Compliance July 13, 2017

EBSA Fraud Investigation Leads to Lengthy Prison Sentence

A Department of Labor investigation found evidence that $5 million, including retirement plan assets covered by ERISA, was inappropriately diverted and used to pay various business and personal expenses.
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A fraud investigation by the U.S. Department of Labor’s Employee Benefits Security Administration, the FBI, and the Department of Health and Human Services’ Office of Inspector General has led to a 12-year prison sentence for William Jackson Moates Jr., of Fort Smith, Arkansas.

Moates pled guilty to a variety of charges in October 2016, but his sentence has now been handed down. The significant amount of prison time denotes the severity of the fraud charges.

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As EBSA explains, the investigation found that over the course of nearly five years, Moates, received investment funds from at least 25 different clients, which were not invested as he said they would be. In a variety of ways, Moates “diverted clients’ investments to his personal use, to pay back other investors, and for the use of his various businesses for operating expenses.” Further, EBSA investigators found that Moates had embezzled $150,000 from an employee benefit plan sponsored by a pool company. 

EBSA Dallas Regional Office Director Deborah Perry says the severity of the prison sentence is completely appropriate: “Through the combined efforts of this department, the FBI, and Department of Justice prosecutors, this defendant is being punished in accordance with the law and has been ordered to pay restitution.”

EBSA says Moates used investor funds for a variety of ends—to renovate his home, take vacations, make credit card payments, make payments to personal iTunes and Amazon accounts, make contributions to local charitable organizations, and to make mortgage payments on his home.

“He would also use investor funds to make disbursements to other clients whose money he had embezzled,” Perry says.

On June 28, 2017, Moates was formally sentenced to 150 months in federal prison on one count each of mail fraud, theft of government funds, theft from an employee benefit plan, money laundering, and two counts of wire fraud. Moates was also ordered to pay restitution in the amount of $5,710,816 to his victims.

Additional information can be found at http://www.dol.gov/ebsa. 

The Markets July 12, 2017

CITs and Custom TDFs Shine in Mega Market

New research from Northern Trust finds its largest plan sponsor clients have broadly embraced collective investment trusts, and more than half now use custom TDFs.
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A new analysis examines the behaviors and aspirations of the top-25 clients in Northern Trust Asset Management’s book of business. 

In the group of mega plan sponsors, the median balance is $2.5 billion invested, while the mean average is closer to $9 billion—sizable plans by any estimation, with a net $225 billion in assets.

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Discussing the research results with PLANADVISER, Sabrina Bailey, global head of retirement solutions, said these plan sponsors are on the cutting edge of plan design and administration, many of them having implemented major reforms in the last decade.

Notably, the research shows the core menu of investment options offered to participants has remained stable, averaging 12 fund options in total. “While the industry continues to preach the need for simplicity, plans seem to have found that 12 is the sweet spot to not only streamline and simplify, but also maintain their robust offerings,” Bailey explained. This ties to some extent into the trend of the plan sponsors utilizing more custom target-date fund approaches built as an overlay on the core menu.

“We see that 52% of these sponsors offer custom target-date funds that are a blend of actively and passively managed assets, while 48% offer off-the-shelf target-date funds that are primarily passively managed,” Bailey noted. “The average percentage of plan assets invested in target date funds is 31%, a number which is not surprising given the majority of flows into 401(k) plans today go to the target-date funds, and we expect this trend to continue.”

Bailey further explained that this bifurcation between custom and off-the-shelf target-date funds results from the fact that some plan sponsors have very unique plan participant populations with unique savings needs, while others have a more traditional workforce for which an off-the-shelf approach may be perfectly suitable. It all depends on the needs of the sponsor and the participants.

According to the data shared by Northern Trust, within the capital preservation asset class there was a “big shift away from the use of stable value,” with just under half of plans offering it in their menu today.

“Instead, plan sponsors have added money market funds and ultra-short fixed income as a replacement option,” Bailey observes. “Finally, the number of plans offering company stock remained at around 75%.  We don’t expect to see much of a change over time, but we are seeing more guidelines in place to limit the assets flowing into the option. Today, the average amount of assets invested in company stock is 21%.”

In one clear demonstration of the difference between the micro and mega plan markets, Bailey noted that every single one of the top-25 clients utilize white labeling in some fashion. Unlike on the small side of the market, where there is a persistent hesitancy to adopt white label approaches, mega plan sponsors value that they can use the white label approach to make tweaks and adjustments to their investment menu without changing the information presented to participants.

“At the end of the day, we see that each one of these mega plans is designed to align with the plan sponsor’s philosophical beliefs and meet the unique needs of their participants,” Bailey concluded. 

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