The Markets March 16, 2022

Investments That Protect Participant Assets From Inflation

Exposures can be offered as standalone investments on via target-date funds.

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Defined benefit and defined contribution plan sponsors can help protect participants’ savings by offering exposure to commodities, real estate and Treasury inflation-protected securities, according to industry experts.

Julian Regan, senior vice president and public sector market leader at Segal Marco Advisors, advises that DC plan sponsors should consider including exposures to a mix of asset classes that provide inflation protection both within the suite of target-date funds, and on the investment menu.

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Denver-based Michael Clark, managing director and consulting actuary at River and Mercantile (which is being renamed Agilis), agrees that commodities, real estate and TIPS are good investment options for plan sponsors because they are hedged against inflation risk. “Those are the big things that a plan sponsor will want to analyze to make sure that the inflation hedge protection is either embedded in the options that they’re already giving participants or, if not, that they’re at least providing opportunities for them to have that exposure,” he says.

Some DC plan sponsors—primarily larger ones—might consider an investment such as TIPS as a standalone asset category investment option, Regan says. 

Real estate can protect against inflation because as it rises, property prices also typically increase. DB plans often include real estate in investment portfolios, and real estate exposures in DC plan are often within TDFs, Regan explains. Many DB plans include an allocation between 7% and 12% to real estate, he says.

Regan and Clark agree that many of the same participant options for inflation protection are useful to protect assets from current geopolitical upheaval, oil price shocks, stock market volatility and downturns.

DC plan sponsors and retirement plan advisers can assist participants with selecting investment options through a deep examination of the investment menu, looking for inflation protection exposures, Regan adds.

He notes that inflation is particularly harmful to already-retired participants and those nearing retirement. Plan sponsors should “doublecheck under the hood of the target-date funds and make sure that those series of target-date funds that are designed for late-career employees and in-retirement employees have lower allocations of public equities and higher allocations to fixed income and cash that provide principal preservation,” Regan adds.

Clark cautions that if DC plan sponsors offer inflation-protection investments as standalone options on the fund menu, they should be wary of the possibility that participants will invest more than they should. “Anytime you’re giving participants a fund that they can invest in, sometimes they’ll invest a huge allocation into it, and in fact, more than what they maybe should,” he says.

Ultimately, plan sponsors must educate participants not to overreact, especially younger workers with time to save and invest, says Regan.

“Make sure participants are being reminded that timing the market is not effective; shifting assets from a high-risk investment to a low-risk investment when equity markets are falling is not an effective strategy,” he explains. “Staying in your diversified target-date fund, or your lower-risk capital preservation fund throughout the market cycle has been proven to be the best strategy for generating return. It’s also a very good time to be reminding participants that we have had historical declines in equities in the past, we will have historical declines in the future, but over time, a well-diversified portfolio has generated a return that’s sufficient to provide meaningful retirement income, which is the name of the game.”

Compliance March 16, 2022

Costco Agrees to $5.1M ERISA Case Settlement

The agreement, in which Costco admits no wrongdoing, also includes mandatory changes to the plan’s fee management process.

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The parties in an Employee Retirement Income Security Act lawsuit filed against Costco have reached a settlement that will see the company pay $5.1 million to resolve allegations that it committed fiduciary breaches in the provision of retirement benefits to employees.

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The lawsuit arose in June 2020, when a participant in the Costco 401(k) Retirement Plan filed a suit against his employer, its board of directors and the members of a benefits committee. The lawsuit suggested the fiduciaries of the plan breached their ERISA duties by authorizing the plan to pay unreasonably high fees for recordkeeping; failing to objectively and adequately review the plan’s investment portfolio with due care to ensure that each investment option was prudent in terms of cost; and maintaining certain funds in the plan despite the availability of identical or similar investment options with lower costs and/or better performance histories.

The complaint alleged the defendants did not have a viable methodology for monitoring the expenses of the funds in the plan, failed to have an independent system of review  to ensure that the plan participants were charged appropriate and reasonable fees for the plan’s investment options, and failed to leverage the plan’s size to negotiate lower expense ratios for certain investment options maintained and/or added to the plan during the class period.

In agreeing to the settlement, Costco admits no wrongdoing and insulates itself and its executives from future related allegations. The firm will pay  $5.1 million into a settlement fund, of which a maximum of $1.5 million will be paid out as attorney’s fees, with the remainder going to participants and beneficiaries of the Costco retirement plan.

In addition to the settlement payment, the settlement agreement also covers various non-monetary items. For example, commencing no later than the end of the first calendar quarter beginning after the settlement’s effective date, Costco “will ensure that the plan administrative service per capita recordkeeping fee deducted from plan accounts does not exceed $3.25 per plan account per quarter.”

The settlement agreement further stipulates that Costco’s obligation to ensure that the plan administrative service per capita recordkeeping fee does not exceed $3.25 per plan account per quarter “shall continue for the number of calendar quarters necessary for the value of the reduction of the plan administrative service per capita recordkeeping fee amount to total $3.2 million.” To this end, the agreement presents a formula that Costco must use to calculate the level of recordkeeping and administration fees paid. In basic terms, the plan’s fiduciaries must subtract from the actual per-plan account recordkeeping fee charged in the first quarter of 2022, the fee charged in the subsequent quarter in question, and then multiply the result by the number of fee-paying plan accounts during the quarter in question. Then, the fiduciaries must add the results for all such quarters.

“If this calculation results in a reduction in the plan administrative service per capita recordkeeping fee for any fraction of a calendar quarter, the fee for such quarter may be reduced on a pro rata basis such that the total fee reduction does not exceed $3.2 million,” the agreement stipulates. “Costco may, but is not required to, meet its obligation to ensure the value of the fee reduction in the amount described … by obtaining a plan administrative service per capita recordkeeping fee lower than $3.25 per plan account in one or more quarters.”

The settlement says Costco may arrange for a lower fee “by any reasonable means including, but not limited to, direct negotiation with the recordkeeper, a request for proposal, and/or a company subsidy.”

The full text of the settlement agreement is available here.

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