Products August 11, 2010

John Hancock Funds Launches New Behavioral Finance Program

John Hancock's new “hard wired” program helps advisers understand client behavior, structure client portfolios, and build advisers' businesses, the company said. 
Reported by

The program’s two core components seek to educate advisers about the interplay between physiology and reasoning. The first Continuing Education course is titled “What Were They Thinking?” and uses behavioral finance concepts to help advisers understand and moderate client behavior. The second, “Building Better Portfolios: Portfolio allocations that help minimize irrational investor behavior,” builds on that knowledge and translates Behavioral Finance into practical ideas for allocations.  

“Hard Wired” explains, for example, that in moments of severe stress (such as those caused by a market meltdown), the reasoning part of the brain may shut down in favor of a more immediate instinct towards survival. This kind of temporary block on logical functional may lead to emotional or irrational investment decisions.  

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

The “Hard Wired” program includes: 

  • A client one-page summary on the three levels of brain function – reptilean, mammalian, and hominid – and how the brain functions under periods of stress.  
  • A client sheet that looks at redefining diversification, to include both normal and bear market performance.  
  • An Adviser Guide, with helpful information on how to recognize biases in clients, and how to reframe discussions with clients in order to move forward.  
  • A new thought paper, Defensive & Offensive Strategies to Help Minimize the Cycle of Emotional Investing, which helps advisers understand common investor behavioral biases to help their clients overcome them.  
  • A complete client seminar kit, including slides, script, invitation, prospecting material and client video.  

Carey Foran Hoch, Senior Vice President and head of marketing for John Hancock Funds, said, “It helps advisers understand the connections between human biases and investment behavior, and apply that knowledge to their clients and their clients’ portfolios.” The program begins this month and with continue to run through the end of the year; it is available at www.jhfunds.com/behavioralfinance.  

 

Compliance August 11, 2010

Verizon Allowed to Fix Plan Drafting Mistake

Admitting it was creating “tension” with the plan documents rule in federal benefits law, a federal appellate court has allowed an employer to correct a drafting error that could have cost its cash balance plan $1.6 billion in unanticipated benefits. 

Reported by

Opening its decision in Young v. Verizon’s Bell Atlantic Cash Balance Plan by quoting a 2010 U.S. Supreme Court decision that “People make mistakes. Even administrators of ERISA plans,” the 7th U.S. Circuit Court of Appeals, upheld a lower court ruling allowing Verizon Communications Inc. to fix the drafting error (see Verizon Escapes $1.6B Pension Liability).

Circuit Judge John Daniel Tinder, in writing for the appellate panel, asserted that courts should deal with a case involving a so-called “scrivener’s error” the same way judges now handle disputes over ambiguous plan document language – by “look(ing) beyond the plan document to extrinsic evidence to determine the parties’ understanding of the plan.”

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

“ERISA’s (Employee Retirement Income Security Act) rules for written plans are strictly enforced, but they are not so strict as to prevent equitable reformation of a plan that is shown, by clear and convincing evidence, to contain a scrivener’s error that is inconsistent with participants’ expected benefits,” Tinder wrote. “…Drafting mistakes in ERISA plans may take many forms; some involve language that is ambiguous on its face while others, like the mistake here, involve language that is not intrinsically ambiguous but still misstates participants’ benefits. It would not further the purposes of ERISA to allow courts to correct one type of mistake but not the other.”

Tinder said the panel was promulgating a standard for presenting evidence in future drafting effort cases that it said should ease some of the tension with ERISA’s rule that plan document language should govern plan operations.

“Only those who can marshal clear and convincing evidence that plan language is contrary to the parties’ expectations will have a viable claim,” Tinder explained. “This standard of proof is rigorous, requiring evidence that is clear, precise, convincing and of the most satisfactory character that a mistake has occurred and that the mistake does not reflect the intent of the parties. The evidence also must be objective and not dependent on the credibility of testimony (oral or written) of an interested party.”

Tinder declared: “These high standards of proof should deter an employer from seeking to reform plan language simply because it has proven unfavorable.”

 

(Cont...)

A Multiplication Error  

According to the court, plaintiff Cynthia N. Young’s 2005 suit argued that, during the conversion, the plan should have twice multiplied the cashout value of each employee's stake in the old defined benefit plan by a variable "transition factor" that was based on age and years of service. The official who drafted the document setting out the conversion terms said the plan only intended a single multiplication.

If the court ruled that Verizon had to implement the mistaken double multiplication, the lower court judge indicated, members of the class bringing the suit along with Young would have enjoyed a $1.67 billion windfall including $400,000. Young.   More than 5,780 participants would receive unanticipated increases in their opening pension balances of $100,000 or more, the lower court said.

In the appellate ruling, Tinder expressed surprise at the circumstances leading to the plan drafting mistake. “Bell Atlantic charged a single in-house attorney, Barry Peters, with revising a critical provision of a multi-billion dollar pension plan, apparently without critical review by another ERISA expert,” he wrote. “It is baffling that a major corporation would not invest greater resources to ensure accuracy in the drafting of such an important document.”

The 7th Circuit ruling is available. here. 

 

«