DC Retirement Plans In Need of Non-Traditional Investments

On Wall Street:

BY: MARGARIDA CORREIA

THURSDAY, JUNE 6, 2013

Defined contribution retirement plans need the non-traditional investment solutions that traditional pension plans offer.

English: Emerging Markets without China and India (Photo credit: Wikipedia)

That’s the gist of BNY Mellon’s latest white paper. The report argues that DC retirement plans could improve their risk-adjusted returns, reduce volatility and provide better protection against inflation by broadening their investment options to include real assets, emerging market equities and debt, and liquid alternatives.

English: Study on alternative investments by institutional investors. (Photo credit: Wikipedia)

"Traditional DC plans do not provide the level of diversification and risk balance that plan participants require to achieve their retirement goals,” Robert Capone, executive vice president of the BNY Mellon Retirement Group and author of the report, said in a statement.

English: Investment Process Focused on Risk Measurement & Management (Photo credit: Wikipedia)

The limited range of investment options is the primary reason the plans are unable to match the performance of traditional pension or defined-benefit plans, which tend to incorporate a range of non-traditional assets, according to the report.

“We believe that applying the best DB practices to DC plans would reduce equity risk and home country risk as well as thoughtfully incorporating alternative investments to increase diversification, return potential and downside risk management,” Capone said.

If DC plans were constructed more similarly to DB plans, approximately 20% of the DC plan assets would be allocated to non-traditional strategies, such as real assets, total emerging markets and liquid alternatives, according to the report.

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For Performance, 401(k) Plans Can’t Touch Pensions

A new analysis shows that the performance gap in 2011, the most recent year for which research is complete, was the most in almost 20 years.

CFO.com:
Retirement Plans | May 28, 2013
David McCann

Pension plans have almost always outperformed 401(k) plans, but the gap in 2011 was the greatest it’s been since the mid-1990s, according to a new report from consulting firm Towers Watson. ...

... “Our research shows that over the last 17 years, at least, DB plans have consistently outperformed DC plans,” says Dave Such
sland, senior retirement consultant for Towers Watson. “DB plans are actually a less-costly way to provide the same benefit, because the better investment returns mean a company would need to contribute fewer dollars to offer that benefit. But generally when a company moves from DB to DC, it doesn’t provide the same benefit.”

WellPoint (Photo credit: Wikipedia)

The shift from DB plans to 401(k) plans has been ongoing since 1981. Companies have given different rationales for making the switch: to stay cost-competitive with others in their industry or to pay for rising health-care costs, for example.

English: This is the main office building of Hanover Insurance Group in Worcester, Massachussets, USA (Photo credit: Wikipedia)

Some even suggested that their employees didn’t value the pension plan, preferring a 401(k) or other savings vehicle instead. WellPoint, for example, said employees wanted to decide for themselves how to invest their retirement funds, according to a 2006 article in the Indianapolis Business Journal. At Hanover Insurance Group that same year, the company said its workers “liked the ability to borrow or take withdrawals from 401(k) plans,” according to the Worcester Telegram & Gazette.

English: Telegram and Gazette Building, Worcester, Massachusetts, USA. (Photo credit: Wikipedia)

Assuming those were accurate representations of employee sentiment, the workers probably changed their minds after the recent recession hammered their 401(k) balances. While the value of most accounts has since recovered, a sense of trust in 401(k) plans likely has not, and there is great yearning within American society for the guaranteed monthly benefit for life that a pension plan brings.

Not that DB plans are a picture of stability. “A DB plan may be even more volatile than a 401(k),” says Suchsland. “But it will typically provide a better benefit than a comparable contribution to a DC plan would provide, because of the advantages of greater diversification, lower fees, and access to investment professionals.”

Towers Watson’s analysis of more than 2,000 employer-sponsored retirement plans found that DB plans had median investment returns of 2.74 percent in 2011, compared to 0.22 percent loss for DC plans. ...

In fact, over the past five years that gap has been narrower than it was historically. Since 1995, DB plans have outperformed DC plans by an average of 76 basis points annually. But in the 2007-2011 period the difference shrank by roughly half, to an average of 39 basis points, driven almost entirely by strong stock-market performance in 2009, when DC plans returned 20.9 percent while DB plans gained 15.5 percent.

Judging by the stock market’s recent stellar performance, when the analysis for 2013 becomes available it likely will show that DC plans once again did better than DB plans, at least for a year’s time.

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New proposed regulations could mean changes for employee retirement plans

Employee Benefit News:

By Sally Doubet King & Carolyn M. Trenda

April 23, 2012

Seal of the United States Department of the Treasury (Photo credit: Wikipedia)

... For several months, the Department of the Treasury, the Internal Revenue Service and the Department of Labor have been exploring ways to provide “income-stream” options for more retirement plan participants. The agencies have focused on finding a balance between lump-sum cash distributions (which provide liquidity) and lifetime-income options.

This past February, the Treasury and the IRS released two proposed regulations, and the IRS issued two revenue rulings, that provide different strategies for achieving such a balance. Here, we go over two:

Logo of the Internal Revenue Service (Photo credit: Wikipedia)

- A longevity annuity option, providing an annuity that begins at an advanced age under a defined contribution plan.

- A deferred annuity option from a defined contribution plan.

Longevity annuity option under defined contribution plan

To address the concern that retirees may outlive their savings, especially where the only retirement plan distribution received by the retiree is a lump sum from a defined contribution plan, the guidance package includes a proposed regulation that introduces a new concept, the “qualified longevity annuity contract." Such a contract would provide a stream of income commencing at an advanced age, such as 80 or 85, and would continue as long as the individual lives. ...

Under the proposed regulation, if a plan offered a QLAC, the QLAC would be disregarded in determining RMDs. Therefore, a participant would not need to commence distributions from the QLAC before the age selected under the QLAC contract.

Also under the proposed regulation, a QLAC would be an annuity contract purchased from an insurance company for a plan participant that satisfies each of the following requirements:

- Premiums for the contract satisfy a specific dollar limitation and percentage of assets limitation, i.e., the lesser of $100,000... or 25% of the account balance.

The contract provides that distributions must commence not later than a specified annuity starting date, and that annuity starting date cannot be later than the first day of the month coincident with or next following the participant’s attainment of age 85. ...

The contract does not make available any commutation benefit, cash surrender right or other similar feature.

There are no benefits provided under the contract after the death of the employee, other than a life annuity payable to a designated beneficiary.

The contract, when issued, states that it is intended to be a QLAC.

Additionally, issuers of QLACs are subject to certain reporting and disclosure requirements.

QLACs could also be provided under 403(b) plans and traditional IRAs, but not under 457(b) plans, defined benefit plans or Roth IRAs.

Note: Similar to the proposed regulation on partial annuity distributions, the new guidance on QLACs would be effective for contracts purchased after the publication date of a final regulation; in the interim, plans cannot rely on the proposed regulation.

Deferred annuities from defined contribution plans

The final piece of guidance is Revenue Ruling 2012-3. This ruling describes how the qualified joint-and-survivor annuity (QJSA) and qualified pre-retirement survivor annuity (QPSA) requirements in Code Sections 401(a)(11) and 417 apply when a deferred annuity contract is purchased under a defined contribution plan.

The ruling provides three examples that illustrate different deferred annuity design alternatives, each with different conditions: a revocable annuity, a fixed annuity and a fixed annuity with an election not to pay amounts attributable to matching contributions under the annuity contract in the event the participant dies prior to the annuity starting date. The ruling then provides an analysis of how each alternative would necessitate certain plan terms, including compliance with QJSA and QPSA notice, waiver and consent requirements.

The ruling clarifies that where the plan separately accounts for the deferred annuity contract, the remainder of the plan is not subject to the QJSA and QPSA requirements.

Future considerations

Employers may wish to provide comments to the Treasury on either or both of the proposed regulations; these comments must be provided by May 3, 2012. In addition, plan sponsors interested in the new options should evaluate how the options could be integrated into current plan design and communicated to participants.

For more information, contact Partner Sally Doubet King at            (312) 849-3684 begin_of_the_skype_highlighting            (312) 849-3684      end_of_the_skype_highlighting       or sking@mcguirewoods.com and Associate Carolyn M. Trenda at             (312) 849-8130 begin_of_the_skype_highlighting            (312) 849-8130      end_of_the_skype_highlighting       or ctrenda@mcguirewoods.com at the law offices of McGuireWoodds LLP.

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Time to update ERISA fiduciary rule--OPINION

Currently, some advice, however conflicted, is seldom actionable

Pensions & Investments
By Phyllis C. Borzi
April 18, 2011, 12:01 AM ET

Image via WikipediaPension plans and participants routinely depend on experts for guidance in making important investment decisions. They turn to these investment professionals for reliable advice on how best to manage and safeguard retirement assets. Most would assume that these experts give their advice as fiduciaries, obligated to act with prudence and undivided loyalty to the plans' financial interests, rather than in their own interests — and that's exactly what the Employee Retirement Income Security Act of 1974 provides. However, a regulation issued in 1975 by the Department of Labor substantially narrowed the statutory fiduciary definition, making it far too easy for today's advisers to avoid fiduciary responsibility. We are now working to update this rule.

John Dean
Phyllis C. Borzi is assistant secretary of labor for the Employee Benefits Security Administration, Washington

So much has changed over the last three decades and the concepts and interpretations developed long ago often need to evolve or they risk becoming irrelevant. … The department's plan to update its 36-year old fiduciary regulation is necessary to ensure its relevance in today's environment of participant-directed investments.

… ERISA provides that a retirement plan fiduciary must act with prudence and undivided loyalty to the participants in that plan. Among other things, the law says that anyone providing investment advice for a fee, either direct or indirect, is a fiduciary. The department's 1975 rule restricted this definition by creating a five-part test for the definition to be met. At the time, … 401(k) plans didn't exist and individual retirement accounts were just starting up. Now the majority of retirement plan assets are in 401(k) plans where participants shoulder most of the investment responsibility, regardless of their financial sophistication. Additionally, IRA assets now exceed those in 401(k) plans. As a result, good investment advice is in greater demand, both by participants and by the plan sponsors who select plan investments.

Among the key elements of the five-part test was the requirement that the advice had to be given on a regular basis and that it had to be given pursuant to a mutual understanding that the advice would be the primary basis for the investment decision. This means that advice given infrequently, however flawed or conflicted, is seldom actionable by the department. … Moreover, unless both the plan official and the adviser understand that the advice serves as a primary basis for the investment decision, advisers who base their advice on their own financial interests rather than the plan's can't be held accountable under ERISA for the resulting losses.
Consequently, plan sponsors and participants are often left holding the bag for damages caused by conflicted advice, even in cases where the adviser might have represented that the advice was covered under ERISA. Plan officials who relied on that advice, as a result, are often the sole targets of legal actions that may follow.

… Plan sponsors hire their advisers with the expectation that the advice will be free of conflicts of interest and that these advisers will be held to the same legal standard of care that any fiduciary would.
To fix this problem, we have proposed a new rule that more closely reflects Congress' decision in 1974 as to when investment advisers are “fiduciaries” to the plans they serve. The new rule would remove the “regular basis” and “primary basis” requirements to give added protection to both employees who participate in retirement plans and to the businesses that offer them. ...

Image via WikipediaIn developing this rule, we are working collaboratively with the Securities and Exchange Commission and the Commodities Futures Trade Commission to harmonize our respective regulatory activities. We want to ensure that compliance with one regulatory regime does not create violations of the other. … We also have broad authority to issue exemptions from ERISA's prohibited transaction rules, so we can make sure that beneficial advice practices are permitted, even if they would otherwise be technical violations of the statute. While we recognize that most advisers act in good faith, the new rule would permit us better to protect plans from abusive practices and to address them when they occur. We will, however, continue to evaluate the scope, terms, conditions and exceptions in the proposed rule to ensure that the final regulation is as clear and effective as possible, and to make sure that we avoid any unintended consequences.

Our actions will benefit America's businesses and their employees nationwide. The proposed rule would hold financial professionals who present themselves as expert purveyors of investment advice more accountable for that advice, allowing plan sponsors to be secure in the knowledge that outside advisers are giving them the best possible guidance. Shouldn't advisers who provide such crucial advice be held to the same standard of care as those who are paying them for it?

Phyllis C. Borzi is assistant secretary of labor for the Employee Benefits Security Administration, Washington.

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The ideal DC plan: auto-enrollment, escalator and quicker vesting

Employee Benefit Adviser

Posted November 8, 2010 by Editorial Staff at 10:43AM.

Image by Getty Images via @daylifeThe ideal defined contribution plan should be mandatory, and include auto-enrollment, savings escalation and employer contributions, sponsors of large retirement plans believe.

That’s the conclusion of a new study from Northern Trust Global Investments, “The Path Forward: Designing the Ideal Defined Contribution Plan.” Northern Trust surveyed 50 large DC plan sponsors, representing more than 970,000 participants and over $100 billion in plan assets, as well as five leading investment consultants.
The survey found that 63% of plan sponsors and four out of five consultants think participation in DC plans should not be optional. Forty-nine of the 50 plan sponsors and all of the investment consultants believe automatic enrollment should be a key feature of DC plan construction. Currently, federal data indicate that only 19% of private industry workers are enrolled in plans with automatic enrollment, according to Northern Trust.
Seventy-five percent of the plan sponsors and all of the consultants support automatic escalation, which would build on the default level of between 3% and 7% for employee salary contributions to auto-enrollment plans.
Almost all plan sponsors and consultants report that the ideal DC plan structure would include significant contributions from employers, while 60% of plan sponsors believe employer contributions should vest immediately, instead of waiting until an employee works for one year or more at the company.
The majority of those surveyed also said they were in favor of government and employer policies, including tax incentives, restrictions on taking loans against plan balances and transparent fee structures, to strengthen plans.

Image via Wikipedia“The study participants describe the ideal DC plan as simple, automatic and cost effective,” says Jim Danaher, senior investment product manager for Defined Contribution Solutions at Northern Trust. “These traits are necessary to satisfy the requirements of three different constituencies: employees who need an efficient means of accumulating assets for retirement; employers in need of a cost-effective benefit to attract and retain valuable employees; and policymakers in need of a reliable savings vehicle in an age of lengthening life spans, pension funding crises, and chronic under-saving.”

— By Ruthie Ackerman, an online editor for Financial Planning, a SourceMedia publication.

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