Retirement Plan Committees Need a Custom Charter

Many retirement plan committees do not have a charter, and often those that do find it fails to provide adequate guidance because it is not specific enough to the organization.

According to an article in Sibson’s latest Perspectives newsletter, in the interest of sound organizational and plan governance, every retirement plan committee should have a custom charter that provides a framework for meeting its responsibilities.

Richard A. DeFrehn and John K. Graham, vice presidents at Sibson Consulting, say, among other things, a custom charter can help get new retirement plan committee members up to speed. A company with high turnover at senior levels may find its newly hired employees lack the necessary experience to take responsibility for the company’s retirement plans. A retirement committee with a plan charter would have clearly outlined duties and oversight responsibilities for committee members which would enable the company to arrange and carry out training quickly for new employees who will be performing key fiduciary and governance tasks.

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To further point out why retirement plan committees need a custom charter, DeFrehn and Graham point to the case of Tussey v. ABB, Inc., in which a court noted that the plan fiduciaries did not follow their investment policy statement, and as a result, paid excessive recordkeeping fees and failed to perform appropriate due diligence with respect to the costs associated with the plan’s investment fund offerings (see “Fidelity Wins Some in Appeal of Tussey Case”). A retirement committee with a plan charter would have defined roles and responsibilities for the plan’s fiduciaries, including the performance of the tasks delineated in the plan’s investment policy statement, they say.

In addition, a custom charter can help retirement plan committee’s avoid costly litigation, according to the article. DeFrehn and Graham bring up the recently filed case against Novant Health, in which the committee was accused of offering imprudent investment options and causing the participants in two defined contribution plans to pay third-party service providers millions of dollars in unnecessary recordkeeping and administrative fees (see “Health System and Plan Providers Sued Over Plan Fees”). “A retirement committee with a plan charter would have due diligence processes for selecting and managing vendors,” the authors say.

According to the article, a retirement plan committee’s charter should:

  • Establish the committee’s authority;
  • Define the committee’s purpose;
  • Determine the committee’s structure;
  • Formalize the committee’s procedures;
  • Delegate authority and assign responsibilities and duties;
  • Create processing for selecting and managing vendors;
  • Outline the committee’s reporting needs; and
  • Set procedures for performing updates and protecting committee members financially.

 

Establishing a charter is a complex process that requires input from within the organization and from trusted advisers who thoroughly understand what is required and have experience in this area, DeFrehn and Graham contend. The retirement plan committee will also need assistance from human resources and/or benefits staff who are responsible for the plan’s day-to-day administrative activities and duties to define the required elements for administrative oversight of the plan.

Once the charter is constructed, it must be reviewed by the organization’s legal counsel. The charter would need periodic review and maintenance and should be updated regularly, as needed.

Sibson Consulting’s Perspectives newsletter for March 2014 is here.

When Wirehouse Advisers Seek Independence

When recruiting, don’t automatically look past wirehouse advisers, says Neal Simon of Highline Wealth Management, because they might be a firm’s value add.

 

Many in the industry believe that successful wirehouse advisers frequently move between the big four but rarely transition to full independence under the RIA model, according to Simon, CEO and founder of Highline Wealth Management and author of the case study “The Grass Is Only Greener If They See It: Helping Wirehouse Advisers To View Your Firm as a Destination.”

Simon notes that over the past eight years, during some of the most difficult and turbulent markets in recent memory, RIAs saw their market share grow by more than 30%,while the market share of wirehouses dropped by nearly 20%.

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Highline’s case study says it is not just clients and assets in transition but also advisers. The number of advisers in the registered investment adviser (RIA) channel has steadily grown during that same time by 25%, compared with a decrease of 21% by their wirehouse counterparts, the study says.

Some of the most successful wirehouse wealth management teams in fact are peering over the fence at independence. A growing number are making the move, he says, but advisory practices should ask whether they are prepared to state why their firm is the right destination.

Each adviser is different, Simon says, and so each has different hot buttons that would attract them to a practice. “Highline’s approach is to be very transparent about who we are, how we do things and, when appropriate, even our financials,” Simon tells PLANADVISER. “We look for advisers who are a good fit culturally and have investment philosophies similar to Highline’s. We have added advisers who are hungry to grow their client base and income, and also added advisers who are closer to retirement.”

The benefits a wirehouse adviser can bring to an independent practice may not be entirely predictable. Since each adviser brings unique knowledge, skills and experience, the answer will depend on the specific adviser, according to Simon. 

Improved Service

Highline’s case study mentions a Merrill Lynch adviser who joined Highline in early 2008. “Bill Schwartz is a CPA and Certified Financial Planner (CFP) with tremendous knowledge and experience in tax and planning issues,” Simon says. “He has improved the way we serve clients and has served as an adviser to many of our firm’s key clients. Believe it or not, in addition to the tax and planning knowledge, Bill has a real knack for aesthetics and marketing. He led the revamping of our office, website and marketing materials.”

The thought of transitioning to an RIA would have been highly problematic and relatively unattractive for all but the bravest wirehouse advisers even five years ago, Simon says. “Back then, the more transactional commission-based nature of their book of business would have made the change to a mostly (if not entirely) fee-based environment a veritable non-starter,” he says.

But today’s landscape is very different. Simon notes that wrap fee business has become a significant part of many wirehouse advisers’ books, and continues to grow briskly. “As a result, both their portfolios and their billing structures are much more closely aligned to the RIA model than ever before, significantly alleviating much of the past complexity associated with transitioning,” he says.

So why isn’t there a mass exodus of wirehouse advisers moving to establish a new RIA or join an existing one? Simon believes the answer is a mix of cultural factors as well as the upfront payments or checks that wirehouses use as both recruitment lures and retention handcuffs. “I also believe that the RIA path could and would prove much more attractive to many, if only they were better educated as to the compelling benefits they would realize from both a service model and compensation perspective by joining forces with an existing RIA,” he says.

Simon suggests a change of mindset for advisers to break free of old models. “At Highline, we do not care as much about where an adviser is today but care more about who the adviser is, how they invest, and how they serve their clients,” he says. “Through the five transactions we have done, we have found that adding advisers has been beneficial for all three of our key constituencies.”

Practice Benefits

Growth let the firm provide additional services and add resources to the investment team, two key benefits for clients. Their employees benefited because of the new responsibilities the top performers could take on. Last, Simon says, growth was good for their partners because it added economy of scale and improved their margins.

Some firms might worry that adding a wirehouse adviser would change the practice. “Adding any new adviser changes a practice, especially if the firm intends to standardize across advisers,” Simon says.

Some companies, especially the aggregators, allow advisers to act as silos, he says, but Highline does not want to operate as a collection of different advisers. “We want to have one culture, one investment philosophy, and one client service experience,” Simon says. “I want to know that, if I sit next to a Highline client on an airplane, I know what that client experience is like. In order to create this experience, we have incorporated new partners into our investment committee and have enabled them to utilize the firm’s support resources.”

The study’s key takeaways are:

 

  • The wirehouse universe holds significant adviser talent.
  • It may not be universally fit as a growth strategy for every firm, but wirehouse advisers can fit in and thrive, in the right RIA.
  • The greatest challenge is education. You can’t overemphasize the differences and benefits of your service model and compensation structure.

 

“I think the greatest selling points are that independence is better for their clients and that we are a fast-growing enterprise that is willing to share its success with new partners,” Simon says.

“The Grass Is Only Greener If They See It: Helping Wirehouse Advisers To View Your Firm as a Destination” was released by the Alliance for Registered Investment Advisors (aRIA), a research study group that comprises six RIA firms. The case study is available free of charge on the aRIA website

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