Benchmarking as a Part of a Prudent Process

Reish & Reicher Adviser Report
By Fred Reish

It is commonly accepted that 401(k) fiduciaries must prudently select and monitor both investments and service providers. It is also understood that, in order to fulfill their selection and monitoring responsibilities, 401(k) fiduciaries must engage in a prudent process. However, … many plan fiduciaries and advisers do not understand the specific requirements for a prudent process. This article focuses on those requirements.
Basically stated, there are several steps to a prudent process, which are:

1. Identify the particular issue to be considered. …
2. Determine the information that is relevant to making an informed decision about that issue. …
3. Gather and evaluate the information. …
4. Implement the decision.
5. At reasonable intervals thereafter, monitor the decision.

When evaluating the relevant data, the fiduciaries should compare it to comparable information from the marketplace. In other words, fiduciaries have to “benchmark” the investments and services in order to evaluate their quality, cost, effectiveness and other attributes. This requirement applies to all fiduciary decisions, regardless of whether they are about recordkeepers, investments, investment advice, participation, and so on. In other words, benchmarking is an inherent part of a prudent process—and fiduciaries must engage in a prudent process for every decision they make.
Here is what the DOL says about the process for selecting a service provider (which applies to all fiduciary decisions): “...the responsible plan fiduciary must engage in an objective process designed to elicit information necessary to assess the qualification of the service provider, the quality of the work product, and the reasonableness of fees charged in light of the services provided.”
The DOL goes on to say: “What constitutes an appropriate method of selecting a service provider, however, will depend on the particular facts and circumstances. Soliciting bids among service providers at the outset is a means by which the fiduciary can obtain the necessary information relevant to the decision-making process.”
In this case, the DOL is saying that, by soliciting bids, the fiduciary can obtain information about the individual provider... and can also obtain comparative, or benchmarking, information about other providers of these services.
The DOL continues: “Whether such a process is appropriate in subsequent years may depend, among other things, upon...the fiduciary’s knowledge of prevailing rates for the services...Regardless of the method used, however, the fiduciary must be able to demonstrate compliance with ERISA’s fiduciary standards.”
In other words, regardless of how the fiduciary obtains the comparative information, the fiduciary must be able to demonstrate that he engaged in a process to evaluate both micro information (related to a single service provider) and macro information (comparative data from the industry).
The point of this article is that, in order to engage in a prudent process, fiduciaries must do more than analyze a particular service provider or a particular investment. Instead, they must also compare that information to comparable data about other similar plans, services or investments. …

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Any U.S. federal income tax advice contained in this communication (including any attachments) is neither intended nor written to be used, and cannot be used, to avoid penalties under the Internal Revenue Code or to promote, market or recommend to anyone a transaction or matter addressed herein.

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© 2009 Reish & Reicher, A Professional Corporation. All rights reserved. The ADVISER REPORT is published as a general informational source. Articles are general in nature and are not intended to constitute legal advice in any particular matter. Transmission of this report does not create an attorney-client relationship. Reish & Reicher does not warrant and is not responsible for errors or omissions in the content of this report.
Learn more about R&R related practice areas:
Employee Benefits

IRS Creates Retirement Plan Tool for Small Business

WebCPA.Com

Washington, D.C.
(October 13, 2009)
By WebCPA Staff
The Internal Revenue Service has created a new Web-based tool to help small-business owners determine which tax-favored pension plan best suits their needs and how to keep their plans in compliance.
The IRS Retirement Plan Navigator aims to provide employers with an online guide for choosing, maintaining and correcting a plan. The navigator does not suggest which plan may be best for a specific employer, but instead lays out the options to allow small-business owners to choose a plan that best fits their situation. Options include 401(k) plans, plans with individual retirement accounts, defined-benefit plans and tax-exempt plans. …
The navigator also provides a checklist and suggested resources for maintaining compliance. It offers suggested options to employers seeking to correct errors and bring their plans back into compliance. …
The IRS said the Web-based guide will be kept up to date as pension laws and regulations change.

Significance of November 30th in New RMD Waiver Rules

SunGard Relius

In Notice 2009-82, the IRS provides transition relief and other guidance relating to the WRERA waiver of required minimum distributions under Code §401(a)(9). … November 30, 2009 figures prominently in this relief, however, there is substantial confusion about the significance of that date. This Technical Update will discuss what distribution recipients and retirement plan sponsors must do by that date.
Rollovers
Notice 2009-82 recognizes that some recipients of 2009 retirement plan or IRA distributions might have been confused about whether 2009 RMDs (distributions which would have been RMDs if Congress hadn’t passed WRERA) were eligible for rollover. The Notice also provides transition rules which allow plan participants to roll over certain distributions (extended 2009 RMDs) which would otherwise be ineligible for rollover.
The Notice gives recipients of 2009 RMDs (whether distributed from a plan or an IRA) until November 30, 2009 to roll over the distribution, even though the normal 60-day rollover period may have expired. It provides a similar extension for recipients of extended 2009 RMDs from retirement plans. This extension only affects distributions received prior to October 1, 2009. Distributions after September 30 continue to have their normal 60-day rollover period (which will expire on or after November 30).
Plan amendments
WRERA’s RMD relief and Notice 2009-82 force plan sponsors to address several issues, including:

1. Will the plan make 2009 distributions which would be 2009 RMDs or extended 2009 RMDs?
2. Will the plan give participants the option to take or not take such a distribution? If so, what will be the default if the participant does not select?
3. Will the plan cooperate in direct rollovers involved 2009 RMDs or extended 2009 RMDs?

In most cases, the employer’s decision will require a plan amendment. (A future Technical Update will discuss the specifics of those amendments.) Plan sponsors must adopt the amendment no later than the last day of the 2011 plan year (2012 for governmental plans). …
Recognizing this difficulty, the IRS provided transition relief. The IRS will not treat a plan as failing to comply with its terms, during the period from January 1, 2009 to November 30, 2009, with regard to those three questions. …
What does this mean for the future? It means that although the employer has until 2011 to adopt its RMD amendment (unless the plan terminates before then), beginning December 1, 2009 the plan must operate in conformance with the amendment it ultimate adopts. In other words, now is the time for decision and implementation. Documentation can wait.
For most participants, this decision will affect distributions of 2009 RMDs and extended 2009 RMDs distributed during December, 2009. For participants with an April 1, 2010 required beginning date (such as participants turning 70½ during 2009), this decision will affect distributions from December 1, 2009 to April 1, 2010.

Poll Finds Strong DB Support

PLANSPONSOR.COM

September 1, 2009 (PLANSPONSOR.com) – Fifty-four percent of employees in a new Watson Wyatt survey say they are satisfied with their company’s retirement program.
A Watson Wyatt news release said the poll also found 61% of employees view their company's retirement program as the primary vehicle to save for retirement, and 29% indicated they would not save for retirement without it.
The survey found more employees with defined benefit (DB) plans (62%) are satisfied with their retirement program compared with those with only defined contribution (DC) plans (51%). Some 46% of employees said they would be willing to pay a higher amount out of their paycheck to ensure a guaranteed benefit in retirement….
More than half (52%) of workers covered by a DB plan said their company's retirement program is a key reason they continue to work for their employer compared to 33% of those with only a DC plan. Workers with a DB plan are also more likely to want to stay with their employer until retirement (67% versus 54% of those with only a DC plan).
Other preferences of DB plans over DC plans that workers cited include having benefits distributed as guaranteed monthly payments over retirement years (39%) and guaranteed payouts with no opportunity for higher returns, but also no chance of lower returns (25%. …
The Watson Wyatt survey was conducted in February 2009 and includes responses from more than 2,200 full-time workers.
More information is available at http://www.watsonwyatt.com/.
Fred Schneyer
editors@plansponsor.com

New twist on annuities in 401(k)s - Pensions & Investments

Investment-only shops create income guarantees, but clients aren't biting yet

Pensions & Investments

By Jeff Nash October 5, 2009, 12:01 AM ET

Lacking: Sue Walton believes more details are needed on income solutions.

Several money managers are scrambling to design investment options embedded with annuities or income guarantees in what they hope will be the next major evolution in defined contribution plans.

… With 401(k) and other DC plans now the main retirement vehicle for many workers, the industry has been shifting away from focusing on asset accumulation to retirement income and the distribution phase. Plus, last year's market collapse further highlighted the need for plans to better protect assets, particularly for those participants at or near retirement.

As a result, several investment-only DC service providers … have launched or are developing strategies within investment plan options such as target-date funds that annuitize or guarantee a portion of participants' assets to provide steady income. …

But industry experts say DC plan executives, along with their consultants and some large record keepers, are reluctant to get behind such solutions, citing legal and fiduciary hurdles and cost concerns. Some even wonder if there is participant demand for such strategies.

“Adding income solutions to DC plans makes perfect sense, but the details are the biggest challenge,” said Sue Walton, senior investment consultant at Watson Wyatt Worldwide in Chicago. …

Keith Overly, executive director of the $6.8 billion Ohio Public Employees Deferred Compensation Program, Columbus, agreed the idea of adding a guaranteed income option to target-date funds or other investment options is “good in theory,” but “there are certainly many details to consider, including fees, how the product is structured, and whatever terms and conditions apply if a plan wishes to terminate a manager and discontinue the guaranteed income product.”

Tobi Davis, retirement plans and cash manager at Playboy Enterprises Inc., Chicago, which has an $87 million 401(k) plan, said “it's a bit early” for DC plan sponsors to adopt guaranteed income solutions. …

2 strategies

There are two basic strategies for offering income guarantees. In one approach, an investment manager designs a target-date fund (or other qualified default option) that includes an income guarantee from one or more insurers. The participant begins accumulating future income by buying slivers of a traditional deferred fixed annuity as he or she approaches retirement. At retirement, the participant continues to receive income from the annuity, and the rest of the plan's assets are invested.

In the second strategy, the investment manager and the insurer design a “guaranteed lifetime withdrawal benefit,” which is offered as part of a target-date fund or balanced fund. The participant chooses to transfer assets in that fund to the guaranteed benefit, or is automatically enrolled in the feature as he or she nears retirement. The design allows participants to remain invested in a balanced portfolio “wrapped” by an insurance guarantee, permitting the participant to withdraw a set percentage of the “high-water” value of the account each year in retirement, even if the market value of the account is tapped out.

Philip Suess, a Chicago-based principal at Mercer, said the complexity of such investments could initially put off some plan executives and participants. “But I think there is a place for these types of solutions,” he said. …

One major hurdle, explained David L. Wray, president of the Profit Sharing/401(k) Council of America, Chicago, is that such solutions “currently don't have the blessing of the federal government.” Congress, he said, would have to repeal the joint and survivor annuity laws, which give a non-employee spouse the right to choose a survivorship annuity as the way in which benefits are distributed from the plan. …

Another issue, said Tom Idzorek, chief investment officer and director of research and product development with Chicago-based Ibbotson Associates Inc., is plan sponsors are worried about the fiduciary risk of choosing a new, untested strategy. “This is something all plan sponsors are talking about, but very few want to be the first movers,” he said. “Plan sponsors have a very strong desire to not be sued.” …

Plan executives might receive a nudge from Washington. Late last month, Phyllis C. Borzi, assistant labor secretary, told the Profit Sharing/401k Council of America's annual conference that she is planning to ask plan executives, consultants and vendors what regulatory or statutory changes would “encourage” employers to offer a lifetime income stream option, such as an annuity, in their DC plans.

Safe-harbor designation

Thomas J. Fontaine, global head of AllianceBernstein Defined Contribution Investments, New York, said if Washington were to classify DC investment options with lifetime income guarantees as “safe harbor” investments, “it would ignite the adoption” of such investments. “Nothing changed quicker than the adoption of target-date funds after it was designated a safe harbor, thus protecting plan sponsors from lawsuits.” …

BGI spokesman Lance Berg said the company hasn't “quantified” the success of the program yet, but did say company officials have had “hundreds” of meeting with plan sponsors about the program.

Drew Carrington, UBS Global Asset Management's managing director and head of defined contribution and retirement solutions, Chicago, … said record keepers and consultants have been reluctant to recommend these products to plan sponsor clients. (Fidelity Investments, for example, has no plans to add a guaranteed income to their lifecycle funds, said spokeswoman Sophie Launay.)

“Record keepers are concerned about record keeping these investments and portability,” Mr. Carrington explained. “Consultants tend to stick traditional, marketable investments. It's really important that we get both consultants and large record keepers on our side on this one.”

Contact Jeff Nash at jnash@pionline.com