Compliance March 7, 2017

Connecticut Aims To Strengthen 403(b) Provider Reporting

Service providers to tax-qualified 403(b) plans already have certain federally mandated conflict of interest reporting requirements, but the Connecticut State Legislature may also step up and play a role.
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A bill introduced in the Connecticut State Legislature would order the State Treasury to establish a new set of regulations “guided by the United States Department of Labor’s Final Rule concerning contracts or arrangements under Section 408(b)(2) of the Internal Revenue Code of 1986 published in the Federal Register of February 3, 2012.”

The bill is aimed at implementing a state-based rulemaking process that will require any person who enters into a service contract or agreement with a 403(b) retirement plan and “reasonably expects to receive $1,000 or more in compensation, direct or indirect, in connection with the provision of such services,” to disclose to a fiduciary of the plan “any conflict of interest such person has with such retirement plan.”

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This was the main thrust of the 2012 regulation from Department of Labor (DOL), but now it seems the Connecticut Legislature also wants to play a more active role monitoring (and potentially policing) 403(b) service providers working within the state.

As the text of the Connecticut bill lays out, new regulations would apply to any retirement plan created under Section 403(b) of the Internal Revenue Code of 1986, “or any subsequent corresponding internal revenue code of the United States, as amended from time to time, that is not regulated under the Employee Retirement Income Security Act of 1974, as amended from time to time.”

Disclosures “shall include, but need not be limited to, a description of services to be provided to the retirement plan pursuant to such contract or agreement, the compensation such person or an affiliate or subcontractor of such person expects to receive as a result of such services, and any direct or indirect compensation that such person or an affiliate or subcontractor of such person expects to receive in connection with termination of such contract or agreement.”

The bill would also establish that the Connecticut Department of Treasury, in consultation with the Comptroller, “shall adopt regulations, in accordance with the provisions of chapter 54 of the general statutes, to implement and administer the provisions of this section. Such regulations shall be guided by the United States Department of Labor’s Final Rule concerning contracts or arrangements under Section 408(b)(2) of the Internal Revenue Code of 1986 published in the Federal Register of February 3, 2012.” 

The Markets March 7, 2017

GMO Urges Retirement Investors to Consider 'Dynamic TDFs

Pairing this with higher deferral rates can result in balances as much as 30% higher, the investment firm says.
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GMO took a look at several variables retirement plan advisers and sponsors can consider when selecting a target-date fund—such as active versus passive, level of risk, dynamic versus predetermined glidepaths and custom versus off-the shelf—and how these factors would have resulted in outcomes for the 40-year period between 1975 and 2015.

Other factors that GMO looked at included: proprietary underlying funds versus open architecture, traditional versus alternative investments, “to retirement” versus “through,” and auto escalation versus not.

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In “Target Date Decisions, Decisions … Getting the Biggest Bang for the Buck,” GMO concludes that dynamic allocations paired with higher-than-typical deferral rates can result in significantly better outcomes for participants—and that these are the two most important factors that sponsors and advisers should consider when selecting a TDF and the plan design around it.

GMO also found that passively managed investments should be included in TDFs, noting in its white paper, “It is clear from the scoreboard that active management across this [40-year] time frame did not add value. The takeaway: Plan sponsors should not obsess about open-architecture active frameworks.”

NEXT: What level of risk should a TDF take?

GMO next looked at how TDFs with more conservative glidepaths would have fared compared with those with more aggressive approaches, and found a 6% disparity in performance—conservative TDFs ended up with 2% less assets and aggressive TDFs with 4% more. GMO concluded that whether a TDF has an aggressive or conservative glidepath should not be a driving force for sponsors’ and advisers’ selection of TDFs.

GMO notes that when TDFs first hit the market, they were designed with pre-determined glidepaths, which the firm believes is a faulty approach for an investment that can last 40 years or longer. GMO learned that dynamic glidepaths can increase a participant’s TDF balance by as much as 14%, making this a significant factor when choosing a TDF.

And increasing a person’s deferral rate by even a mere 1%, from 6% to 7%, can boost their balance by 11%, again, a factor that GMO believes is meaningful.

GMO concludes, “Based on our results, the two most promising levers appear to be adding a dynamic component to the glidepath and boosting deferral rates”—and if these two factors are combined, balances could increase by as much as 30%.

GMO’s white paper can be downloaded here.

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