care and procedures. The best situation is an entity that is willing to fully stand behind their independence and guidance as a named fiduciary on the plan.
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Friday, July 20, 2007Welcome to Fiduciary Risk Management's Blog!
I hope everyone gets a lot of use and enjoyment from this blog. Please send an email to webmaster@hawcpa.com if you have any questions about using it. Thanks! - Andrew
Posted By: FRMblog Master @ 9:17:12 AMTop
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