In Practice February 10, 2016

Advisory Practice Outlook Is ‘Tough But Exciting’

Manning & Napier adviser services executive suggests the regulatory environment confronting retirement plan advisers and their clients is about as complex as it’s ever been. 
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Not since the run up to passage of the Pension Protection Act (PPA) or, thinking further back, the creation of the Employee Retirement Income Security Act (ERISA) have retirement plan advisers faced so much regulatory disruption.

The coming year promises to bring fundamental fiduciary reform, for starters, observes Shelby George, senior vice president for adviser services at Manning & Napier. Add to this the federal government’s stated interest in creating more state-based retirement plans for the private sector and various other reforms coming down the pike, such as the Securities and Exchange Commission’s (SEC) liquidity and money market fund reforms and key Affordable Care Act (ACA) deadlines—think Cadillac Tax—and it can make a benefit plan adviser’s head spin.

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“Being an ERISA plan fiduciary is not easy and it is only going to become more challenging,” George told PLANADVISER while discussing the firm’s newest research paper, “Understanding how today’s challenging regulatory landscape impacts your practice and clients.” She predicts more advisers will be lumped into the fiduciary relationship in 2016 and beyond, suggesting the Department of Labor (DOL), through its updated fiduciary rule, “will extend the fiduciary standard embedded in ERISA to advisers who handle any kind of retirement account, including individual retirement accounts (IRAs).”

Noting that the fiduciary rule language has been submitted to the Office of Management and Budget and is “finally about to arrive,” George predicts the best-interest contract exemption and other key aspects of the proposed rule language will be maintained in any final rule. Advisers and providers will complain when the rule language finally emerges, she adds, “but they will very quickly have to get to work assessing the new layer of administration they’ll have to build out to meet all the new requirements.”

The final aspects of the fiduciary standard will be shrouded in some mystery until the final rule language actually emerges from OMB, George explains, but she still predicts pretty confidently that the biggest impact is going to be on the IRA market and rollover accounts. Unless major changes are made to the rule language, advisers selling in these areas will have to start papering best-interest contract exemptions left and right.

NEXT: Regulation is just one challenge 

Beyond the difficult regulatory picture that is testing advisers, George says the interest rate environment and related fixed-income investing outlook is another challenge.

“Over the past 30 years, interest rates have declined very slowly and steadily,” she explains. “Today, the interest rate outlook is challenging. The Federal Reserve is trying to raise rates while yields are still at very low absolute levels, and therefore rates have more room to go up than down. However, an increasingly interconnected world means events from around the globe can influence U.S. growth and ultimately the direction of interest rate movements.”

Investors of all types—including their advisers—have generally grown unfamiliar with how interest rate movements affect traditionally “safe” bond investments, George warns. “Related, using a bond index fund to gain exposure to the broad fixed income market has become a common investor strategy and has been considered a safe strategy,” she says. Today that picture is falling apart.

“The key point to realize in a fluctuating interest rate environment is that bond portfolios tied to a benchmark may not deliver the best the market has to offer,” George explains. “Typically, a benchmark’s composition is market-capitalization weighted according to the total value of debt outstanding in the market; it’s not based on the fundamental characteristics of each bond.”

George predicts even savvy investors may need assistance from their advisers in understanding how a portfolio can be expected to perform in different environments. “Fiduciaries responsible for retirement plan assets need to understand how interest rate movements may affect plan participants who are nearing retirement and are more exposed to this traditionally ‘safe’ asset class,” she adds.

All in all, George says that “bond market volatility has become a heightened source of risk for those investors nearing the date that they will need to start living off their savings.” This results from the higher allocation to fixed income near retirement, which may mean being more heavily exposed to the most overvalued sectors of the bond market, like U.S. Treasuries, at the same time that stability of retirement balances becomes most important to meet ongoing living expenses.

“The answer is not to simply own more stocks when nearing retirement, since volatility is inevitable in the stock market,” she concludes. “Active, flexible management of fixed income portfolios with the ability to adjust maturities and sector exposures to avoid taking risk, unless well-compensated for those risks in the form of more attractive yields, is most important for investors right now.”

Compliance February 10, 2016

Court Finds Custodial Agreement Must Be Provided to Participant

A federal judge found the agreement does dictate important aspects about the participant’s benefits under the 401(k) plan.
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In a dispute as to whether he received benefits to which he was entitled, Derrick Askew requested a number of 401(k) plan documents from the plan sponsor, R.L. Reppert Inc.

In a lawsuit, Askew says there are no factual disputes concerning what documents he was provided in response to his document requests; however, he identifies a number of documents to which he claims he is entitled and has not yet received, including:

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  • Trust Agreements
  • Custodial Agreements
  • Periodic Benefit Statements
  • Notice of Vested Deferred Benefits
  • Disclosure of Financial Reports (Audit, Investment)
  • Section 404(c) Disclosures
  • Notice of Qualified Default Investment, Automatic Contribution Arrangement

U.S. District Judge James Knoll Gardner of the U.S. District Court for the Eastern District of Pennsylvania found that only a custodial agreement was required to be provided. Gardner first noted that courts agree that the plain language of the Employee Retirement Income Security Act (ERISA) refers only to “formal documents that govern the plan, not to all documents by means of which the plan conducts operations.” But, he found that the Nationwide Trust Company agreement with Reppert, Inc. does dictate important aspects about the participants’ benefits under the 401(k) plan and who is or is not responsible for the management and investment of plan funds.

According to Gardner’s opinion, the Nationwide Trust Company agreement incorporates a number of schedules that determine what investment funds a plan participant can choose to invest his or her benefits in; determine what the default investment option is; designate the authorized representative and details its duties, acts, responsibilities and obligations; and define the rights and obligations of the self-directed brokerage accounts provider. “In other words, from the perspective of a participant, the Nationwide Trust Company agreement establishes to a substantial extent where and how his or her benefits were going to be invested and who would be managing and administering his benefits account,” Gardner wrote.

NEXT: Other documents not required

Regarding the request for trust agreements, the judge found that ERISA requires that, in general, “all assets of an employee benefit plan shall be held in trust by one or more trustees. Such trustee or trustees shall be either named in the trust instrument or in the plan instrument . . . or appointed by a person who is a named fiduciary” He concluded that no provision of ERISA requires that there be an independent trust agreement separate from the plan instrument, and the plaintiff was provided with the plan document. 

Regarding periodic benefits statements, Reppert Inc. countered that it had, in fact, continuously sent those benefit statements to the address which plaintiff provided during his employment, but beginning in July 2011, those mailings were returned as undeliverable. ERISA requires only that the plan administrator “mail the material requested to the last known address of the requesting participant or beneficiary” and will not penalize any failure to do so if “such failure or refusal results from matters reasonably beyond the control of the administrator.” Since Askew had moved without informing Reppert Inc. of his new address, Gardner found that Askew’s failure to receive those benefit statements was reasonably beyond the control of the plan administrator, so Reppert, Inc. satisfied its obligation to provide periodic benefit statements.

Gardner noted that the requested “Notice of Vested Deferred Benefits” must be issued for former employees under the Internal Revenue Code, but ERISA permits Askew to sue for certain violations of ERISA, not for violations of the Internal Revenue Code.

Regarding the disclosure of financial reports (audit, investment), Gardner said it is undisputed that Askew did in fact receive the complete Form 5500 annual report that was filed with the Department of Labor (DOL). Although the request need not specifically name the documents sought, neither Askew’s initial request nor his second request make clear that the document he was actually seeking was the audit report that is generally required to be filed with the Form 5500 annual report.

As for 404(c) disclosures, Gardner found the DOL has promulgated regulations that create additional disclosure requirements for plan administrators, and the disclosures that Askew lists are only required by this regulation and not by the statute. Gardner noted that a plan administrator’s “failure to provide information required by federal regulations d[oes] not state a claim under ERISA § 502(c)(1) [29 U.S.C. § 1132(c)(1)]” because “the words ‘this subchapter’ in § 502(c) refer only to violations of statutorily imposed obligations, and that the term does not embrace violations of regulations promulgated pursuant to the statute.”

Finally, Askew conceded that the Notice of Qualified Default Investment, Automatic Contribution Arrangement is not mandatory and not subject to penalties under ERISA. Consequently, Gardner found Reppert, Inc. is not liable to plaintiff for failing to provide the notice.

The opinion in Askew v. R.L. Reppert, Inc. is here.

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