Compliance October 26, 2011

Voluntary Termination Disqualifies Right to Plan Benefits

The U.S. District Court for the Eastern District of Pennsylvania has found that two doctors who voluntarily terminated their employment from a hospital are not eligible for benefits under their former employer’s non-qualified retirement benefit plan.
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In dismissing the case, the court also ruled that Steven J. Feinstein, M.D., and Albert P. Sarno, M.D., were wrong in their belief that their non-qualified benefits would be merged into and vested under Saint Luke’s Hospital’s qualified plan because they were repeatedly told that if they voluntarily left the hospital, they would be ineligible for benefits under the Executive Retirement Benefit Restoration Plan. In addition, plan-related correspondence showed that such a merger of benefits was a one-time action, and not a “systematic practice.”  

The court also rejected the doctors’ claim for penalties from the hospital for failure to furnish plan documents because finding the hospital was not the plan administrator and therefore had no duty to provide the plan-related documents to the plaintiffs under ERISA.  

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According to the court opinion, the plaintiffs are both perinatologists who were employed by Saint Luke’s Hospital from January 1991 and August 1993, respectively, until late November 2008, when there was an employment dispute between the hospital and the physicians. The court noted that the defendants indicated in an e-mail to the plaintiffs that the plaintiffs had repeatedly expressed their desire to terminate their employment and enter into private practice, and there is no e-mail response from the plaintiffs refuting that understanding. In addition, according to the court opinion, on September 12, 2008, counsel for the plaintiffs confirmed that both sides had mutually agreed that the doctors would continue their employment with the defendants until November 30, 2008, and in that letter, the plaintiffs provided the requested notice to the defendants that they had decided to terminate their employment with Saint Luke’s as of November 30, 2008. In advance of this letter, the plaintiffs were reminded by the defendants that, should they voluntarily leave their employment, they would not be entitled to benefits under the Restoration Plan.  

The case is Feinstein v. Saint Luke’s Hospital, E.D. Pa., No. 5:10-cv-04050-LS.
Data & Research October 26, 2011

Wirehouse Brokers Use Alternatives the Most; RIAs the Least

Research from asset management firm American Century Investments indicates the use of alternative investment strategies by financial intermediaries is widespread and growing.  
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According to the firm’s “2011 Financial Professionals Alternative Investments Study,” which surveyed 300 financial advisers and planners, 80% report they are currently using alternative investments with their clients, while 95% have some level of experience with these strategies. And, among those currently using alternative strategies, 55% plan to increase use in the next year.

“Financial intermediaries clearly recognize the valuable role alternative investments can play in their clients’ portfolios,” said Peter Cieszko, American Century Investments senior vice president of North America. “It’s incumbent on asset management firms to offer an array of options so that financial professionals can devise customized solutions in line with their clients’ long-term goals, time horizon and risk tolerance.”

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Among financial professionals participating in the study, almost one third of their clients have alternatives in their portfolios; the average allocation to alternatives in a typical client portfolio was 17%. Intermediaries who indicated “extensive” experience with alternatives reported higher use across their client base (an average of 49% of their clients) with the average allocation of a typical client at 23%.

Current use of alternatives varies by type of financial professional, with wirehouse brokers (90%) reporting the greatest level of use, while registered investment advisers (68 %) report the lowest level of use. Also, 83% of regional brokers and 81% of independent brokers indicate current client use.

Types of Alternatives 

When financial professionals were asked to name the type of alternative investments that are most top of mind, “precious metal commodities” were cited by 75% of respondents, “natural resource commodities” by 67% and “hedge funds” by 65%. Among intermediaries using alternative strategies with clients, “precious metal commodities” ranked first for use at 40%, “natural resource commodities” ranked a close second with 39% and “U.S. REITs” ranked third with 33%. The least-used alternative investments were “bear market” vehicles (3%).

“These ‘top-of-mind’ and ‘use’ statistics might suggest that financial intermediaries are currently gravitating toward more tangible, less esoteric strategies such as commodities,” said Cieszko. “That said, over time we anticipate increased use of all types of alternative strategies as intermediaries gain a better understanding of the different options and their potential benefits when used in a diversified portfolio.”

Risk Management

The study also indicates that financial professionals appear to use alternative strategies to manage risk in their clients’ portfolios rather than achieving out-sized returns. “Low correlation with traditional asset classes” was the trait that topped the list of features chosen as “most attractive” by 41% of respondents. And, “potential for broader diversification” garnered 29%, the second-most attractive feature. “Potential for higher returns” was only cited by 12% of respondents.

“These results really debunk the common misconception that financial intermediaries use alternative strategies to juice the performance of clients‟ portfolios,” Cieszko said. “To the contrary, they are acting as true fiduciaries looking out for the long-term welfare of their clients through effective risk-management techniques.”

The study also indicates that mutual funds are the most popular way for financial intermediaries to provide alternative strategies to clients. Among professionals currently using alternatives in client portfolios, 42% cited mutual funds as the preferred mode of access followed by exchange-traded funds at 28%. Among those selecting mutual funds as a primary mode of access, respondents used words and phrases like “simple/easy, offering diversification and/or having active and/or professional management” when describing the attractive qualities of the vehicle.

The American Century Investments 2011 Financial Professionals Alternative Investments Study included data from surveys of 300 financial professionals employed as financial planners, financial advisers, personal financial consultants, brokers or registered investment advisers (RIAs). Respondents averaged 15.8 years of business experience and participation was contingent on having a book of business equal to, or exceeding, $10 million.

American Century Investments currently has approximately $2.5 billion in assets under management in five alternative investment strategies – Strategic Inflation Opportunities, Global Real Estate, Real Estate, Global Gold and Equity Market Neutral – with others incubating and expected to launch in the near future.

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