Compliance February 12, 2014

Trustees to Restore $4 Million to Illinois Plan

Two Department of Labor (DOL) lawsuits have resulted in plan trustees of an Aurora, Illinois, business being ordered to restore over $4 million in employee contributions and other losses.
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In response to Perez v. Hartmann (docket number: 1:10-cv-00123) and Solis v. Hartmann (docket number: 1:12-cv-05503), the U.S. District Court for the Northern District of Illinois, Eastern Division, ordered that the trustees restore losses to Mid-States Express Inc. 401(k) Plan. In addition, the plan fiduciary is ordered to restore losses to Mid-States’ Employee Benefit Plan, a health plan.

The lawsuits, brought on behalf of plan participants, sought the recovery of $75,416.72 in unremitted employee contributions and participant loan repayments and associated lost opportunity costs to the Mid-States Express, Inc.’s 401(k) Plan, as well as employee contributions and unpaid health plan claims of the Mid-States Express Inc. Employee Benefit Plan totaling $3,983,980.

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The district court has ordered that plan trustees Bruce Hartmann and Terry Hartmann are liable for the total debt of $75,416.72 in unremitted employee contributions, participant loan repayments and associated lost opportunity costs to the 401(k) plan. Within 10 days of the order, Terry Hartmann is ordered to pay $75,416.72 to the plan. The aforementioned losses will be offset by any sums actually deposited in the 401(k) plan account by Bruce Hartmann. In December 2013, Bruce Hartmann restored $20,000 to the Mid-States Express 401(k) Plan and has agreed to restore $30,000 in five annual payments beginning on August 1.

Bruce Hartmann was also found liable for employee contributions and unpaid health plan claims to the health plan totaling $3,983,980. The judge ruled the debts owed to both the 401(k) plan and health plan are not dischargeable under Bruce Hartmann’s Chapter 7 bankruptcy petition. Both Terry Hartmann and Bruce Hartmann are permanently enjoined from acting as a fiduciary to any plan covered by the Employee Retirement Income Security Act (ERISA) in the future.

The DOL lawsuits alleged that Bruce Hartmann, Mid-States’ chief financial officer and a trustee of the 401(k) plan, violated ERISA by failing to remit the employee contributions and loan repayments to the 401(k) plan, as well as failing to forward employee contributions and fund claims of the health plan. Terry Hartmann, Mid-States’ former chairman of the board and also a trustee of the 401(k) plan, was alleged to have violated ERISA by failing to ensure employee contributions and loan repayments were remitted to the 401(k) plan’s trust account.

Mid-States Express Inc. filed for Chapter 11 bankruptcy protection in March 2009, which was converted to a Chapter 7 bankruptcy in May 2009. Bruce Hartmann filed for Chapter 7 bankruptcy protection in November 2011.

The court document for Perez v. Hartmann can be downloaded here. The decision for Solis v. Hartmann can be downloaded here.

Data & Research February 12, 2014

Interest Rates Lead Adviser Conversations

It’s not just large pension funds that have concerns over rising interest rates and their impact on portfolio strategies—defined contribution plan advisers are apprehensive, too.
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More than nine in 10 (93%) financial advisers say rising interest rates will be a critical client conversation topic in 2014, according to the “Advisor Viewpoints 2014” study from Janus Capital Group. The trend represents both a challenge and opportunity for advisers and their clients, who have seen rates trending downward since the earliest days of the financial crisis.

The survey underlying the study, conducted by Cogent Research, also finds that 84% of advisers will initiate conversations with their clients on the topic of capitalizing on equity market highs. The same percentage of advisers plans to engage in discussions with clients around the topic of sustainable income generation during 2014.

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One interesting finding in the survey shows advisers are unsure whether they will be successful in conveying more technical and challenging financial information—like the impact of rising interest rates on a fixed-income assets—as more than two-thirds of advisers (69%) say they often find themselves playing equal parts psychologist and financial professional.

“Clients are not only seeking financial advice from their advisers, but also looking to engage with them on a more personal level,” says Kathleen Burns Kingsbury, wealth psychology expert and founder of KBK Wealth Connection, in commenting on the report from Janus. “By understanding how to approach the year’s most pressing themes from a technical and conversation perspective, advisers have the opportunity to better address their clients’ true financial concerns in 2014.”

Concern for Rising Interest Rates

The Janus survey found that advisers are more concerned than their clients about rising interest rates, by nearly a 2-to-1 margin, and only 7% of advisers say clients are actively seeking advice on the topic. With so few clients actively seeking advice, advisers feel they have the responsibility to initiate conversations to help clients better understand the potential risks rising rates presents to their portfolio.

The primary message from advisers will be about fixed-income products, the survey shows, and which may continue to perform well as interest rates tick up.

“While we believe opportunities exist for risk-adjusted fixed-income returns, advisers need to initiate conversations about the potential impact of rising interest rates as many of their clients have never seen a significantly down or flat bond market,” says Colleen Denzler, senior vice president and global head of fixed income strategy with Janus.

According to Denzler, advisers should begin by making sure their clients truly understand the basic mechanics of bonds.

Examining Equity Market Highs

Almost half (47%) of advisers say their clients are well-informed and are open to advice on how to invest more in the equity markets. However, the 2013 run up in equities has created the potential for some clients to have an imbalance when it comes to what is generally accepted as the starting point for a properly diversified portfolio, the study shows.

"The need to rebalance to client portfolios coming out of 2013's equity market highs should be the starting point for advisers, because the most important thing an adviser can do for a client is to set a properly diversified portfolio based on risk tolerance," says Enrique Chang, chief investment officer for equities and asset allocation at Janus.

The survey also found that advisers anticipate that clients will agree to a slight increase in allocations to equities to take advantage of expected strong, though somewhat volatile, markets performance through 2014. But advisers also report that they expect clients will agree to bond allocations of around 24%, which is significantly lower than the generally accepted equities-to-fixed-income ratio for a properly diversified portfolio.

"There is a stress point when advisers need to have a disciplined asset allocation process in place, because that's when clients will be least likely to do the right thing," Chang says. "Together, advisers and clients should have the discipline in up markets and down markets to believe that they've done the right level of work to come up with the 60% vs. 40% or 65% vs. 35% allocation mix."

Education on Income Generation

Clients are proactively bringing up a number of income goals for 2014, the Janus survey shows. Despite this, advisers do not believe their clients are connecting the broader economic issues to their personal portfolios. Indeed, only 8% of advisers believe clients truly "understand" how income is generated in their portfolio.

Advisers feel clients will be most receptive to recommendations of two investments known for their income-generation potential – dividend-paying stocks/stock funds (86% of advisers surveyed) and high-yield corporate bonds/bond funds (53% of advisers).

"It's important for advisers to keep in mind that yield is not free," Denzler says. "Conversations about high-yield strategies are really about exercising proper risk management and making sure the client truly understands an investment the adviser is recommending."

Readers can download the Advisor Viewpoints 2014 Executive Summary for more in-depth information on the types of conversations advisers should use to navigate critical client conversations, or watch a replay of Janus’ Advisor Viewpoints panel discussion to learn more about 2014's pressing conversation themes.

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