Roland|Criss Blog

How is an ERISA plan sponsor to know who is competent to serve as a 3(38) investment manager?

As more boutique investment consultants rollout a service that requires the competency, sophistication, and experience that we expect of mutual funds managers, how is a buyer supposed to know which consultants to trust?  Here is one way.

Tip #4: Secure Your Employees' Futures and Improve Your Leadership Legacy...

Secure Your Employees' Futures and Improve Your Leadership Legacy... 

...by identifying excessive retirement plan vendor fees. Excessive fees are present in thousands of 401(k) plans - which benchmarking alone did not catch. 

Not only are excessive fees illegal under the new 408(b)(2) regulation, but identifying excessive retirement plan vendor fees maximizes employee investments and enables you to fulfill your stewardship role and minimize risk.

LEARN MORE:

Gain leadership best practices and implement strategies that will reduce your fiduciary risk immediately. Learn how at the Fee Disclosure Symposium on Oct. 23.

Tip #3: Implement Three Steps to Fee Disclosure Compliance

Implement Three Steps to Fee Disclosure Compliance  In order to be compliant under the new fee disclosure rules, ERISA plan sponsors must prove they have followed three steps: received fee disclosures from vendors; examined the disclosures for adequacy; and proved that fees are reasonable (assessment and opinion). To test your organization's fee disclosure rule savvy, take a brief quiz:  http://www.rolandcriss.com/408b2/getstarted408b2.htm. LEARN MORE: For practical strategies to implement these steps, attend the Fee Disclosure Symposium on Oct. 23.

 

Tip #2 of 5 for Fee Disclosure Success

Attend the Fee Disclosure Symposium on Oct. 23

 Identify Key Clues to Help Verify Adequacy of Vendor Disclosures  

While all covered service providers are required to disclose their fees and service arrangements, few disclosures appear the same.  Look for these three clues to help you gauge whether your vendor's disclosures are adequate.  

• Did the vendor simply identify its service agreement as the disclosure or did they submit a separate document?
• Were the fees general in nature or did they specify in-scope and out-of-scope services?
• Did your vendor verify receipt of all forms of revenue sharing fees?

LEARN MORE:

Want to learn more vendor management best practices? 

Register for the Fee Disclosure Symposium on Oct. 23.

Enforcement Actions: So Soon?

by Ron W. Hagan

Recently, the U.S. Department of Labor and the Securities and Exchange Commission announced enforcement proceedings against two separate investment advisory firms.  The actions of the regulatory agencies come on the heels of the enactment of the ERISA prohibited transaction exemption, warmly regarded as 408(b)(2).

The violations of both the USI Advisor's unit in Glastonbury, CT and Portland, OR-based Focus Point Solutions, indicate that the DoL and SEC are actively enforcing inappropriate fee arrangements and conflicts of interest among investment advisors. 

USI Advisors was found guilty of not disclosing revenue sharing arrangements in 13 of their clients' defined benefit plans, thereby breaching the advisor's fiduciary responsibility of acting in the exclusive benefit of the plans' participants.

Interestingly, the assessment of the penalities was a result of an investigation over the periods between 2004 and 2010.  This case is a good reminder that service providers are not evaluated simply on the basis of a few months, one year or a few years of service.  Their arrangements are subject to a review over the course of many years, or as long as the statute of limitations permits.

Equally important is the Focus Point Solutions' case.  This situation highlights the inherent challenges of an advisor performing in a fiduciary capacity while also managing investment funds for a client.  Even more perplexing is the client's task of monitoring these arrangements.

"Payments to investment advisers for recommending certain types of investments may corrupt their ability to provide impartial advice to their clients," said Bruce Karpati, Chief of the SEC Enforcement Division's Asset Management Unit.  Marc J. Fagel, Director of the SEC's San Francisco Regional Office, added, "We will continue to focus our enforcement and examination efforts on uncovering arrangements where advisers receive undisclosed compensation and conceal conflicts of interest from investors."

So, how do investors - retirement plan fiduciaries and individuals - arm themselves in the new fee disclosure enforcement era? While there may be a catch-all response, seemingly simplifying the burden, the fact is that the process for monitoring fee arrangements and drawing conclusions is not so straight forward.  

A new trend, called fee and/or plan benchmarking, has surfaced over the past few years. Many distributors of these reports would have plan sponsors believe that benchmarking is the answer.  However, benchmarking would not have spotted these breaches.  Plan fiduciaries need to go beyond benchmarking with fresh due diligence and monitoring mechanisms in order to stay above the fray. 

Roland|Criss is committed to raising the awareness and the practices among fiduciaries in order to succeed in their roles. Come join us as we address solutions to these challenges and many more at the Fee Disclosure Symposium on October 23,2012. 

 

 

Tip #1 of 5 for Fee Disclosure Success

 

De-Bunk the Benchmarking Myth:  Measure Vendor Value to be Compliant

Moving beyond benchmarking means measuring the specific services provided by your vendor - not just comparing universal fee structures (which may or may not help you in deciding the reasonableness of your vendor's fees).  In order to measure vendor value and comply with the new 408(b)(2) rule, use a tool that measures historical vendor services against fees charged. 

 

Shown: Vendor Value Index

  

 

LEARN MORE:

Want to easily measure your vendors' value? Learn how at the Fee Disclosure Symposium Oct. 23.

Goldman Sachs Resignation: What Is the Cost of Fiduciary Leadership?

This week's candid expose of an ex-Goldman Sach's executive speaks to a point Roland|Criss addresses often, as it is the cornerstone of our business: an organization must maintain relentless attention to the interests of its stakeholders. If their interests are not placed first, then the concept of the "corporation" is compromised.

It's easy for organizations to develop promotional material that claims a "client-first" culture. But the proof is always in the doing. In cases like Goldman Sachs' announcement, the shortfall between claims and actions can have a widespread negative effect on an organization's trustworthiness. In an industry where trust is the glue that holds so many relationships together, the result can be devastating.

What Greg Smith was saying in his New York Times diatribe was that Goldman Sachs has established a culture and philosophy that will enrich itself before it will address the best interest of its clients.

Unfortunately, this is not an anomaly in the market. A real-world case study allows us to see the ramifications of this type of mentality.

• A hospital client had a defined benefit plan, with a bank that was serving as trustee in a money management capacity for the plan.
• In the time the hospital had been with this bank, the bank was acting in a non-fiduciary manner by utilizing separate account management in order to make checking on the funds and fees extremely difficult for the hospital management.
• In order to put the plan in a better prospective position going forward, we selected a new investment consultant, advisor and fund platform.
• In researching back 10 years, we discovered that the defined benefit plan was only funded at 65% of what the hospital needed today based on employee liabilities. The hospital was experiencing a 6.9% return on funds. After fees, it experienced a 4.2% return on funds (almost 3% annually being lost in fees alone).
• If the hospital continues to work in that portfolio, the benefit plan wouldn't be fully funded for 30 more years.
• In the new investment structure, the hospital would experience the same 6.9% return, with only .2% being taken as fees, resulting in a total of 6.7% return.
• If the hospital would have had this investment structure previously, it could have been fully funded in two years, not 30. The previously-utilized investment structure gave 40% of the hospital's funding to pay a money manager.

This case exemplifies the economic impact of inappropriate fiduciary leadership. This is why Roland|Criss drives these types of accountabilities, so that the focus can be on an organization's stakeholders, not the bank accounts of their plan's service providers.

Hopefully, stories like Greg's will help to communicate the message that a lack of fiduciary leadership is not just unfortunate for the organization, but contributes to greater social, ethical and economic implications that we, as a community, must address sooner rather than later.

The Stanford Case for Stewardship

R. Allen Stanford was convicted yesterday of orchestrating a $7 billion Ponzi scheme. This case demonstrates two clear, if not disconcerting, truths: 1) laws do not necessarily regulate behaviors, and 2) dishonesty and greed are given much more of an opportunity to thrive where fiduciary standards are lacking.

What if Stanford’s clients possessed the insight to hold him accountable before he stole their money?

The purpose of the much-debated fiduciary standard is to establish an even playing field for fiduciaries, investors and stakeholders — who often lack the training to possess adequate knowledge and understanding of ever-changing laws and complex provider fee structures.

If those who are responsible for our money are not proper stewards of our investments — whether intentionally or unintentionally — there is a significant breakdown in the fabric of fiduciary duty. The fiduciary standard seeks to rectify this disparity between leadership and stewardship, so that hope and trust can be reestablished in our financial institutions and our future.

What is your perspective on the fiduciary standard? What are the major questions about the standard that are still unanswered or unclear in the market?

When the risk outweighs the reward: The business (or personal) case for hiring an expert

by Ron W. Hagan

I learned an important lesson while planning our family's annual vacation to Colorado this past December. We anticipated taking our Suburban on the 12-hour road trip, ­an appropriately hardy vehicle for facing treacherous mountain roads at wintertime. As a conscientious driver and shepherd of my family, I took the Suburban in for a standard check-up before we left for the trip. The car was diagnosed with a cracked U-joint. The auto mechanic said it would probably be fine for driving around town, but that to take it on a high-speed, long distance jaunt would be risky.

In my capacity as caretaker and steward for my family, I didn¹t question the cost or give a second thought to the inconvenience of the car repair. I would have done ­and did ­whatever was necessary to gain assurance that my family would be safe during our travels.

At that moment, I realized, "How is this different from any leader who is a steward of his employees?"

There are always "quick fixes" and do-it-yourself approaches, but when you are most invested in the outcome, an expert is well worth the cost to be able to insure that those you care about are safe and secure.

Have you experienced a moment when you were glad that you consulted an expert for an important solution or fix, instead of trying to do it yourself?

Buyer Beware

by Ron W. Hagan

In a recent article appearing in CFO.com, Jeff Mamorsky revealed a surprising development that could change the game for multi-employer plans ("MEP").  Highlighted in this revelation was the report by the Department of Labor ("DOL") indicating that MEPs may not satisfy the requirements of ERISA if there is not a sufficient "connection" between the plan sponsor and the participating employers.

The term "connection" is thoroughly defined in the article.  In summary, it is a relationship "between an employer and employee that participate in the plan by some common economic benefit or representation interest or genuine relationship unrelated to the provision of benefits."  This could challenge the arrangements between a professional employer organization ("PEO") and its co-employer clients.

While it seems that the DOL is preparing to tighten the belt on its definition of the business relationship between service provider and co-employers (or participating employers) in a MEP, the bigger picture and heavier weight of burden has to do with the DOL's concern that participating employers are engaging in MEPs to relieve themselves of ERISA fiduciary responsibility. 

Fiduciary Protections that Fail in the Courtroom

There are many business models in the retirement plan industry that claim to offer fiduciary protection.  Very few vendors' claims of such protection are surviving tests in cases involving breaches of fiduciary duty against plans sponsors.  And rarely do plan administrators test the validity and functionality of these providers' claims.  In particular, there are many PEOs that promote their version of fiduciary protection with words like...diminish, reduce, eliminate fiduciary liability...for their co-employer clients. It is this claim that gives us great pain, for both the PEO and the co-employer. 

Sowing the Wind to Reap a Whirlwind

I just read about another conflicted service provider that offers TPA, recordkeeping, and investment advice services, promoting its great victory in landing thousands of small employers.  It's main pitch to the market is its ability to offer a retirement program to these employers "without their incurring any plan sponsor or fiduciary liability."  This was released just 10 days after the article appeared in CFO.com.

Is anyone reading this stuff? Does anyone care?  Co-employers will, of course, eventually care. 

The Good Guys Still Wear White Hats

With that said, there are PEOs that work very well for their clients.  But they are also the ones that do not deceive their clients. They disclose the fact that the co-employer maintains the fiduciary responsibility to prudently select and monitor the performance of the PEO in accordance with best-practice standards.  These PEOs equip their clients with ways to monitor them; objective and transparent proof, not deception.

Ironically, the retirement plan service providers (PEOs included) are all too willing to provide a myriad of services that they have defined and developed, while also unable and unwilling to offer the one thing their clients need the most.  If you'd like to know more about that one thing, please click here.