Data & Research July 11, 2007

DB Closures Generally Paired with DC Improvements

Although a majority of defined benefit plan sponsors have either closed the plan to new hires or frozen it for all participants in the last two years, most of those sponsors have also bettered their 401(k) offering.
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A news release from the Employee Benefit Research Institute (EBRI) said a survey of 162 plan sponsors EBRI conducted with Mercer Human Resource Consulting found that about two-thirds have cut back their DB program or plan to do so in the next two years. At the same time, the vast majority of employers closing their pension plans have also upped their defined contribution plan payments.

According to the news release, just over 35% of the respondents changed their defined benefit plan in the last two years with 25.3% closing it to new hires and 12.9% freezing it completely.

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Just over a third that had not already made a DB change indicated they were likely to do so in the next 24 months. The most common planned change was to close the plan to new hires (19%), while 14.2% said they planned to freeze their defined benefit plan for all participants.

Meanwhile, among those that closed their defined benefit plan to new hires in the last two years, 78 reported they would increase employer contributions to the defined contribution plan. For those that plan to close their pension in the next two years, 80.9% reported they would step up their DC payments at the same time.

EBRI data show that among private-sector American workers who have a retirement benefit at work, about 37% have a defined benefit pension and 63% have a 401(k)-type retirement plan.

The news release said automatic enrollment in 401(k) plans is popular among many defined benefit plan sponsors. Of those sponsors that have already closed the pension plan to new hires, 59% have adopted automatic enrollment features in the 401(k) plan, as opposed to 42% of those that have not.

Of those sponsors that will close the plan to new hires in the next two years, 61% have adopted automatic enrollment features, compared with 39% of those that do not plan to close the plan in the next 24 months.

Pension plan sponsors say the driving forces behind these benefit changes are new funding requirements in the Pension Protection Act of 2006 (PPA) and/or new and pending accounting rules by the Financial Accounting Standards Board (FASB), the survey showed. The news release said that changes are expected to dramatically increase the cost and risk of offering a pension benefit.

The results of the spring 2007 survey are at http://www.ebri.org/pdf/EBRI_IB_07-2007.pdf.

Compliance July 11, 2007

Securities America Fined for Improper Commission Sharing

NASD announced on Wednesday it has fined Securities America, Inc. of Omaha, Nebraska, $375,000 for improperly sharing directed brokerage commissions from a mutual fund company with Michael Bullock, a former Securities America broker.
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NASD also found that Securities America failed to adequately supervise Bullock’s communications with his union-sponsored retirement plan clients to ensure that Bullock disclosed his additional compensation to those clients, according to the announcement. NASD has charged Bullock with improperly receiving directed brokerage commissions and other compensation of more than $280,000 and with misrepresenting and failing to disclose this compensation to his retirement plan clients.

NASD said Bullock failed to disclose his additional compensation at the same time he was advising his clients to maintain or include the fund company’s mutual funds in the retirement plans they offered.

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Previous NASD actions involved firms receiving directed brokerage in exchange for promoting specific mutual funds to the investing public and among their own brokers. This is the first case in which the fund company directed brokerage specifically for the benefit of an individual broker, NASD said.

NASD found in its settlement with Securities America, and alleged in its complaint against Bullock, that Bullock negotiated an arrangement with a mutual fund company to have thousands of dollars of brokerage commissions directed to him every month and used the additional compensation to hire a sales assistant, formerly employed by the fund company, to help him find new retirement plan clients. Securities America approved the arrangement and from 2002 through 2003 received $420,000 in directed commissions from the fund company for Bullock’s benefit, paying Bullock $262,500 and retaining $157,500.

NASD alleged that while Bullock was sharing in commissions generated by the fund company, all but one of Bullock’s 15 union retirement plan clients included at least one mutual fund from the fund company in their plans. In addition, in one instance, NASD said Securities America approved one of Bullock’s misleading communications to a client, despite its involvement in the directed commission arrangement that resulted in Bullock’s conflict of interest.

In addition to receiving over $260,000 in directed brokerage payments, Bullock also requested and received a $20,807.32 check directly from the fund company in 2002 to reimburse him for some of the same expenses for which he was receiving directed commissions. The complaint alleges that Bullock concealed from Securities America that he received these funds.

Securities America neither admitted to nor denied the charges against it.

Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm by using NASD’s BrokerCheck at http://www.nasdbrokercheck.com.

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