Compliance August 20, 2013

Adviser Ordered to Restore Plan Losses

An investment adviser has been ordered to restore plan losses, incentive fees and penalties for several employee benefit plans.
Reported by

The U.S. Department of Labor (DOL) obtained approval of four consent judgments by the U.S. District Court for the Northern District of California in which Zenith Capital was ordered to pay $602,018 in restitution for plan losses and restoration of the improper incentive fees, plus lost opportunity costs and penalties payable to the department, and three individual defendants were ordered to restore $503,385 in plan losses, incentive fees and penalties.

In addition, the three individuals are permanently barred from serving or acting as discretionary fiduciaries, investment managers, or trustees or administrators to a plan covered by the Employee Retirement Income Security Act (ERISA). The consent orders require the defendants to meet certain disclosure and training requirements in order to serve as consultants or investment advisers to ERISA-covered plans.

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The defendants named in the case of Harris v. Zenith Capital LLC are Rick Lane Tasker, Martel Jed Cooper and Michael Gregory Smith, individually and as fiduciaries and service providers. Zenith Capital LLC, an investment advisory firm located in Santa Rosa, California, was also named as a defendant in the case.

According to the DOL’s Employee Benefits Security Administration (EBSA), the defendants were alleged to have breached their fiduciary duties and engaged in prohibited transactions when they placed 13 employee benefit plans into Global Money Management (GMM), a hedge fund that collapsed and went bankrupt.

The DOL claimed Zenith Capital and the individual defendants placed the plans in the high-risk hedge fund despite the fact that the plans were not qualified, accredited investors, and failed to conduct prudent due diligence on GMM or its suitability as an investment for the plans. They also failed to disclose GMM’s ownership interest in Zenith Capital and their receipt of incentive fees from GMM for the plans that it placed into GMM. The general partners of GMM were convicted of mail and wire fraud in connection with GMM.

The full text of the consent judgment and order (docket number: 3:08-cv-04854-EMC) can be found here.

Data & Research August 19, 2013

$1M Gap in Insurance Coverage for Most

Most consumers (98%) who are married, partnered or have dependents, lack enough life insurance coverage to replace their income, according to a survey by Nationwide Financial.
Reported by

The average consumer surveyed will earn approximately $1.5 million before retiring and currently holds about $300,000 in life insurance coverage, leaving him or her about $1.2 million short of replacing income with life insurance.

“Too many Americans make the mistake of assuming that simply providing what may appear to be a large lump sum of money for their beneficiaries will be enough to protect them,” said Eric Henderson, senior vice president of life insurance and annuities for Nationwide Financial. “Instead, they should think about how much of their income the insurance money will replace. If it doesn’t replace a high percentage of it, their family faces the risk of financial disruption or a reduced standard of living. It’s simple math, and it doesn’t add up for 49 out of 50 of those we surveyed.”

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According to the survey, many consumers are willing to pay enough to close or reduce this income replacement gap; however the average life insurance policy currently replaces just 16% of the income the insured person will earn before retirement. Despite the fact that one-third (33%) said their most important consideration when purchasing life insurance was replacing their income, only 2% have actually done so completely.

“Filling a $1.2 million income replacement gap without life insurance is a tall order for surviving family members when you consider late life expenses such as college, weddings, retirement, health care and long-term care,” Henderson said. “The good news is that an affordable solution may be available for consumers of nearly any income level.”

Willing to Insure

Consumers surveyed said they are willing to pay $99 per month on average to ensure their family can maintain its standard of living indefinitely following the death of a bread winner. For this amount, a healthy 35-year-old man can purchase a 20-year term life policy worth more than $2.3 million. A healthy 35-year-old woman can purchase more than $2.6 million in coverage. This is more than is needed to wipe out the average life insurance income replacement gap.

“It’s common for Americans to insure the entire value of their largest assets,” Henderson said. “For most of us, the income we will earn before retirement is far more significant to the financial well-being of our family than any material possession. The cost for enough life insurance to replace this income may be less than you spend to insure your home or car. A lack of understanding of the true cost of life insurance may be part of the reason for such widespread consumer inaction.”

Less than three in ten (29%) believe they can afford enough life insurance to replace their household income. However, according to the Life Insurance Marketing and Research Association (LIMRA), consumers generally overestimate the cost of life insurance by nearly three times.

Consumers have varying levels of confidence in their life insurance plan. Two-thirds (66%) of those who have life insurance are somewhat or very certain they have enough insurance to replace the income they or their spouse/partner would generate for the remainder of their working careers. Just over half (55%) think they could replace their spouse or partner’s income.

“Many Americans have the false perception that they have an adequate life insurance plan in place,” Henderson said. “When they actually do the math, the true picture may become clearer, and hopefully motivate action.”

Understanding the Gap

Despite this relative confidence, when asked how long their family could maintain its standard of living if a breadwinner died, six in ten (62%) either don't know, or think they could do so for just four years or less. Just over one-third (36%) of respondents believe their family could adequately fund the retirement of the surviving spouse or partner.

Just over one in three (35%) consumers worked with an insurance agent or financial adviser to figure out how much life insurance coverage they need. One in five (20%) simply guessed how much coverage they needed.

“Advisers and insurance agents may be able to motivate clients by helping them understand the implications of their income replacement gap,” Henderson said. “We know that consumers don’t respond well to scare tactics, however, they may be relieved to learn that the solution is not as scary as they may expect. Even if they don’t feel compelled to buy enough life insurance to replace all of their income, most consumers can afford enough to put a significant dent in their income replacement gap. That’s at least a step in the right direction.”

Nationwide Financial offers a free life insurance calculator to help consumers figure out how much coverage they need: nationwide.com/life.

Nationwide Financial’s Life Insurance/Income Replacement Study was conducted online by Harris Interactive between March 15 and March 21. The respondents were 1,163 U.S. adults, ages 24 to 66 that are married or partnered and/or have dependents, are not retired, and have household incomes of $24,000 or more.

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