This race I had jet lag and couldn’t take my usual midday nap when he was biking.  The result of that time is 4 Things the Ironman Can Teach Us About Retirement:

1. You have to want to do it. Then train like crazy.

Retirement, like the Ironman, is a long term train-up. You can’t get up one day and decide to swim, bike, and run 140.6 miles. You need time, training, and planning. Likewise with retirement: it takes preparation and setting money aside so that someday you can have the luxury of deciding how you spend your time. Start that 401k plan already!

2. Have a plan. Be ready to deviate from it or scap and start over.

This race day had insanely hot weather. No wet suits allowed and 97 degree heat  = slow down and hydrate or end up with heat stroke. This also meant that all fast race time goals were out the window and replaced by “completion without getting to know any of the medics.” With retirement, you need a framework (race plan) but be prepared to deviate, lower or raise expectations, or just change the whole idea. No one can control the weather anymore than you can control what financial curve-ball life will throw at you, but without that plan you can’t react as easily or get creative.

3. Some folks won’t speak your language along the way. Find someone who does.

The race briefing was delivered in 5 languages so athletes from around the globe knew the rules and what to do.  The Spanish woman in front of us was delighted and left the English meeting so she could fully absorb it all later at the Spanish meeting. Likewise, retirement often bleeds over into “financial planning,” meaning financial goals besides just retirement, which typically requires outside help. If you don’t have someone to work with that understands you AND that you understand, find a new translator. Don’t slog through thinking you’ll get it eventually.

4. Consider what happens after you get your medal.

Athletes work so diligently in preparing for the race that it’s common for there to be the Now what? blues after the medal is in hand and the race recovery complete. Retirement: same goes. Just because you stop working (or change things up) you don’t live happily ever after. You. keep. living. You’ll need friends and social interaction that won’t come built-in from work, you’ll need purpose, and you’ll need to occupy your time.

While your race might look different, retirement is probably the biggest thing you’ll train for! So get going on your training plan, find a translator if necessary, and start thinking about what it means to have the luxury of deciding how you spend your time!

P.S. This is an example of how we target employees with plain-speak communication to get them interested in their retirement plan and build understanding and appreciation. How can we help your employees?

Why? Because pay schemes have gotten really complicated and the DOL believes (and so do we) that transparency is good. Additionally, all plan sponsors have the legal obligation to make sure they are only paying “reasonable” fees. How can you do that if you don’t know what you’re paying?

It’s standard practice to have fees that are billed to the client, and then to receive what we call indirect payments (or revenue sharing, 12b1s, sub-TAs, etc), which are built into the plan and hidden from sight unless you know to go look for them. If you’ve come to one of my fee seminars recently with my friends the attorney and the auditor, you’ve seen my diagram of how this works. Here’s a great 5-minute video from the GAO that explains the same thing (and you don’t have to take my word for it).

Bottom line: these disclosures are VERY important. They will help a plan sponsor figure out exactly what they and (more importantly) participants are paying for the plan. And, IMHO savvier buyers lead to lower costs and fairer play by all. Another GAO study presented in this PlanAdvisor Magazine article agrees too. Our recommendation is you make sure you’ve received them all, they’re calculated correctly, and then work with a professional on determining whether what you’re paying is reasonable in light of services received.

You can always reach out to us if you have questions or need advice!

This topic came up yesterday at lunch. Retirement plan vendors are spending a lot of time and money on marketing new options related to the idea that it is the job of the plan sponsor to give participants every opportunity to retire comfortably, factoring in inertia, behavioral finance, participant education, and, well, a propensity for poor decision-making skills on the part of the average employee.

This phenomenon started with asset allocation funds — pre-made portfolios in different risk flavors.   Then came Target Date funds — a one-stop shop that invests funds in an asset allocation portfolio that changes to become more conservative as a participant gets closer to a particular retirement date. Then the DOL further helped solidify these types of approaches to help folks solve that, “Where do I invest?” question by making it ok to use them as a default fund. (And then came the market of 2008…)

Automatic enrollment came around. After all, if it’s inertia that prevents people from enrolling, then let’s use it to our advantage and have them opt OUT instead. The Pension Protection Act said it’s ok, and it’s ok to allow refunds for a bit so that if an employee complains, you can refund what was taken automatically.

Education significantly improved in the past decade as the market shifted from throwing a poorly designed packet of paper at an employee to having onsite meetings and marketing pieces born in an ad agency and ending with the compliance department, leaving us with slick pieces that have (gasp) applicable content and reduced jargon. Retirement plan vendors hired education specialists to go onsite and bring the word to the people, and nifty computer + video enrollment software now bring the message to the internet generation.

Enter Guaranteed Withdrawal Benefit from stage left. If you haven’t heard about this feature that is becoming popular for plan vendors to offer, it’s a way for participants to elect some guarantees in their account for an extra fee. On its simplest level, a participant decides they’d like to protect their balance in down markets or sign up for a program that turns their balance into guaranteed payments in retirement, and they pay in the neighborhood of 1% plus investment expenses. Think pension meets defined contribution plan.  Every vendor offering it has their own special sauce of how they derive the guarantee, and it assumes the insurance company will still be around to honor their commitments.

So that begs my question: Is it your job, as the plan sponsor, to do everything in your power to make sure that your employees are able to retire comfortably, including nudging them in the right direction and paying for additional efforts (see above), or, is it simply your job to provide a plan? Just how far does, and should, your reach extend?

Any way you answer this question, these types of features should be an ongoing discussion regarding your plan. Every one of the features above has a positive side and a negative underbelly, and may not be appropriate for your employees because of any number of factors.

If you aren’t having these discussions but want to or want more information on what’s available in the marketplace, give us a buzz or drop a note on the “contact us” page.

Really? Is that so?

Let me be absolutely clear: conflicts of interest are inherent in any business, including financial services. Being honest about them defines a financial advisor’s integrity and their motivation for serving you. This is at the forefront of the DOL’s fee legislation – getting providers to give the information that helps you decide and weigh those conflicts of interest. Fees and conflicts of interest are both things that plan sponsors should be reviewing regularly (source: ERISA).

Back to my new client. Amidst reviewing their documents associated with their plan, I came across a disclosure mailed to the client from this broker’s firm that had likely been mailed to satisfy a recent legal issue. I’ll paraphrase (and yes, names have been removed):

Our firm has designated (#under 10) mutual fund families as preferred fund families. We exclusively promote preferred fund families on our website and marketing materials. We receive payments, known as revenue sharing, from them and not from any other fund families. Our firm, our advisors, and our equity owners benefit financially from these payments. As a result, this creates a potential conflict of interest.

Um… “potential” conflict of interest?

I’ll let you be the judge.

The entire mutual fund lineup in this client’s retirement plan was made up of funds from these preferred families. Coincidence? I think not. This broker has no conflicts of interest? I also think not. (They didn’t put a lot of thought into the fund lineup either.)

Also FYI – the new fee regulations effective in July require covered service providers (including advisors and brokers) to provide you with how much they’re being compensated and what services are being provided for that compensation.  Be hip to the fact that if you’re working with a commission-based representative, commissions can vary on the transaction — upfront versus ongoing — and investment option.  Make sure that investment recommendations aren’t being slanted towards the ones that pay better.

Or, here’s a better idea: hire a fee-only advisor who is paid the same fee no matter what is recommended to give you advice and read their disclosure document they hand you up front (Form ADV 2) that readily discloses any conflicts of interest.

Stumped on fees? Call us.

We’re asked this a lot, especially when we’ve been hired for a vendor search.  I’ll shed some light on this but it will take far more than one blog post to explain how the proverbial sausage is made.

Let’s start with the business models of the 2 basic types of vendors: Data Keepers versus Asset Gatherers. All the vendors branch out into these or hybrids. We’re going to over-simplify today. Each of these has a different business model and thus a different way of collecting fees.

Data Keepers have robust data systems. They care about how many people’s information flows through their systems and make money on plan participant volume. Volume is a bigger driver than amount of money flowing through. More participants on their system translates to more per-participant fees collected.  They favorably price plans with lots of people, even if the plans are really small or really ugly.  They make the same fees, even when markets are down, because they’re based on numbers of people, not on the value of assets.

Asset Gatherers want assets under management. They are trying to gather fees based on the amount of assets under management and/or amount of money flowing into the plan.  They favorably price plans that have high assets or high average account balances or high contributions.  These companies will be more profitable during bull market (asset levels are up) and less profitable during bear markets (asset levels are down).

That’s it. Vendors are data centers based on volume, asset gatherers based on dollars under management, or a hybrid of the two. Every vendor has their own formula and their own master to serve in the way they pay for plan services and ultimately profit, so this is why it’s so important that you shop your plan around, compare lots of types of vendors from a pricing standpoint, and get full disclosure on where the money goes between your vendor and their partners.

Is one model better than another?  No.  It all comes down to services they can offer your plan and then how much it costs.  Since every plan is different, there’s room for all the vendors in this space. The trick is having the complete picture: what are your plan’s particular characteristics and needs, and what is the value of the services a vendor can provide in exchange for the fees they charge.

Need help finding a vendor that fits or surfing the marketplace for what’s out there? Give us a buzz. We know how the sausage is made.

The article talks about hiring a consultant to help with your plan where you might fall short, especially since the law gives permission to hire prudent experts. This is not a new concept at all, and a lot of us have been doing it for years for retirement plans! Remember though, even if you outsource a responsibility with your plan, you never fully abdicate your liability for it. You’re still responsible for overseeing the individual you assigned to the role and making sure they carry out their responsibilities in the best interest of the plan.

[Before we get much further, you need to know that ERISA is the Employee Retirement Income Security Act of 1974 which has numbers assigned to sections. So, when you see things like ERISA 404(c), it's referring to something said in that section of the code.]

Pulling from the article:

1. ERISA Section 3(21) Investment Fiduciary: These advisors assume “co-fiduciary” responsibility, and they accept that responsibility in writing. As a plan advisor, they can offer “objective” advice and recommendations to the business owners or board of directors who may make the actual decision as to selecting, monitoring and removing plan investments. Given the co-fiduciary aspect, the business owner or board of directors are still on the hook for investment responsibility.
2. ERISA Section 3(38) Investment Manager: These advisors also accept fiduciary responsibility, in writing, but they assume total responsibility and liability for the selection, monitoring and removal of investment options. You are granting them discretion. The business owner, board of directors or any other fiduciaries cannot be held legally responsible or liable for investment decisions, but selects and monitors the 3(38).
3. ERISA Section 3(16) Fiduciary – This individual accepts total responsibility for the operation of the 401(k) plan, including hiring of service providers, ensuring appropriate and timely filings, handling disclosure notices, etc. They operate the plan, rather than the plan committee, business owner or board of directors. The only responsibility of the business owner or board of directors is to select and monitor the 3(16) Fiduciary.
4. Multiple Employer Plan (MEP) – A MEP is a plan operated by a 3(16) Fiduciary, who appoints a 3(38) Investment Manager, and two or more independent companies to participate in the MEP. An example would be a MEP sponsored by a Chamber of Commerce or a trade association, offering the MEP for the benefit of the member companies.

A quick note on MEPs – these still require just as much due diligence as any other product. Questions to ask include: who is the 3(16), what are their qualifications, how is the plan being governed, where are the checks and balances, how/how much are they getting paid, did they appoint a 3(38), where are the assets held (custody), etc.

Questions? Reach out to us! We’re here for your outsourcing.

This is for educational purposes and is not to be construed as legal or investment advice.

The author, Eve Kaplan, argues that it’s important to know the difference because it determines the quality of financial advice you receive. To that I would add it may end up determining how solutions are chosen for your situation. (If all they have is a hammer…) It also defines how/if the consumer is informed regarding conflicts of interest or biases in advice given, and how the advice-giver is regulated under which laws.

Here’s a brief overview. I highly suggest you read the whole article:

1) Insurance agents, brokers, registered representatives: Paid to broker products. (Translation: If you don’t buy something, they don’t get paid.) Their standard of fiduciary care is a “suitability” standard. As long as their products are very broadly considered to be “suitable,” they’re OK to sell.

2) Fee-Only advisors/financial planners: Only accept fees for advice; no product sales. Their standard is the fiduciary standard– undivided loyalty to the client, must disclose conflicts of interest, must disclose compensation.

3) Fee-Based ["hybrid"] advisors/financial planners: May accept fees and/or commissions; sell advice and sell products. Standard? Might be suitability, might be fiduciary, depends.

Why this matters in Retirement Plan Land: Well, are you getting “advice” [read: NOT "advice" but "education" about product options] on your investments and vendor choices that is limited to products that pay more? Are conflicts of interest readily disclosed up front? Or, are you receiving unbiased advice where you can hold the advice-giver accountable as a fiduciary in a courtroom? It matters.

Final word I’m sure someone will ask if I’m condemning all product-salesmen after reading this blogpost. The answer is this: It’s the quality and integrity of the person you work with, AND understanding fiduciary standard and payment. Experience, licensing, disclosures, disciplinary history, etc. all matter. You spend a lot of time shopping for a car. You should spend more time choosing your financial advisor. Here’s a shopping guide from the SEC. Use it!!

“The suit resulted from an investigation by the Washington District Office of the DoL’s Employee Benefits Security Administration (EBSA), which found that, since January 2006, the defendants have failed to remit employee contributions to the plan, remitted certain employee contributions late without interest and failed to segregate the plan’s assets from the general assets of the company.”

We won’t speculate about this case or who dropped the ball.  Retirement plans have so many moving parts and so many requirements under ERISA and the DOL that it’s easy for the little things get overlooked.  Making contributions on time, delivering important notices to participants, submitting data for testing to take place, storing participant and beneficiary information all matter just as much as the attention-grabbing items in the plan, like fees, investments, and education.

Put all these and more operations-related tasks under the umbrella of “plan governance.”  It’s the first thing we talk about when we take on a new client, not because we’ve always got all the answers, but because if there is no plan for governance and operations in place, it could potentially expose us to unwanted risk since we’re fiduciaries to the plan too.  Liabilities exist where there are gaps in fiduciary duty and coverage.  We aim to identify the gaps.

Remember that if you are a fiduciary to your plan, you are personally liable if there is a breach of fiduciary duty under ERISA. Surround yourself with good people, have checks and balances in place to make sure tasks get carried out, and establish your plan governance policy and operations procedures.

Call us if you want a check list or some assistance in reviewing your plan’s operations and governance.

Background: DOL felt that how retirement plan service providers (i.e. record keepers, TPAs, securities brokers, investment advisors, consultants, accountants, auditors, etc.) are being compensated has gotten complex. So complex that:

• It was difficult for plan sponsors to figure out how and how much providers were being compensated — both directly and indirectly. Examples: commission, revenue sharing, 12b1 fee, sub-TA fee, wrap fee, direct bill, investment advisory fee, ERISA recapture accounts…etc.
• There was concern that conflicts of interest existed and that plan fiduciaries needed to be provided with comprehensive information to be able to make a decision whether they were paying reasonable fees for the services provided to the plan and identify/act on conflicts of interest, in order to comply with the requirements of ERISA.

Real life example: When you buy a car, you know the features of the car and how much they contribute to the cost of it. You know the sales person doesn’t act in your best interest because they’re paid on commission and thus do not want to sell for a low price. Being aware of this, you can 1) make a decision about which car you want, 2) know what features you need and the price you’ll pay for them, and 3) some research will tell you where to start your price negotiation with the sales person. Now back to Retirement Plan Land…

Key points of 408(b)(2):

• The effective date is July 1, 2012;
• Disclosures need to be made in writing (provided electronically is ok);
• Covered service providers (CSP) paid $1000+ must describe the services to be provided and ALL direct and indirect compensation to be received by it, its affiliates, or subcontractors — even when there is no explicit charge for a service part of the contract/package;
• Any CSPs who disclose “indirect compensation” must describe the arrangement between the payer and CSP, sources, and which services relate to that compensation.

 What does this mean to you?

As a plan fiduciary, you need to have the full picture of how much is being paid for the plan in order to be able to make informed decisions. Under ERISA, you are charged with only paying “reasonable” fees. Up until this point, there has been no [enforced] impetus for plan service providers to be transparent about the fees they were receiving from the plan, either directly or through indirect payments. You need to be looking for some lengthy disclosures that break down the full costs of the plan for the services they are providing. If you don’t receive them or your service provider(s) refuses to give them to you, the DOL expects you to terminate the relationship with that provider!

In short, your plan is not free! It usually takes some detective work to find out the bottom line and this fits hand in glove with the participant fee disclosures the DOL also requires. DOL is mandating that this fee information be provided to you so that you can act in the best interest your the employees.

It is imperative that you 1) receive the information and 2) weigh the fees you are paying in light of services you are receiving to determine whether they are reasonable and 3) understand the impact of and decide what to do regarding any conflicts of interest.

If you feel you need more information about fees or help understanding how this applies to your plan, please reach out to us!

Note: This article is provided as general information only and is not to be construed as legal or tax advice.

Dr. Cornwall defined bootstrapping as: The process of finding creative ways to exploit opportunities to launch and grow with limited resources. He argued that the current economic climate we’re in dictates that we all get creative, even established businesses, and that it’s critical to survival.  (I’ll drink to that.)

Cornwall’s main points of the talk were: keeping overhead effective and efficient — cheap but purposeful, marketing for impact rather than volume, fostering an effective employee base and bootstrapping culture, and letting others carry operating and inventory costs. 

Overhead matters; it eats away profits. As a business owner, I can tell you that it’s difficult (even near impossible) to pry open my wallet unless it has a direct and meaningful impact on us better serving our clients.  Ironically enough, I stare down the opposite end of this barrel every day.  No business owner that I know started their business in order to offer good benefits.

You offer a retirement plan as a way to help you attract and retain quality employees. Along with this benefit comes a bunch of strings (assuming it’s a 401k here): you’re liable for it, the DOL says you need to spend “reasonable” fees and meet a bunch of prudent parameters, it’s part of your overhead cost, and it puts extra workload on your staff.

So back to bootstrapping and how this all works in my head.

Overhead cheap but purposeful: “Reasonable fees” means you’re getting value for what you’re spending.  (Mark that down – the DOL actually aligned with a principal of doing business.) But do you know what you’re spending on your plan, getting in return, and what you could have?

Marketing for impact and fostering an effective employee base: Your retirement plan is a tool to attract and retain employees while supporting the culture that you, the employer, care about them and their future well-being.

Letting others carry operating and inventory costs: This is exactly what your retirement plan advisor or consultant should be doing for you! Leveraging them frees your  staff up to do other things.

As part of your bootstrapping efforts, if you don’t know if your plan is on target, it’s time to revisit plan design.  If you haven’t benchmarked your plan against others like it or haven’t taken a long, hard look at what you’re getting in return for what’s being spent, do it now.  If you’re not sure what value your advisor is providing or what exactly it is they do, replace them with someone who will lighten your load.  Lastly, if your employees don’t appreciate this important part of your overhead, get someone to educate them!

If any of that last paragraph resonated with you or you need creative solutions, we’re here for you. Contact us today.