Little has been written about how a plan fiduciary should prudently select insurance companies and guaranteed retirement income for participants. There’s a DOL “safe harbor” regulation, but it doesn’t give fiduciaries a checklist for compliance. To address this, Lincoln Financial hired us to work with an insurance consultant to develop a set of criteria that fiduciaries or their advisors can use to make those decisions. Bruce Ashton and I have written an article about the checklist that can be found here: Did you know…About the Fiduciary Requirements for Selecting a Lifetime Income Provider? The article has links to the white paper and the checklist.
Category Archives: General
Selection and Monitoring of Target Date Funds
As I review investment policy statements for participant-directed plans, I see a number of common deficiencies. This email is about one of those—the selection and monitoring of target date funds (“TDFs”).
In my experience, most IPS’ say little or nothing about the criteria to be applied to TDFs. For example, an IPS might be completely silent on the issue or may simply say that they will be selected and monitored. But, in neither case is there a robust set of criteria. That is problematic.
One reason is that TDFs are capturing an increasingly large percentage of 401(k) assets. As more plans automatically enroll, that percentage will continue to grow. I can imagine a day, in the not-so-distant future, where over half of the assets in 401(k) plans will be in TDFs. That leads to the unfortunate conclusion that, based on the current practices of many advisers and committees, over one-half of the assets in the plan will be in a suite of investments that has not been subjected to close scrutiny, while the other investments – that hold less than half of the assets — will be subject to a rigorous evaluation process. That just doesn’t make sense. And, where a situation doesn’t make sense, it can lead to problems.
With that in mind, I recommend that you take a look at the evaluation criteria in DOL comments filed by the Investment Company Institute and the American Benefits Council. It is the most robust set of TDF criteria that I have seen. The ABC/ICI comments can be found at: http://www.americanbenefitscouncil.org/documents/tdf_abc-ici_letter-submission033010.pdf.
The criteria in those comments set a much higher standard than the common practices of advisers and plan committees. However, I think those comments may suggest the future — rather than reflecting the past.
For example, the comments suggest considering, among other things:
- The performance of each of the mutual funds inside the TDF,
- Appropriate benchmarks to evaluate TDF performance,
- Participant demographics, and
- Whether the plan sponsor also offers a pension plan.
In next month’s post, I will discuss the recent DOL guidance on the selection and monitoring of TDFs.
Limiting the 401(k) Finder’s Fee
Fred Reish was quoted in a New York Times article on June 21. The article, titled, “Limiting the 401(k) Finder’s Fee” takes a look into the fees behind employee’s 401(k)’s as they begin to replace pensions.
A series of lawsuits are making their way through the courts, which have raised questions about whether employees are being overcharged for their accounts. The lawsuits and new federal rules have helped bring fees down to a more reasonable level. While some employers have begun to adopt arrangements with less fees that more clearly separates what they are paying for, fees that workers pay can still vary widely and be hard to recognize or understand.
“It’s unfortunate that it took litigation to focus attention on costs, but it has,” said Fred.
The link to the article can be found on the Drinker Biddle website, here.
GAO Report on IRA Rollovers
Periodically I will be posting information or materials from external resources, such as government agencies, that I think will be useful. This is the first of those posts. These materials will be linked on the blog to the “External Resources” page of the blog.
The GAO just issued a report on IRA rollovers. The title is: “401(k) PLANS: Labor and IRS Could Improve the Rollover Process for Participants.” You can find a copy of the 71-page report here.
While the GAO Report recommends a number of changes to improve the rollover process and experience for participants, it is remarkable for the comments that it makes about the IRA rollover services of some providers. For example, at one point, it states: “Plan participants are often subject to biased information and aggressive marketing of IRAs when seeking assistance and information regarding what to do with their 401(k) plan savings when they separate or have separated from employment with the plan sponsor. In many cases, such information and marketing comes from plan service providers.” Look at the portion of the linked report beginning on page 22.
Based on this report and on the response by the DOL, it seems almost certain that the fiduciary advice proposal (that is due in July 2013) will contain provisions that further regulate the IRA rollover process.
Fred Reish (fred.reish@dbr.com)
Featured Member in The University of Arizona Newsletter
Fred Reish was profiled in the April 24, 2013 alumni newsletter of The University of Arizona James E. Rogers College of Law. To see the full feature, click here.
Plans With Only Brokerage Accounts
On July 30, the DOL reissued its Field Assistant Bulletin (FAB) concerning participant disclosures. The FAB was reissued because of the controversy about the DOL’s position on individual brokerage accounts.
The new FAB deletes the old, and controversial, Q&A 30 and replaces it with a new Q&A 39.
While some of the controversial provisions were removed, some remain. For example, the DOL states:
“…in the case of a 401(k) or other individual account plan covered under the regulation, a plan fiduciary’s failure to designate investment alternatives, for example, to avoid investment disclosures under the regulation, raising questions under ERISA section 404(a)’s general statutory fiduciary duties of prudence and loyalty.”
New Disclosure Rules
All of the service provider disclosures must be made by April 1, 2012. Once the disclosures are made, the focus will shift from service providers to plan sponsors. That is, after plan sponsors receive the disclosed information, they must prudently review and analyze it. In other words, they must engage in a prudent process to evaluate the services and compensation. That will inevitably lead to a benchmarking of service provider compensation.
My partner, Bruce Ashton, and I have written a detailed Alert on that subject for our firm, Drinker Biddle & Reath, LLP. A copy of that Alert can be accessed through the Drinker Biddle & Reath LLP website, at:
Please copy and paste the link into your browser to access the publication.