Perspectives September 25, 2008

Perspective: The Efficiency of Adding an Auto-Rollover Provision

What do terminated participants and under-inflated car tires have in common?
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It sounds like a silly question until you consider that they can both gradually and silently drag down performance and increase risk.

The fact is, many of us drive cars with under-inflated tires. In doing so, we unintentionally increase the risk of a crash, waste power from our engines, and burn an extra 144 gallons of gas per year.1 The reason we continue to drive this way, day after day, is because we don’t “feel” the lost efficiency and increased risk. It happens slowly and quietly over time.

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The same occurs in your sponsors’ plans. A glut of terminated participants on the books can drag down a plan’s efficiency.

They increase your head count, which serves to increase plan costs if fees are assessed on a per-participant basis.

They decrease your average account balance, which limits the plan’s ability to negotiate better fees from the plan provider.

Worse, the recent LaRue ruling2 has shown how terminated participants are a danger to your plan. Participants now have the right to sue plan sponsors for breach of fiduciary responsibility. But how do your sponsors perform their fiduciary duties for a former employee who has moved and not left a forwarding address? Terminated participants expose your sponsors to fiduciary risk.

EGTRRA, LaRue, Auto-enrollment, and Turn-over: The Perfect Storm

Prior to EGTRRA, advisers could set up a retirement plan to cash-out de-minimus accounts up to $5,000. In 2004, though, the DOL proposed Safe Harbor regulations that allowed automatic rollovers–and disallowed forced cash distributions–for balances below $5,000 and above $1,000. At the time, many EGTRRA provisions seemed unclear and were not clarified or made permanent until the Pension Protection Act of 2006. As a result, sponsors and advisers often chose to simply play it safe, lowering their cash-out threshold to $1,000.

Then came auto-enrollment. Nationwide, plans saw more and more terminated participants with low balances swelling their books. Now we have the LaRue ruling, and every one of those terminated participants potentially has standing to sue their plan.

The Solution: EGTRRA Restatements

Instead of just allowing your plan sponsors to bear the burdens of inefficiency and risk, you can use EGTRRA to your advantage. This year, employer-sponsored retirement plans are restating their EGTRRA filings. Since you’re currently going through the paperwork, you should take advantage of EGTRRA’s safe harbor auto-rollover provision. An adviser can engage a third-party provider to locate missing participants, roll over non-responsive participants below $5,000 (including those below $1,000), service all terminated participants in retirement preparation, and help direct high-balance leads to your wealth management practice.

Selecting a Rollover Solution

In selecting your rollover service provider, it is important to keep your sponsors’ needs in mind:

  • Independence: Sponsors are increasingly wary of IRAs populated by proprietary funds, giving the appearance that participants are “forced” into a product.
  • Costs: Run scenarios to ensure that the Safe Harbor IRA doesn’t rapidly deplete accounts due to excessive fees.
  • Participant assistance: Look for a provider that locates and communicates with terminated participants, is equipped with licensed professionals that can help participants understand their options, and provides complete transaction assistance. Many solutions leave participants to find their own way. These participants probably need the most help and are the most likely to cash-out on their retirement.
  • Fair treatment: You want a service that provides the same level of service to all participants, regardless of account size. This generates a true “win-win” to the sponsor, participant, and adviser.

Pump Up Your Plan Efficiency

EGTRRA restatement time offers you the chance to tune-up your plans. Choose an independent Safe Harbor IRA provider that improves your plans’ efficiency, lowers your sponsors’ exposure to risk, and–best of all—helps to demonstrate the value you provide as a retirement plan adviser.

 

Previous articles in this series are:

 

 

1 U.S. Dept. of Energy Fuel Economy Guide www.fueleconomy.gov
2 LaRue v. DeWolff Boberg & Associates, Inc. et al., 128 S.Ct. 1020

Spencer Williams is President and CEO of RolloverSystems, an independent provider of rollover services. Over his career, Spencer’s experience spans starting, building and leading businesses in the financial services industry. Prior to joining RolloverSystems, Spencer served in numerous roles with MassMutual, including founder and CEO of Persumma Financial, LLC (a MassMutual Financial Group company) and as a leader in creating and building the company’s retirement income and rollover IRA lines of business.

© 2008 RolloverSystems, Inc. This article is protected by copyright law. Any redistribution or commercial use in whole or in part is strictly prohibited without the express written consent of RolloverSystems, Inc. The information provided herein is for educational and informational purposes only and should not be considered investment advice.


The Markets September 24, 2008

Portfolio Politics

The only thing more volatile than the polls of late has been the markets.
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In fact, we now have at least one candidate who says that Wall Street’s problems are so critical that he’s coming off the campaign trail to deal with them.

Still, with the presidential election only about a month away, prudent investors might well be wondering which candidate – or perhaps which party – will prove to be “kinder, gentler’ to their portfolio.

A recent CNETnews.com report claims that in looking at data from Ibbotson Associates that covers 1926 through the end of August, the market – at least the market as defined by the Standard & Poor’s 500 – has done better under Democratic presidents (9.2% annually after inflation) than under Republicans (4.6%).

Moreover, the report goes on to claim that small cap stocks have done even better under Democratic administrations, returning 16.5% a year after inflation, versus just 2.2% annually under Republicans. On the other hand, bonds have done much better in Republican than Democratic administrations (4.8% versus negative 0.4% annually, after inflation).

Fed Factor

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Setting aside for a minute just how relevant those 1926 comparisons might be to today’s market, and questions about just how much a president can impact market trends, the report goes on to cite the perspective of one Robert Johnson, a former finance professor who now helps run the CFA Institute. According to the article, Johnson claims that the real answer lies not in the White House, but with the Fed. While it seems a bit of Fed Policy 101, the article notes that in years when the Fed tightens the money supply by raising interest rates, the market does poorly; and when the Fed eases by cutting rates, the market does well. More interestingly, those rate cuts are apparently most common in the third year of a presidential administration – and that helps explain why stocks have a significant tendency to do roughly twice as well in Year 3 of presidential terms as in years 1, 2 or 4.

Of course, once you account for the market impact of the Fed’s actions, the apparent predictive power of the presidential cycle evaporates – and if you don’t know whether the Fed will have to raise or lower interest rates, it doesn’t matter which party is in power.

Those betting (hoping) for gridlock – say a President McCain struggling with a Pelosi/Reid Congress – can find a glimmer of hope in the Stock Trader’s Almanac. Since 1949, the Dow (yes, we’re changing reference points) has gone up by an annual average of 19.5% when the White House was Democratic and Congress was Republican. On the other hand, that’s been the case in just six of those 60 years (all during President Clinton’s term). Going back to 1926 (and the S&P 500), the market has gained an average of 6.3%, after inflation, whenever one party controlled the White House and the other held the majority in both houses of Congress. That’s less than the 6.8% annual average for the period as a whole.

But – unless Congress can work something out this week – unless, of course, what they work out is worse than the disease (and it could be) – the next president – whoever it is – is likely to have his hands full.

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