Compliance July 29, 2013

ASPPA Asks DOL to Improve Form 5500

The American Society of Pension Professionals & Actuaries (ASPPA) has asked the U.S. Department of Labor (DOL) to enhance Schedule C of Form 5500.
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ASPPA General Counsel and Director of Regulatory Affairs Craig P. Hoffman sent a letter to the DOL which asked for modification of Schedule C of Form 5500 to better apply new disclosure requirements, while improving consistency in the reporting of indirect compensation.

Hoffman noted that beginning with 2009 plan year filings, Form 5500 documentation has required plan sponsors to provide information on Schedule C to increase transparency regarding compensation and expenses paid by retirement plans. He believes the following improvements can be made:

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  • Reporting in Part I should focus on information about service providers that received indirect compensation and eliminate the distinction between indirect compensation that is eligible for simplified reporting and indirect compensation that is not eligible. Hoffman said the term ‘eligible’ has been inconsistently interpreted by Form 5500 preparers, which has resulted in less useful data being collected by the DOL.
  • Information required about service providers that receive $5,000 or more of direct compensation should be streamlined to the amount of direct compensation, the service codes associated with such compensation, and whether the service provider also received any indirect compensation from the plan. Reducing the reporting of direct and indirect compensation would allow for a simplification of service codes because there would no longer be different types of indirect compensation. Hoffman included ASPPA’s proposed Schedule C, containing a modified listing of service codes.
  • Update instructions to Part III of Schedule C to provide that the termination of a plan’s accountant or enrolled actuary should be reported on the schedule C for the plan year in which the change is first reflected on either the Accountant’s Opinion or the Actuarial Schedule (SB or MB), instead of the current requirement that the termination be reported during the plan year in which the termination actually occurred.

Hoffman said, “Adoption of these modifications will assist both the DOL and plan fiduciaries by eliminating confusion about the reporting of the indirect compensation of service providers, improving reporting consistency and enhancing the quality of data collected by the DOL about large plans.”

A copy of the letter can be found here.

The Markets July 29, 2013

Hedging Appropriate as Dollar Strengthens

According to Mellon Capital Management, U.S.-based investors with international portfolios may want to consider the merits of hedging.
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The San Francisco-based multi-asset-class investor for BNY Mellon said hedging could be something to make use of as the U.S. dollar appears to be entering a period of sustained strengthening. “A long bullish run by the U.S. dollar could detract significantly from the returns of international portfolios that are not hedged against the currency,” said Sam Valtenbergs, senior quantitative/research analyst of Mellon Capital and the author of the white paper, “Dollar Longs Buoyed by the Inevitable Taper.”

Investors in exchange-traded funds (ETFs) might be surprised at the differences in returns from two separate ETFs, if one is hedged and the other is not, Valtenbergs said.

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Since the beginning of May, the market has been focusing on the expected winding down of the U.S. Federal Reserve’s quantitative easing program, according to the paper. Over that period, the dollar has been strengthening against its developed market peers. In addition, the paper notes that emerging markets rates and currencies have had increased volatility.

Investors had been expecting the combination of the U.S. trade and budget deficits to continue to put downward pressure on the value of the U.S. dollar, but the budget sequestration that became effective on March 1 has helped to rein in the U.S. budget deficit, according to Mellon Capital.

While the current account remains in negative territory, it has been stable for years, the paper said. If the current account and budget deficits demonstrate continuing improvement, Mellon Capital believes the dollar could continue to strengthen.

The white paper found that the dollar is likely to outperform during periods of risk aversion and underperform during periods of heightened risk appetite. However, the currency could outperform over the longer term if the U.S. economy can continue to strengthen in a benign inflation environment, the report said.

“When one considers the relative inexpensiveness of hedging the currency risk of international portfolios against a rise in the U.S. dollar, it could prove to be good value for U.S.-based investors,” said Vassilis Dagioglu, head of asset allocation, portfolio management, Mellon Capital, San Francisco, California.

When asked what specifically should defined benefit (DB) pension plan sponsors do and what will happen to DB portfolios that don’t hedge against the bull run for the dollar, Dagioglu told PLANSPONSOR, “U.S.-based DB plans with big international positions should consider hedging against a rising U.S. dollar, which is a trend that can continue for some time. It’s a relatively small cost to pay given that short-term interest rates and funding costs are very low across most developed currencies, but would offer significant protection.”

A copy of the paper can be found here.

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