In Practice September 30, 2010

PANC 2010: Building a Better RFP/RFI

A successful request for proposals (RFP) or request for information (RFI) process starts with establishing goals.
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Michael Kozemchak, Managing Director, Institutional Investment Consulting, an NRP member firm, told attendees at the recent PLANADVISER National Conference, that they first should determine who the plan decision makers are. Advisers should educate this committee about the task they are undertaking.  

They should first identify the goal of the process and the sponsor’s preferences, according to Kozemchak. It will also help to identify political connections. For example, if the CEO knows someone at the provider or prefers a certain service, it will save time to include them from the start.  

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Kozemchak says the committee should determine whether it is just benchmarking–in that case performing an RFI–or if it is actually prepared to change vendors, requiring an RFP.  If issuing an RFP, committee members should set a timeline for a decision from the start.  

Matthew A. Savage, Senior Business Development Manager, Strategic Insight, an Asset International company, says sponsors and advisers should have an open mind and be prepared for an unbiased evaluation. A provider that didn’t work five years ago may work out now.  

Who you send the RFP or RFI to will depend on the plan type and size, according to Phil Senderowitz, Senior Plan Consultant, 401(k) Advisors. Advisers should determine which providers serve the plan type and size sponsored by their client.  Savage notes that RFI and RFP questions will change with the latest trends and the latest regulations.  He adds that the best way to understand the culture of a provider is with onsite visits as well as peer referrals. 

Senderowitz says advisers can use a standard online RFP provided by an entity such as SPARK, and add specifics for the plan and pricing requests when doing a search. Kozemchak also suggests using PLANSPONSOR’s Pathfinder, a database of approximately 130 providers that can be narrowed down based on inputs of what the sponsor is looking for.  

Savage adds that with Pathfinder, advisers and sponsors can weight the importance of specific questions and the system will score accordingly.  In addition, Pathfinder will show why certain providers didn’t make it to the finals.  

Compliance September 30, 2010

SEC Charges Two in State Street Subprime Mortgage Case

The Securities and Exchange Commission (SEC) has charged a pair of former State Street Bank and Trust Company employees with misleading investors about their exposure to subprime investments.
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A news release said the agency alleges that John P. Flannery and James D. Hopkins marketed State Street’s Limited Duration Bond Fund as an “enhanced cash” investment strategy that was an alternative to a money market fund for certain types of investors.

However, according to the SEC, by 2007 the fund was almost entirely invested in subprime residential mortgage-backed securities and derivatives, but continued to be described as less risky than a typical money market fund. The extent of its concentration in subprime investments was not disclosed to investors.

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Flannery was a chief investment officer at State Street, while Hopkins was a product engineer who the SEC said is currently State Street’s head of product engineering for North America. The Wall Street Journal reported Hopkins had also left the company.

The SEC alleged both men “played an instrumental role in drafting a series of misleading communications to investors.”

(Cont...)

Allegation Details  

According to the SEC's order, the misleading communications to investors related to the effect of the turmoil in the subprime market on the Limited Duration Bond Fund (established in 2002) and other State Street funds that invested in it. State Street provided certain investors with more complete information about the fund's subprime concentration and other problems with the fund. These better-notified investors included clients of State Street's internal advisory groups, which provided advisory services to some of the investors in the fund and the related funds, the SEC charged.

The regulator further alleged that State Street's internal advisory groups, one of which reported directly to Flannery, decided to recommend all their clients redeem from the fund and the related funds. The pension plan of State Street's parent company, State Street Corporation, was one of those clients.

At the direction of Flannery and State Street's Investment Committee, State Street sold the fund's most liquid holdings and used the cash it received from these sales to meet the redemption demands of better informed investors, the SEC said. This left the fund and its remaining investors with largely illiquid holdings.

In the settlement with the firm announced jointly by the SEC and the offices of Massachusetts Secretary of State William F. Galvin and Massachusetts Attorney General Martha Coakley earlier this year, State Street agreed to pay more than $300 million to investors who lost money during the subprime market meltdown in 2007 (see State Street Settles Subprime Mortgage Charges with State, Feds).

State Street distributed those funds to investors in February and March and has also paid nearly $350 million to investors to settle private lawsuits.

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