Compliance March 16, 2011

DoL Asked to Add to Participant Disclosure Rules

The Government Accountability Office (GAO) suggested that retirement plan sponsors and participants should be made more aware of the risk that some investments may have distribution restrictions.
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The agency suggested that the Department of Labor (DoL) amend its regulation on plan sponsor disclosure to participants to include a specific requirement for plan sponsors to provide information to participants that discloses the risks of investing in stable value funds. In addition, the GAO recommends the DoL study stable value funds and the practice of securities lending with cash collateral reinvestment by 401(k) plans to identify situations or conditions where plan sponsors could be prevented from meeting their fiduciary obligations, revise one of its prohibited transaction exemptions, and provide better disclosures and guidance to plan sponsors and participants.   

“Labor should revise PTE 2006-16 to include the practice of cash collateral reinvestment by requiring that plan sponsors who enter into securities lending arrangements utilizing cash collateral reinvestment on behalf of 401(k) plan participants not do so unless they ensure the reasonableness of the distributions of expected returns associated with this arrangement,” one of the recommendations said.  

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In addition to reading reports from Industry experts and current regulations, the GAO conducted a survey of plan sponsors in conjunction with PLANSPONSOR magazine asking about withdrawal restrictions in their plans.

The GAO noted that between 2007 and 2010, some 401(k) plan sponsors and participants were restricted from withdrawing their plan assets from certain 401(k) investment options, including real estate, money market, and stable value investment options, as well as other investment options that lent securities (the practice of lending plan assets to third parties in exchange for cash as collateral that a fund reinvests). In most cases, the withdrawal restrictions were caused by losses and illiquidity in the investment options’ underlying portfolios and sometimes contract constraints placed on plan sponsors by the investment options.   

For stable value funds, and also for those investment options that lent securities, the withdrawal restrictions and their causes highlight the risks that participants face when allocating their 401(k) plan assets to these investment options—and, that losses are borne by plan participants, according to the report. In addition, participants often do not understand or may receive insufficient disclosures of the risks posed by these investments, and plan sponsors may be unaware or receive insufficient disclosures of the risks and challenges involved with those investment options and practices, GAO contended.  

“Labor can take a variety of steps to help plan sponsors who offer stable value funds and investment options that lend securities. Many of these steps can draw upon the changes that the Securities and Exchange Commission and others have already made, or will make, regarding these investment options and recent suggestions from plan sponsors, industry service providers, and other key stakeholders,” the agency said. 

In Practice March 16, 2011

If the Vatican is Using Social Media…

In a Webinar discussing the power of real-time marketing on social media platforms, authors of a new book asked the financial industry–why are we so behind? 
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Advisers and other financial professionals always jump to the same answer when discussing why they don’t have a greater presence in social media: compliance issues. Teri Thompson and Beverly Macy, authors of the book, The Power of Real-Time Social Media Marketing, say this is no longer a valid excuse. If the U.S. military, Pentagon, pharmaceutical industry, and even the Vatican have adopted social media, the financial industry cannot shy away from it any longer.

Referring to the “Now” lens, Thompson said social media can almost be thought of as a sixth sense, which allows you to be in touch with what is happening in the world this instant. This “sense” combines truth, openness, authenticity, and adding value; “a perfect mix for success for financial professionals,” said Thompson.

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Thompson spoke in the first of a series of Webinars sponsored by linkedFA, a social networking site designed for financial professionals, and McGraw-Hill, called “Growing Your Business Using Social Media” (see “linkedFA and McGraw-Hill Produce Social Media Webinars”).  

 

In addition to the compliance excuse, many professionals think if they stay out of the “Twittersphere,” no one can say anything bad about them. But that won’t work, Thompson said. It’s better to be involved in the conversation from the start, rather than jumping in at a time of crisis management.  Being involved in the conversation is the best way to mitigate the fear, she concluded.

Once these obstacles are overcome, there is real potential to improve the “bottom line.” Thompson cited Burson-Marsteller’s Second Annual Global Social Media Check-up, which found a 25% increase among Fortune 100 companies in their use of Facebook, Twitter, YouTube, and corporate blogging.

At the close of the webinar, Thompson threw out a phrases that have been cropping up in communications and business circles: “Reviews are the new advertising” and “Conversation is currency.” Everyone has a soapbox today, she added, and financial professionals need to get on one too.

At the ASPPA 401(k) Summit in Las Vegas earlier this month, Adam Pozek provided first-hand account of how a financial professional in the retirement industry is capable of leveraging social media. See “Making Social Media Work.”

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