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Insight on Plan Design & Investment Strategy
Updated: 8 hours 45 min ago

Could Auto-Enrollment Be a Boost for Government DC Plan Participants?

Wed, 11/20/2019 - 19:26

The median account balance in government defined contribution (DC) plans was $644,994,965 as of December 31, 2018, according to the National Association of Government Defined Contribution Administrators’ (NAGDCA)’s 2019 Benchmarking Report.

The median account balance per participant for 2018 was $45,504.63. Not surprisingly, the older the participant, the larger the typical account balance. Older plan participants were also contributing more than their younger counterparts in terms of dollar per paycheck deferrals.

The participation rate for state-sponsored DC plans was 49%, while for non-state plans it was 68%.

One possible reason for low participation and low account balances is that 93% of the responding plans had participants that were eligible to participate in defined benefit (DB) plans. Another possible explanation for the low participation rate compared to that of private-sector DC plans is the lack of ability to offer automatic enrollment.

According to the report, only 23% of the responding plans reported using automatic enrollment, while one in 10 used automatic escalation from which a participant must opt-out. This is nearly the same as the number of plans that reported using auto-enrollment in NAGDCA’s inaugural benchmarking report in 2016.

NAGDCA has been an advocate for states allowing government DC plans to use auto-enrollment. “Excuses for not beginning a savings program can be made at every phase in life—student debt, getting married, buying a house, having kids, paying for college, etc.—before you know it you are out of time. With so much burden of responsibility being placed on the individual today, it is imperative to change the system to better serve those that serve the public, by working to make auto-enrollment and auto-escalation programs available to all public sector employees,” NAGDCA said in a previous report.

According to the Association’s website, currently 10 states allow automatic enrollment for all public-sector plans. Sixteen allow auto-enrollment for some public-sector plans, and 24 states prevent auto-enrollment.

Aside from the lack of use of auto-enrollment and auto-escalation, the current benchmarking survey found some similarities between government DC plans and their private-sector counterparts. For example, the most common default investment option for employees was a pre-packaged target-date fund (TDF), with 49% of the respondents reporting this option, followed by a custom TDF, at 28%.

Employee pre-tax contributions comprised over three-quarters of total account balances, and six out of 10 plans offer managed account services.

Among survey respondents, 62% offer a 457(b) plan, 22% offer a 401(a) DC plan, 9% offer a 401(k) plan and 7% offer a 403(b) plan. A variety of covered entities were represented in the survey. A copy of the report may be accessed or purchased here.

The post Could Auto-Enrollment Be a Boost for Government DC Plan Participants? appeared first on PLANSPONSOR.

Categories: Financial News

Consider Demographic Differences When Planning Financial Wellness Initiatives

Wed, 11/20/2019 - 17:53

According to a new analysis by TIAA Institute based on its Personal Financial Index, the nation’s 44 million African-Americans account for 13% of the U.S. population. Their economic impact is significant, TIAA Institute says, with $1.2 trillion in spending activity annually, representing more than one-third of overall spending in several key economic categories.

TIAA Institute’s report is frank in stating that the financial situation of African-Americans lags that of the U.S. population as a whole, and of white people in particular. Simple economic indicators illustrate the gap, but the reasons underlying the gap are many and complex—tied directly to the racially divided history of the United States and the prejudicial treatment of black people over centuries by governments and corporate institutions.   

“While 66% of African-Americans report that they are doing at least okay financially, the comparable figure among whites is 78%,” the report states. “Median household income among African-Americans was $35,400 in 2016; median household income of whites was $61,200. African-American household net worth was $17,600 in 2016 and 19% had zero or negative net worth; the analogous figures for white households were $171,000 and 9%, respectively.”

Like the general population, financial literacy varies across demographic groups within the African-American population, TIAA Institute finds. Financial literacy is greater among men, older individuals, those with more formal education, and those with higher incomes. Also reflecting the full U.S. population, there is a strong link between financial literacy and financial wellness among African-Americans. In the analysis, financial wellness is defined as a state of being where a person has the capacity to absorb a shock, has control over weekly and monthly expenses, and has some freedom to spend money to enjoy life. Those who are more financially literate are more likely to plan and save for retirement, to have non-retirement savings and to better manage their debt.

In some ways such findings are obvious; who would expect that people who are less financially literate would be likelier to be making investments in the equity or bond markets, or to feel that they are secure in their plans for retirement? Nonetheless, the TIAA Institute researchers explain, it is important to objectively examine the areas where African-American people (and Americans generally) can use more targeted support and education from financial institutions, governments and nonprofit advocacy groups.

According to TIAA Institute, insurance is the functional area where personal finance knowledge appears to be lowest among African-Americans. Other functional areas where more support is needed are comprehending risk, investing and identifying go-to information sources.

On the other hand, borrowing and debt management is the area of highest personal finance knowledge among African-Americans, TIAA Institute says. In part, this seems to be the case because more African-American people are pursuing higher education, with many utilizing student loans and other financing strategies. Unfortunately, African-Americans are more likely than whites to feel that they currently have too much debt (45% vs. 35%, respectively). African-Americans are more likely than whites to carry student loan debt (41% and 21%, respectively). Among those with student loan debt, African-Americans are more likely to have been late with a payment in the past year (59% compared with 35%).

Among credit card holders, 68% of African-Americans engage in “expensive credit card behaviors,” TIAA Institute finds. Such behavior includes paying only the minimum due, incurring late payment fees, incurring over-limit fees, and taking cash advances.

“A more refined understanding of financial literacy among African-Americans—their level of overall financial knowledge, areas of strength and weakness, and variations among subgroups—can inform initiatives to improve financial wellness,” the TIAA Institute report says. “While not a cure-all, increased financial literacy can lead to improved financial capability and practices that benefit even those with relatively low incomes.”

The post Consider Demographic Differences When Planning Financial Wellness Initiatives appeared first on PLANSPONSOR.

Categories: Financial News

Long-Term Care Insurance Can Improve Retirement Readiness

Wed, 11/20/2019 - 17:39

Retirement plan sponsors are increasingly asking about offering employees long-term care insurance as a voluntary benefit.

“Every year, we have more companies asking us for a quote,” says Larry Nisenson, chief commercial officer for Genworth’s U.S. life insurance division, and with the population ageing, he expects that to continue to increase. Among companies offering long-term care insurance to their workers, it typically takes a few years after first introducing it for workers to purchase the insurance, Nisenson says. “There is an awareness curve in long-term care insurance that doesn’t exist in other products, like auto, home or life insurance,” he says.

Advisers who are educated about long-term care insurance can increase awareness for retirement plan sponsors and participants.

“Less than 10% of those who would likely need long-term care insurance own a policy,” Nisenson says.

And the need is great, says Keith Moeller, a wealth management adviser who specializes in long-term planning and insurance at Northwestern Mutual. “Seven out of 10 people over the age of 60 will face a long-term care event,” he says.

What typically prompts a person to decide to inquire about or purchase long-term care insurance is having experienced the need for such care in their own family, Moeller says. Or, they are facing a medical issue of their own.

Even if they have encountered either scenario, people are not likely to purchase long-term care insurance without having a conversation with their adviser, Moeller says. The topic comes up when he asks clients about their various financial objectives, such as planning for retirement, planning for a legacy and addressing estate taxes. After asking clients how they might address the potential economic impact on their family should they become incapacitated and where the money to cover that is going to come from, Moeller then discusses long-term care insurance with clients.

“It’s really about prioritizing their goals,” he says, adding that 40% to 50% of Northwestern Mutual clients planning for retirement decide to take out a long-term care policy or add an accelerated benefit to their life insurance. The other half plan to cover long-term care expenses out of their retirement savings, Moeller says.

In total, “100% of our clients are planning to manage the cost of long-term care to minimize the impact on their families,” he says. “This is such a critical issue and has such an impact on the loved ones around you” that clients realize they really do need to have a plan.

Genworth, which sells long-term care insurance both to individuals and through the workplace market, and “is one of the leading providers of group long-term care insurance,” Niesenson says, has found that the average age at which people buy this insurance through their workplace is 53 or 54. In the individual market, it is 58 or 59.

It is important for someone considering this insurance to know that the likelihood of an insurance company underwriting a policy decreases as people age, he says. Only 48% of those in their 50s qualify for long-term care insurance, and for those in their 60s, it drops to 38%, Nisenson says. Genworth underwrites policies for people up to the age of 70, although other insurers extend that to age 75, he adds.

Long-term care insurance covers home care, adult day care, assisted living and full-time nursing home care, Moeller says. Most people want to receive care at home.

As to how much coverage an individual should purchase, the average age that a person needs long-term care is 80, and the average length of time they need such care is six years, Moeller says. Knowing that the cost of this care increases by 5% a year, Northwestern Mutual helps a person project what this care is likely to cost between the age they retire and age 80. The insurer then helps individuals figure out how much savings and Social Security or other benefits they will receive and how much of the assets need to be preserved for their spouse or partner to figure out how much insurance they can afford, Moeller says.

With that information in hand, Northwestern Mutual writes policies that pay anywhere from $1,500 to $12,000 a month for long-term care, Moeller says. The policies are always designed “in the context of what is right for a person’s particular situation, and what fits their budget,” he says.

Genworth also offers individuals an inflation rider, and in the group plans, it is available at the plan level, Nisenson says.

As for what happens when a person purchases group long-term care insurance through their employer and then leaves the company, Niesenson says, by law, “the long-term care policy must be portable.”

Long-term care insurance has evolved since when it was first offered 50 years ago, Nisenson says. It started out covering only nursing home care. “As the population ages and people’s lifestyle changes, policies will continue to evolve to allow more flexibility,” he predicts.

The post Long-Term Care Insurance Can Improve Retirement Readiness appeared first on PLANSPONSOR.

Categories: Financial News

LDI the Key to DB Plan Funded Status Gains

Wed, 11/20/2019 - 16:31

In an environment where defined benefit (DB) plans are experiencing increased costs and declining discount rates, a survey of corporate and health care DB plan sponsors from NEPC reveals plans’ funded statuses have improved since 2017.

Fifty-eight percent of plans have a funded status greater than 90% in 2019, compared to just 46% in 2017. About three-quarters of plans with a funded status of 90% or higher have utilized liability-driven investing (LDI) and two-thirds have 40% or less of their assets allocated to equity.

Among plans that use LDI, 44% have an LDI allocation of 51% or higher, compared to just 37% and 9% in 2017 and 2011, respectively.

“The correlation between strong funded status and the use of LDI illustrates that risk management in the form of LDI works to reduce funded status volatility in a declining interest rate environment,” says Brad Smith, partner in NEPC’s Corporate Defined Benefit Group. “While the use of LDI has remained consistent with prior years, we’ve found that the allocations to LDI have increased significantly over the past two years and are a key contributor to protecting funded status in this market environment.”

The survey also demonstrates that traditional alternative investment strategies remain popular, as nearly two-thirds of respondents (65%) have an allocation to alternative investment strategies in 2019. Among plan sponsors who are actively investing in alternatives, 40% utilize hedge funds, 38% invest in private equity, and 33% have an allocation to real assets.

While plan sponsors have placed a strong emphasis on evaluating risk reduction strategies, they have not been widely implemented yet. The most popular risk reduction strategy utilized today is defensive equity, which 22% of respondents have implemented. Factor-based equity strategies and tail risk hedging are less commonly used, leveraged by just 9% and 5% of respondents, respectively.

Future expectations

Plan sponsors have significantly lowered their long-term return assumptions, according to the survey. Thirty-four percent of respondents have a return assumption of 6% or less compared to 20% in 2017. The percentage of plan sponsors with a return assumption of 7.5% or more has declined. Just two years ago, 33% of respondents expected that level of returns. In 2019, 21% did.

An increased number of plans are unsure if they will stay open (23% vs. 12% two years ago), potentially due to growing costs and interest rate volatility. Consistent with prior years, about 15% are planning a full plan termination, and 35% of state it may occur over the next five to seven years.

Twenty-two percent considered but rejected a plan termination, and 78% cite costs to purchase an annuity as the reason. There was a small increase to those planning or implementing hibernation strategies in 2019 (20%) compared to 2017 (11%). Hibernation investing involves putting plans in a steady state while winding them down over time and/or gradually preparing for pension risk transfer over a longer period of time.

Lump sums remain the most popular liability risk reduction strategy, eclipsing plan terminations and annuities. Eighty percent of respondents have already implemented (54%), or plan to offer (26%) lump sums. Of the 26% that plan to offer lump sums, 67% plan to offer them to retirees due to the IRS guideline change.

More information is here. Information specific to health care respondents is here.

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Categories: Financial News

Westwood Looks to Disrupt Active Management with More ‘Sensible Fees’

Tue, 11/19/2019 - 19:51

Investment manager Westwood Holdings Group Inc., in an effort to further innovate and align with investors, has launched its “Sensible Fees” pricing model for three mutual funds operating within its newly-formed Multi-Asset franchise.

The new performance fee structure is available in Westwood’s Alternative Income, High Income and Total Return Funds. The firm suggests its Alternative Income Fund will be the first of its kind to incorporate a performance fee in its corresponding Morningstar Market Neutral category.

Westwood contends that in the aftermath of the 2008 financial crisis, alternative mutual funds have failed to align expense ratios with the risk and return potential of underlying investment strategies and have often been overpriced. “Over the last five years, expenses in most major alternative liquid categories have average fees that range from nearly 40% to 63% of gross returns, which hurts conservative investors looking for low, single-digit returns to diversify bond portfolios. Sensible Fees help mitigate this disconnect, better aligning with the investor by not charging high fees when a fund fails to generate excess returns and only having the investor pay a proportionate fee as a share of valued-added performance,” the company says.

“We believe this new model serves as a catalyst for mutual fund investors at a time when [exchange-traded funds] and index funds may likely disappoint investors due simply to potentially lower market returns over the next 10 years. Sensible Fees funds will enable investors to pay a low index or ETF-like fee while only charging a higher active management fee when fund performance objectives exceed the benchmark,” said Phil DeSantis, head of product management at Westwood in Dallas, Texas, when the new approach was initially offered in conjunction with Westwood’s “best ideas” high-conviction LargeCap Select strategy back in March.

Sensible Fees and aligning with investor goals

Sensible Fees combine a zero or passive-like base fee plus a linear fee directly linked to risk-adjusted outperformance only when it is earned.

In an interview with PLANSPONSOR, DeSantis says there is a disconnect between what asset owners and asset managers are trying to solve for. Getting this in alignment transcends fees; it’s aimed at changing the probability of winning for investors.

“With U.S. Large Cap, the cost of beta sets the base fee. ETFs charge seven to nine basis points on average, but we use a zero-based fee. Then we use alpha to measure outperformance. We wanted to get hyper-specific around that measurement because we want to get paid on real skill, not on taking excessive beta or market risk,” he says. “We charge 30% of alpha, and the client retains 70% of outperformance. We do this over a 1- or 3-year rolling period, with built in clawbacks based on negative performance experiences.”

DeSantis explains that in one of the mutual funds converted from a fixed fee to a performance-based fee—the Alternative Income Fund—the base fee is 35 basis points (bps), “as close as we come to cost of beta.” When solving for the potential of the asset class, Westwood determined that a return 3% or 4% higher than cash would qualify as top percentile outperformance. “We don’t start earning an active fee until we start outperforming the benchmark, up to 4%. We earn 0.67% if we outperform by 2% and 0.99% if we outperform by 4%,” he says. DeSantis notes that the Alternative Income Fund is designed to complement bond funds, which generally have expense ratios of 2.5%.

Bringing investors back to active investing

In August, Morningstar reported that preliminary numbers showed passive U.S. equity assets passed active U.S. equity assets by about $25 billion.

DeSantis comments that in the institutional investment space, business has been done a certain way for a long time, and Westwood’s Sensible Fees construct is new. “Nothing is going to change on a dime. There is an educational process that needs to take place,” he says.

Steve Paddon, head of Distribution at Westwood in Dallas, Texas, says, “I don’t think [our model] is a replacement for passive investing, it’s an alternative. If investors want alpha, our approach aligns with that proposition better. I don’t know that investors that have given up on active will revisit it, but it is a great way for those who want active to get better outcomes.”

According to DeSantis, the alignment of investor and manager interests is a big topic in the institutional market, and he contends that fixed fees in some ways prohibit the pure alignment of interests. “One of the problems in active management is there’s a cyclicality—some years managers outperform, some years they underperform. The mathematical and psychological disconnect has sort of forced institutional investors to take the path of least resistance. The thought is that it’s easier to go passive and not take the risk of active, because fees are an important topic,” he says.

Westwood believes its Sensible Fees model can change the conversation. “We’re active managers whose job is to deliver alpha. All else equal, we can change the probability of outperformance. The investment strategy is the most important thing; our fee model allows us to manage the cyclicality of active management. It sort of levels the playing field with indexing by only paying for the cost of beta and only paying for alpha when it’s occurring. It’s different from paying a fixed fee when the outcome is uncertain,” DeSantis says.

He points to Japan’s Government Pension Investment Fund (GPIF)—the largest in the world—and more recently the University of California moving their portfolios towards the active side as being indicative of the future. “They are asking asset managers to create constructs similar to ours. This is important because the largest pensions in the marketplace can negotiate any fixed fee they want, but see these constructs as a better alignment with their goals,” DeSantis says.

“From a bigger picture, we want to deliver our investment services in the most flexible way to investors—competitive fixed fees and the Sensible Fee model. It is part of our value proposition to offer world-class investment management with fees aligned with investor’s outcomes,” Paddon concludes.

More information is available here.

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Categories: Financial News

Information Copies of 2019 Form 5500 Published by DOL

Tue, 11/19/2019 - 19:00

In concert with the IRS and the Pension Benefit Guaranty Corporation (PBGC), the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) has released advance informational copies of the 2019 Form 5500 Annual Return/Report and related instructions.

The “Changes to Note” section of the 2019 instructions highlights important modifications to the Form 5500 and Form 5500-SF, as well as to their schedules and instructions.

As required by the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015, the instructions have been updated to reflect an increase to $2,194 per day in the maximum civil penalty amount assessable under Employee Retirement Income Security Act (ERISA) Section 502(c)(2). Technically, the increased penalty under section 502(c)(2) is applicable for civil penalties assessed after January 23, 2019, whose associated violations occurred after November 2, 2015.

The advance copies of the 2019 Form 5500 are for informational purposes only and cannot be used to file a 2019 Form 5500 Annual Return/Report.

Other notable changes include the following:

  • Form 5500, Line 2d – The instructions to line 2d of the Form 5500 have been clarified on how to report the plan sponsor’s business code for multiemployer plans.
  • Schedule H Part III / Accountant’s Opinion – The instructions for lines 3a(1), 3a(2), 3a(3), and 3a(4) have been revised to align with the language in the clarified generally accepted auditing standards, AU-C 700, “Forming an Opinion and Reporting on Financial Statements,” and AU-C 705, “Modifications to the Opinion in the Independent Auditor’s Report.”
  • Schedule SB Mortality Tables – Line 23 has been revised to eliminate mortality table options that are not available after 2018.
  • Schedule R – A new line 20 has been added to obtain information related to PBGC reporting requirements resulting from unpaid minimum required contributions. Only PBGC-insured single-employer plans are required to provide this additional information.
  • Form 5500-SF – A new line 11b has been added to the Form 5500-SF that parallels the new Schedule R, line 20 for PBGC-insured, single-employer plans that file the Form 5500-SF instead of the Form 5500.

The regulators say filers should monitor the EFAST website for the availability of the official electronic versions for filing using EFAST-approved software or directly through the EFAST website.

The post Information Copies of 2019 Form 5500 Published by DOL appeared first on PLANSPONSOR.

Categories: Financial News

Why Americans Need the SECURE Act

Tue, 11/19/2019 - 15:17

In an increasingly competitive economy, it’s time for Congress to pass the SECURE [Setting Every Community Up for Retirement Enhancement] Act to help small businesses provide their millions of employees a workplace retirement plan.

Small-business employees are the backbone of our communities and the American economy. Comprising over 40% of the American workforce, small businesses face challenges, such as retaining top talent in an ever-tightening labor market.

When it comes to recruiting and talent retention, 88% of small-business owners that offer a 401(k) plan to their employees say being able to do so is beneficial, and 84% say their employees view it as a necessary benefit, according to a recent Nationwide business-owner survey1. More importantly, 51% of workers over the age of 50 say an employer-sponsored retirement plan will be their main source of income in retirement2.

However, many small-business owners can’t provide a retirement plan due to costs, management requirements and complexity. This means the financial futures of almost half of the American workforce could be at risk because they lack access to these critical saving tools. We must do more to remove barriers for small-business owners who want to provide a plan to their employees.

Earlier this year, the Department of Labor (DOL) issued a rule to allow “association retirement plans (ARPs)”—a type of multiple employer plan (MEP). However, the rule’s narrow scope and limits on employer eligibility make it unlikely for ARPs to have any significant impact for most small businesses. Fortunately, the SECURE Act contains a provision that would eliminate the remaining barriers to open MEPs and provides a clear path for small businesses to pool their resources and offer retirement plans that are cost-effective and administratively simpler.

This is why Congress must pass the SECURE Act. The SECURE Act moves past the DOL’s rule to remove the association requirements, broadening the options for which employers can band together in a MEP. With fewer restrictions and more choices, employers will be able to find the MEP that best suits them and their business.

The SECURE Act levels the playing field between large and small employers when it comes to offering a workplace retirement plan, creating increased competition. In fact, a recent Nationwide business-owner survey3 shows that 59% of business owners think the SECURE Act will have a positive impact on their ability to offer a 401(k), and 80% say passage of the act will let them offer a 401(k) plan that rivals those at large corporations.

To help ensure small-businesses’ needs are addressed and their employees are supported, Nationwide has been engaged with lawmakers on open MEPs, and other legislative reforms to the U.S. retirement system, for the past decade. We also advanced another provision to increase access to workplace retirement plans by providing small-business owners a financial incentive to offer their employees a plan. The SECURE Act provides for an annual tax credit, which covers up to $5,000 of plan costs for the first three years an employer makes a plan available.

Small-business owners are looking to Washington to ensure they—and their employees—can balance their financial needs of today while preparing for the future. Now is the time for the Senate to pass the SECURE Act and help small businesses offer the workplace retirement plans that are critical to their employees’ retirement security.

1 Nationwide Business Owners Survey, 2019 Survey Report/September 12, 2019

2 Nationwide Retirement Institute Consumer Social Security Public Relations Study, March 2019

3 Nationwide Business Owners Survey, 2019 Survey Report/September 12, 2019


John Carter is president and chief operating officer of Nationwide Financial.

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Categories: Financial News

Ask the Experts – Turning After-Tax Account to Emergency Savings in 403(b) Plans

Tue, 11/19/2019 - 12:00
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“We sponsor an ERISA 403(b) plan that has historically allowed for after-tax contributions, but that feature has been largely dormant. However, I read a recent PLANSPONSOR article about how a 401(k) plan sponsor was able to successfully utilize its after-tax source as an emergency savings account within the retirement plan. Can this be done in a 403(b) plan as well? If so, are there any drawbacks to this solution? We have been investigating automated emergency savings account options as part of a strategy to promote the overall financial wellness of our employees?”

Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

Thank you for your question! It is indeed possible for a 403(b) plan’s after-tax contribution source to be designed as an in-plan emergency savings account, though you should consult with your retirement plan counsel to determine whether such a design would work in your particular plan. Note that contributions to such an after-tax emergency savings account, would NOT be subject to the 402(g) limit on elective deferrals, so these contributions could be made in addition to such deferrals.

However, as we discussed in our Ask the Experts column on after-tax rollover strategies, there are some potential hurdles to the effectiveness of this approach, as follows:

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1)         After-tax contributions to most retirement plans (with the exception of governmental and non-electing “steeple” church plans/QCCOs) are subject to the same actual contribution percentage (ACP) testing as employer matching contributions. This form of nondiscrimination testing is less likely to pass if individuals who are highly compensated employees (defined in 2020 as those who earned more than $125,000 in 2019) contribute large after-tax amounts, which are permitted since after-tax contributions are not constrained by the 402(g) elective deferral limit (but see item 2) on the 415 limit, below). Thus, even if a plan permits after-tax contributions for an emergency savings fund or other purposes, higher earners may be restricted by such testing from contributing significant amounts.

2)         If a participant already receives a large employer contribution to the plan in question (or any other plan that would be subject to the same 415 limit) that contribution could impact the participant’s ability to make after-tax contributions.

3)         Though a plan may be designed to permit withdrawals of after-tax contributions, earnings on such contributions would be subject to taxation when withdrawn, as well as a 10% penalty if the participant is younger than 59 ½, (note that there are exceptions to the penalty; for example, if a participant terminates employment on or after the calendar year in which he/she turns age 55).


NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future Ask the Experts column.

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Categories: Financial News

TRIVIAL PURSUITS: From Where Does the Word ‘Vaccine’ Originate?

Mon, 11/18/2019 - 20:36

From where does the word “vaccine” originate?

“Vaccine’ is derived from Latin vaccina, feminine of vaccinus, meaning “pertaining to a cow.”

The word “vaccination” was used by British physician Edward Jenner (1749-1823) for the technique he devised of preventing smallpox by injecting people with the cowpox virus.

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Categories: Financial News

Participants Say Sutherland’s 401(k) Fees Aren’t Reasonable

Mon, 11/18/2019 - 19:24

A group of participants in the Sutherland Global Services Inc. 401(k) Plan has filed a proposed class action Employee Retirement Income Security Act (ERISA) lawsuit against their employer in the U.S. District Court for the Western District of New York.

The lawsuit names as defendants Sutherland Global Services Inc. and CVGAS LLC, doing business as Clearview Group. The complaint also directly names as defendants several Sutherland’s senior leaders who are plan fiduciaries, along with some 20 John and Jane Doe defendants.

For its part, CVGAS LLC is an investment manager of the plan as defined by 29 U.S.C. 1002(38). According to the complaint, “certain responsibilities in connection with the plan” were delegated to CVGAS LLC during the proposed class period, including the responsibility to select and monitor the array of investment options to be included in the plan.

Among other issues, the plaintiffs allege the defendants “failed to properly minimize the reasonable fees and expenses of the plan.”

“Defendants instead incurred expenses that were excessive, unreasonable and/or unnecessary,” the complaint states. “Defendants failed to take advantage of the plan’s bargaining power to reduce fees and expenses. Defendants failed to offer a prudent mix of investment options. Defendants impaired participants’ returns by offering actively managed retail class mutual funds as investment options instead of identical investor class mutual funds with lower operating expenses.”

According to the complaint, to the extent any fiduciary responsibilities were properly delegated, the defendants “failed to ensure that any delegated tasks were being performed prudently and loyally in accordance with ERISA.”

The complaint continues: “Defendants failed to properly undertake the requisite monitoring and supervision of fiduciaries to whom they had delegated fiduciary responsibilities. Defendants failed to discharge their fiduciary duties with the requisite expert care, skill, prudence and diligence. Defendants enabled other fiduciaries to commit breaches of fiduciary duties for which Defendants are liable.”

The plaintiffs allege that, through this conduct, the defendants violated their fiduciary obligations under ERISA and caused damages to the plan and its participants.

“Based on defendants’ publicly available statements and representations, it appears that the total administrative expenses, not including indirect compensation, incurred by the plan in 2018 exceeded $695,000 and represented expenses of more than approximately $120 per participant,” the complaint states. “In or about mid-2019, the 13 T. Rowe Price mutual funds offered by the plan were all adviser or retail class funds, as opposed to investor or institutional class funds. The adviser or retail class T. Rowe Price funds offered by the plan charge a 12b-1 fee of .25% of the fund’s net assets. A 12b-1 fee is an annual charge for marketing or distribution. Participants of the plan derive no benefit from the 12b-1 fee. … A prudent fiduciary would have selected the investor or institutional class of the mutual funds instead of the retail class of funds with the 12b-1 fee.”

In closing, the complaint demands a jury trial, rather than the typical bench trail associated with ERISA lawsuits. The full text of the complaint is here.

Sutherland Global and Clearview Group have not yet responded to requests for comment.

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Categories: Financial News

The Evolving Nature of TDFs

Mon, 11/18/2019 - 17:55

Today, millions of workers invest their retirement savings in target-date funds (TDFs).

TDFs came to shape in the 1990s as an alternative to money market funds (MMFs), often the then default retirement vehicle. When the Pension Protection Act (PPA) was passed in 2006, it was TDFs that investors latched onto.

“The PPA was a big motivator for TDFs, but [qualified default investment alternative (QDIA) regulations] also listed managed accounts and balanced accounts as well,” says Rich Weiss, multi-asset strategies CIO at American Century Investments. “And so, it begs the questions, why did TDFs take off as opposed to those other two?”

While traditionally, MMFs reigned as default investments, it was soon understood that these funds were not appropriate for those who were relatively unsophisticated or had little time and experience to work on their own investing. While MMFs offer less risk, there is little chance for an investor’s money to grow.

“You were almost guaranteed to not have a successful or wealthy nest egg if you left your money in an MMF, because it would lag everything else,” explains Weiss. “The government realized this and then stepped in to move the needle towards something that made more sense.”  

When TDFs, balanced funds and managed accounts were presented after the PPA, TDFs were seen as the more sophisticated option out of the three, says Weiss. It’s one-size-fits all structure attracted investors, especially those who had no interest in personalizing or tailoring their investments like a managed account would. Managed accounts were pricier and required more intervention and involvement from the participant themselves. TDFs however, were a balanced, diversified fund that presumed asset allocation is right for every type of investor, at every aspect of their life. They were easy to understand by workers, made sense to financial professionals, and were seen as an advancement over basic balanced funds.

“Historically, a participant that would be invested in a 401(k) would be inappropriately allocated to all-cash or too much equity,” says Armen Apelian, director of Target-Date Strategies at Fidelity Investments. “[The passage of PPA] allowed for our target-date offering to be the default option, with appropriate risk characteristics for age cohorts. This better prepares the participant for retirement.”

The evolution of TDFs from its introduction to today, more than 20 years later, is largely thanks to its big adoption by providers. Fidelity launched its Freedom Funds in 1996, while American Century launched its TDF suite in 2004. Most retirement plan sponsors began utilizing the funds in the early 2000s and TDF usage grew, and for participants involved in those plans, many were opted into TDFs.

“Over the years, TDFs exploded in assets and now you barely find a plan sponsor that doesn’t have a TDF as a QDIA, now it’s more of an opt-out,” says Weiss. “It’s truly a default.”

Apelian adds that while TDFs have become very simple for participants, its construction has been highly complicated. Depending on the provider and plan, each asset allocation is different. The mix of stocks, bonds and cash is a main driver in the investment outcome, so there are a diverse amount of investment vehicles or target-date providers with active building blocks, blend building blocks, and ones that may just be active and passive index funds. In thinking through this, it’s imperative to consider a TDF’s glide path, he says.

“What we’ve learned over the years is, not only is it very important to get this right, but plan sponsors should evaluate the glide path construction process when looking at target-date funds,” Apelian explains.

Looking ahead, Apelian anticipates a continued interest in target-date funds. In the past five years, he’s noticed a move from more active funds, to a mix of active and blend implemented products, as well as TDFs using collective investment trusts (CITs). CITs are priced more competitively at a larger scale.

As managed accounts increase in interest among investors, Weiss does not foresee a dip in TDF investing. While managed accounts allow for better personalization tailored to the investor, he argues that TDFs can also accommodate a worker’s unique situation and risk.

As most providers have 10-, 15- or 20-year track records with TDFs, Weiss expects to see more maturity and complexity in the future of TDFs. With multiple years of experience comes two separate economic periods: the bear market in 2008, and the 10-year bull run after the recession. Therefore, it’s not really 15 years of experience. Rather, it’s two separate episodes. This means that the industry is still fairly young. As it matures, Weiss foresees the adviser community, sponsors and providers transitioning to a more refined outlook when choosing TDF providers. Rather than looking at fees, he expects the industry will lean towards pertinence.

“The metrics for determining which TDF is most appropriate for a sponsor has yet to really evolve, and you’re going to see a lot more of that in the next couple of years,” he concludes. “It’s turning into the concept of appropriateness or suitability, as opposed to just picking a fund based on its five-year performance in fees.”

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Categories: Financial News

Equity Compensation Plays a Role in Employee Retirement Strategies

Mon, 11/18/2019 - 17:10

Sixty percent of workers who have an equity compensation plan intend to use the money to help fund retirement, according to a survey of 1,000 equity compensation plan participants who currently receive incentive stock options or restricted stock awards and/or participate in employee stock purchase plans (ESPPs). Their average vested balance is $97,711 and the average total value of their equity compensation is $149,835, according to Schwab Stock Plan Services.

Retirement savings is, by far, the most common goal for those building equity compensation wealth.

Amy Reback, vice president of Schwab Stock Plan Services, tells PLANSPONSOR that having a diversified portfolio of both taxed and tax-deferred savings is a good strategy: “People who enter retirement with the appropriate amount of taxed and tax-deferred savings are more likely to have an enjoyable retirement. If you only have tax-deferred savings, you are still taxed when you draw down those assets, and you could have a pretty large tax bill. It could be as much as 20% or 25% of your assets.”

Schwab’s survey also found that among those with an equity compensation plan, it makes up 27% of their net worth on average. Sixty-eight percent also hold company stock outside of their equity compensation plan, primarily in their 401(k) plan. Sixty-five percent are very or extremely confident their equity compensation plan will help them meet their financial goals, and 28% are somewhat confident.

Equity compensation plans are not just for the highly compensated, says Aaron Shapiro, founder and CEO of Carver Edison. Options and restricted stock units are generally granted to highly compensated employees, but employee stock ownership plans and employee stock purchase plans are designed for broad-based employees, he says.

“The availability of equity compensation plans is out there, but the challenge is that most people who are eligible to participate in them cannot afford to see their paychecks get smaller,” Shapiro says. 

Workers want help from their employer to understand their equity compensation program, according to the Schwab survey. The specific areas they want help with are planning for retirement (68%), meeting their financial goals (55%), developing a financial plan (52%) and balancing equity compensation with other investments (51%).

A survey by E*Trade found that when it comes to their company’s stock plan benefits, only 71% of employees said they understand how to access their account. Only 59% understand how their vesting schedule works. Just over half, 53%, said they understand the benefit, and only 46% know how to find information about their stock plan benefit.

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Categories: Financial News

SURVEY SAYS Workplace Holiday Parties

Mon, 11/18/2019 - 10:30

Last week, I asked NewsDash readers, “What do you think of workplace holiday parties?” I also asked, “Is there something else you’d rather your employer do instead?”

Nearly six in 10 responding (57.9%) readers said their company hosts a holiday party every year, while 42.1% said their company does not.

More than one-third indicated they feel holiday parties are a somewhat of a reward and morale booster, while 10.5% said they definitely are, and 21% said they are not. Twenty-nine percent indicated company holiday parties are a morale booster but not a reward, and 2.6% said they are a reward but not a morale booster.

Asked what they would rather their employer do for the holidays, other than a holiday party, 43.2% chose “give employees bonuses,” while 32.4% selected “give an extra day off.” Only 5.4% said give employees gifts, and 8.1% said they’d rather their company host an employee gift exchange. Nearly two in 10 (18.9%) chose “bring in food to the office,” and 13.5% indicated there’s nothing they’d rather their employer do. Several responding readers who chose “other” said companies should offer a budget for separate departments or teams to do their own activity. Donate funds to charity and “almost anything” were also listed.

In verbatim comments, a few responding readers shared what their company does for its holiday party; several expressed how much they enjoy it. Others said the socializing is awkward for them, or warned about how certain behavior can get out of hand. There’s no Editor’s Choice this week.

A big thank you to all who participated in our survey!


We’re a large company but still have a holiday party at a large hotel, with a program where significant promotions are announced and there’s a buffet dinner. We also receive a gift from the president & CEO. It’s great!

It is always difficult to reach all employees for a specific holiday event when the organization is open 24/7. Someone will always feel left out.

Just give me the money instead of the forced socializing

No holiday party where I work now. I’m just as happy without it. I feel that most employees would prefer some additional time off—even an afternoon—to help them find time for all the things that need to be done during this busy time of year. Also cheaper for the employer and avoids liability issues associated with excessive alcohol consumption.

Just be careful you don’t do something stupid that could damage your career.

They are dull beyond words, because people are “networking” and brown nosing rather than relaxing and having a good time. Need to keep up their personal brands.


I’m an introvert who would rather have dentistry without Novocaine than go to a company-sponsored holiday party.

We have offices all over the U.S., so one holiday party is not practical. Each office can do as they wish, and ours generally does a lunch on a Friday and take the rest of the day off.

The larger the party, the more political it becomes between cliques, power-plays, and similar social constructs. Having smaller (department-sized or smaller) parties are far more effective and actually give co-workers a better chance to gel outside of the office.

No. Just say “No.”

I have attended lavish and expensive parties and the cheapest (sharing a ham). And extra day or even a couple of hours off would be most appreciated.

Should be used to celebrate the diversity of the holiday season and not be limited to Christmas celebrations.

We use to have a holiday party, but as we grew it became too difficult and the stories of the inappropriate behavior at said parties are the reasons we don’t have one anymore. Now each department does their own thing, but it would be nice if the company actually gave us a budget to fund it, instead of everyone chipping in.

Holiday parties are a great time to socialize with co-workers outside of work. For large organizations, it is also an opportunity to get to know employees who you do not work directly with. Lastly, it is nice to get to know the spouses too. We look forward to our holiday party every year.

Our holiday party comes at the end of a busy season. Everyone is ready to eat well, have a few drinks, dance and blow off some steam! It always feels like a great celebration.

While it is an extremely nice gesture for the company to provide a holiday party (they could just as easily eliminate it and save several thousand dollars), it is during the week and employees only attend and can cause more stress than necessary. I guess it is all in how you view it.


NOTE: Responses reflect the opinions of individual readers and not necessarily the stance of Institutional Shareholder Services (ISS) or its affiliates.

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Categories: Financial News

Retirement Industry People Moves

Fri, 11/15/2019 - 19:56

Art by Subin Yang

Gallagher Promotes Consultant to Retirement Plan Leader

Gallagher has promoted John Jurik to the role of retirement plan consulting practice leader for the U.S. region within the company’s benefits and HR consulting division

Jurik began his career with Gallagher as part of an internship program and before developing into a consultant within the retirement plan consulting practice. As a consultant in the mid to large market, his objective was to guide Gallagher’s U.S. clients in reviewing and managing their retirement programs from both an employee benefit and risk management perspective.

“Employers are increasingly aware of the stress caused by financial insecurity and its negative effects on employee and organizational wellbeing. John’s plan governance knowledge and determination to help his clients understand a multigenerational workforce and the appropriate investment and plan design to drive better participant outcomes make him a terrific fit as leader of the retirement plan consulting practice,” says Jeff Leonard, financial and retirement services practice leader at Gallagher.

“I am incredibly honored to be tapped to lead the talented team of people who work hard every day to help employers offer innovative and sustainable retirement solutions to their employees, empowering them to pursue better financial wellbeing and retirement success,” Jurik says.

Hall Benefits Law Adds ERISA Attorney to Compliance Counsel 

Hall Benefits Law has hired attorney Scott Santerre.

Santerre joined the legal team in late October as senior ERISA compliance counsel. For the previous four years, he provided in-house guidance to a large insurance company as their lead privacy attorney, spearheading multiple projects across a variety of disciplines.

Firm Manager David Hall comments on the hire, stating, “Scott brings experience as a retirement plan specialist, tax manager, and in-house counsel to bear when working with our corporate clients. His knowledge of pensions and DC plans rivals that of our most senior team members, and his exposure to the other areas in which we provide counsel is impressive.”

Santerre graduated from Boston University with a degree in psychology and received his Juris Doctor from Suffolk University Law School. In his years as an attorney, he has worked in the Employee Retirement Income Security Act (ERISA) retirement space to help clients maintain compliance with IRS and Department of Labor (DOL) regulations, and drafting and maintaining retirement plan documents and amendments. He worked as lead attorney preparing submissions to the DOL for correcting late remittance of deferrals and loan repayments. Santerre maintains the designation of qualified pension administrator (QPA) and is an active member of the American Society for Pension Professionals and Actuaries.

Prudential Retirement Announces New Customer Solutions Head

Prudential Retirement has hired Christine Lange as head of customer solutions for institutional retirement plan services.

Lange will report to Harry Dalessio, head of institutional plan solutions for Prudential Retirement.

Lange’s immediate focus will be on product development, engagement and pricing. She will also assume responsibility for underwriting and P&L for the defined contribution (DC), defined benefit (DB) and nonqualified businesses of Prudential Retirement.

“I am happy to be joining Prudential Retirement at such an exciting time for both the company and our industry,” says Lange. “I look forward to continuing to position Prudential Retirement’s full service businesses for growth and profitability through engagement with our customers in the right ways at the right times through their preferred channels.”

Most recently, Lange served as head of retirement digital solutions for Voya Financial. Prior to Voya, she led product innovation teams for both Putnam Investments and Fidelity Investments. 

Lange holds degrees from Northeastern University and Boston College. She is a member of the Council for Women at Boston College and a member of Boston College Connections, a mentoring program for undergraduates.

Lange will split her time between Connecticut and New Jersey, with Hartford as her home base.

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Categories: Financial News

Mediation May Resolve SunTrust Bank ERISA Challenge

Fri, 11/15/2019 - 16:17

A new joint motion has been filed in the Employee Retirement Income Security Act (ERISA) lawsuit targeting the retirement plan of SunTrust Bank, which could bring years of litigation to an end. 

The underlying lawsuit alleges that SunTrust Bank’s 401(k) plan engaged in corporate self-dealing at the expense of plan participants. The lead plaintiff suggests that plan officials violated their fiduciary duties of loyalty and prudence by selecting a series of proprietary funds (referred to as the STI Classic Funds) that were more expensive and performed worse than other funds they could have included in the plan—and by repeatedly failing to remove or replace the funds.

Back in early October, the U.S. District Court for the Northern District of Georgia’s Atlanta Division issued a lengthy order in the long-running ERISA lawsuit. In the October ruling, the District Court granted the defendants’ motion seeking to discredit certain expert testimony generated by the plaintiffs. At the same time, the ruling denied the plaintiffs’ motion to reject the expert reporting of two pro-defense witnesses. Finally, defendants’ motion for summary judgment was granted in part and denied in part. It was granted to the extent plaintiffs’ claims are premised on defendants’ conduct regarding the Short Term Bond Fund, Investment Grade Bond Fund, Small Cap Growth Fund, Capital Appreciation Fund, and Prime Quality Money Market Fund. It was denied to the extent plaintiffs’ claims are premised on defendants’ conduct regarding the Mid-Cap Equity Fund, Growth and Income Fund, and International Equity Index Fund.

Now, the plaintiffs and defendants have jointly moved under Local Rule 16.7 for entry of an order referring the case to mediation before Robert A. Meyer, Esq., of the JAMS organization. The parties have also moved for a stay of all proceedings to permit them time to pursue the resolution of this dispute, including at the mediation conference tentatively scheduled with Meyer on January 7, 2020, subject to the Court’s approval.

“The parties respectfully request that the Court refer this case to mediation and appoint Robert A. Meyer as neutral third-party mediator,” the joint remediation motion states. “The parties further respectfully request that the Court stay all proceedings and deadlines in this case pending mediation before Mr. Meyer and remove the case from the Court’s January 6, 2020 trial calendar. The parties will report to the Court on the status of the January 7 mediation and the case no later than January 31, 2020.”

In the report, the parties anticipate stating either that (i) a settlement agreement has been reached and proposing deadlines for subsequent filings seeking Court approval of the proposed settlement, or (ii) that no settlement agreement could be reached and proposing deadlines that will enable the parties to move promptly to trial, including deadlines for remaining briefing on plaintiffs’ motion for reconsideration and submission of a joint consolidated pretrial order.

The full text of the remediation motion is available here.

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Categories: Financial News

Year-End Planning Help Offered for NQDC and Executive Comp Plan Participants

Fri, 11/15/2019 - 13:00

Year-end is a key time for financial and tax planning, especially for employees who have stock compensation or holdings of company shares.

Tax changes introduced in 2018 by the Tax Cuts & Jobs Act continue to affect their year-end-planning decisions. Meanwhile, the election year ahead in 2020 presents uncertainty about the future of tax laws that affect financial- and tax-planning strategies.

To help, provides education and guidance on major issues, choices, and financial-planning strategies for the end of 2019 and the start of 2020. This content is available in the website’s section Financial Planning: Year-End Planning and through content licensing. The section Year-End Planning has been fully updated for 2019, including revisions for what’s different after the tax cuts.

In addition, the calculators and modeling tools at allow users to play out various “what if” scenarios with different tax rates and stock prices.

For similar education and guidance on year-end planning for nonqualified deferred compensation (NQDC), employees can turn to, a separate sibling publication of

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Categories: Financial News

FRIDAY FILES – November 15, 2019

Thu, 11/14/2019 - 21:34
A dancing Nana, problems on the road in Thailand, and more.

In Ottawa, Canada, a Canadian teacher has successfully claimed a canoe trip as a moving expense, public broadcaster CBC reported. The Canada Revenue Agency (CRA) allows Canadians who move more than 40 kilometers (25 miles) for work or school to deduct eligible expenses from their taxable income. The teacher taught in his hometown of Whitby, Ontario, during the regular academic year and for decades made the annual trip to Ottawa by train, plane or automobile for the July job. But his moving expenses were suddenly rejected by CRA in 2011. The decision was upheld by a tax court that ruled his Ottawa stays did “not constitute a change in ordinary residence,” but rather working vacations. So, in June 2018, he loaded up a battered fiberglass canoe and set out for Ottawa, he told the CBC. The move took him through five provincial parks and up the Rideau Canal. He collected receipts for park admission fees, campfire wood and ice and submitted a claim for almost Can$1,000. Last week, he learned that the CRA had accepted his expenses.

In Singapore, an airport baggage handler has been jailed for 20 days for swapping tags on nearly 300 suitcases at the city-state’s airport, causing them to end up at wrong destinations around the world. The court was told he made the swaps between November 2016 and February 2017 out of “frustration and anger” after his request for additional staff at his work section was ignored. It was also told he was suffering from major depressive disorder when he committed the offences. But state prosecutors said evidence presented at a hearing showed his condition “did not contribute significantly to his commission of the offences” as he continued to have control over his actions.

In Iowa, an inmate serving life for murder offered a novel legal appeal, saying he should be released because he “died” four years ago. He became gravely ill in March 2015 when large kidney stones led to septic poisoning. After he was rushed unconscious to a hospital, doctors had to revive the “dead” man five times. They then operated to repair damage done by the kidney stones. He was eventually returned to prison. According to the AFP, in a court filing in April 2018, the man claimed that because he had momentarily died, his life sentence had technically been completed. His lawyer argued that the inmate had been sentenced to life without parole “but not to life plus one day.” The Iowa Court of Appeals found the argument “unpersuasive.”

Love this dancing Nana.

If you can’t see the below video, try

A problem we thankfully don’t have while driving in the U.S.

If you can’t see the below video, try

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Categories: Financial News

Plaintiffs Say AutoZone Breached ERISA Through Prudential’s GoalMaker

Thu, 11/14/2019 - 20:14

AutoZone Inc. is the latest national employer to face an Employee Retirement Income Security Act (ERISA) fiduciary breach lawsuit alleging imprudence and disloyalty in the operation of the company’s retirement plan.

Plaintiffs filed their proposed class action in the U.S. District Court for the Western District of Tennessee. While the complaint does not name Prudential as a defendant, the fiduciary breach allegations discuss Prudential’s GoalMaker investment solution, which was offered by AutoZone to its employees during the period at question in the lawsuit.

“Plaintiffs bring this action because of AutoZone’s extraordinary breaches of its fiduciary duties under ERISA, including the approval, maintenance and recommendation of an abusive ‘GoalMaker’ asset allocation service furnished by Prudential Insurance Company that served Prudential’s interests,” the lawsuit states.

According to the complaint, AutoZone described GoalMaker to participants as a service that would “guide you to a model portfolio of investments available, then rebalance your account quarterly to ensure your portfolio stays on target.” AutoZone also represented, according to plaintiffs, that GoalMaker’s allocations “are based on generally accepted financial theories that take into account the historic returns of different asset classes.”

“The representations were and remain false,” the lawsuit states. “Here, GoalMaker served Prudential’s interests by funneling participants’ retirement savings into Prudential’s own shamelessly overpriced proprietary investment products and into investments that paid kickbacks to Prudential. GoalMaker brazenly excluded the reliable, low-cost index funds in the plan’s investment menu available from reputable providers that did not pay kickbacks to Prudential. This resulted in the participants paying excessive investment management fees, administrative expenses, and other costs, which over the class period cost participants more than $60 million in retirement savings.”

Plaintiffs suggest that AutoZone “could have easily stopped these abuses at any time,” by replacing the “high-fee, chronically underperforming GoalMaker funds with reliable, low-fee Vanguard index funds already in the plan’s investment menu.”

“Year after year, AutoZone chose to retain GoalMaker, ignoring the abusive fees and costs of the GoalMaker funds, the conflicts of interest inherent in Prudential’s asset allocation scheme, and the misrepresentations repeatedly made to participants on behalf of the plan,” the complaint states. “From a fiduciary standpoint, AutoZone’s GoalMaker was not a model of asset allocation but a model of plan mismanagement.”

The complaint goes on to suggest that, although AutoZone “cloaked GoalMaker in Morningstar’s credibility in recommending the service,” Morningstar itself did not assume any responsibility for Prudential’s GoalMaker service.

“In fact, Morningstar specifically disclaimed any responsibility for the review or approval of the information provided to the participants in the AutoZone plan,” the complaint says. “Participants enrolled in Prudential’s GoalMaker service were told they could not change the recommended allocations without being dis-enrolled in the service. Moreover, AutoZone made GoalMaker the plan’s default investment option. This combined with AutoZone’s touting of the service resulted in a large portion of participants’ retirement savings being allocated by GoalMaker.”

Plaintiffs conclude that AutoZone “did not have the competence, exercise the diligence, or have in place a viable methodology to monitor the GoalMaker allocation service and investment options. AutoZone knew, or would have known had AutoZone implemented a prudent investment methodology, that GoalMaker was designed to steer plan participants’ retirement savings to investment options that paid investment management fees and kickbacks to Prudential. AutoZone did not need to scour the marketplace to find prudent investments. AutoZone needed only to look to the Vanguard funds included in the Plan’s investment menu that did not pay kickbacks or investment management fees to Prudential and were therefore excluded from GoalMaker.”

The full text of the complaint is available here.

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Categories: Financial News

Investment Product and Service Launches

Thu, 11/14/2019 - 20:03

Art by Jackson Epstein

Investment Metrics Releases Institutional Portfolio Data Tool

Investment Metrics (IM) has launched Fee Analyzer. The tool provides post-negotiated fee data sourced and aggregated from live institutional portfolios housed on the IM performance reporting platform, used by leading institutional asset allocators.

“Increasingly, institutional asset owners are scrutinizing net of fees performance, and asset managers must be competitive with fees to win new mandates, validating the need for a robust fee benchmarking tool. Fee Analyzer is the first solution that drives competitive insights by bringing together a broad and reliable data source of actual fees in an online, interactive environment,” says Sanjoy Chatterjee, chief strategy officer of Investment Metrics.

With Fee Analyzer, users can create custom fee universes across asset class hierarchies, compare multiple asset classes by investment vehicle, and view fee distribution across many dimensions including mandate size, plan type, and plan size. Additionally, the solution allows users to compare and correlate fees with actual performance and various modern portfolio theory statistics.

Vantagepoint Implements Private Alternative Assets

Vantagepoint has added private alternative assets in its target-date and target-risk funds.

“We are taking the first steps to provide access to a diversified portfolio of private alternatives for people who otherwise would not be able to benefit from these investments. We’re doing it in a daily valued fund, so we’re not restricting liquidity,” says Wayne Wicker, CIO of Vantagepoint Investment Advisers, LLC. “It will be a multi-year process to build our target exposure. We believe that adding alternatives to our target-date and target-risk funds will offer significant value over the long term, because alternative assets like private equity and real estate have different characteristics than traditional assets. By including them in our funds, over time we can potentially help increase risk-adjusted returns and aid participants’ efforts to enhance their retirement security,” he adds.

Alternatives often have different properties than traditional stocks and bonds, enhancing portfolio diversification and potentially improving risk-adjusted returns. As the allocation to diversified alternatives in Vantagepoint’s Milestone Funds and Model Portfolio Funds are built over a multi-year implementation schedule, investors will be able to take advantage of the potential benefits of private alternative asset classes, such as illiquidity premiums and an expanded investment opportunity set. 

Vantagepoint’s approach to introducing the asset class to its target-date and target-risk funds will occur over several years. The firm expects that private alternative investments will comprise less than 5% of the total assets of any single target-date or target-risk fund.

Avantis Selects State Street as ETF Service Provider

State Street Corporation has been appointed by Avantis Investors, a new unit within American Century Investments, to provide exchange-traded fund (ETF) services for its five newly launched low-cost funds. Services will include basket creation, custody, accounting, transfer agency and fund administration. 

Avantis Investors offers active investment strategies for investors in mutual fund and ETF formats. The five funds, launched in late September on NYSE Arca, are: Avantis U.S. Equity ETF (AVUS); Avantis International Equity ETF (AVDE); Avantis Emerging Markets Equity ETF (AVEM); Avantis U.S. Small Cap Value ETF (AVUV); and Avantis International Small Cap Value ETF (AVDV).

“Our agreement with Avantis Investors underscores the scale and expertise of our ETF team and the power of our ETF servicing technology,” says Frank Koudelka, senior vice president and global ETF product specialist at State Street. “Our top priority is to provide strategic advice and partnership to our clients and we couldn’t be more excited to work with Avantis on their suite of low-cost ETFs.” 

“Our goal is to provide investors with active, transparent ETFs that are low cost and can help an individual meet their financial goals,” says Eduardo Repetto, chief investment officer of Avantis Investors. 

Crow Point Partners and Midwood Capital to Launch Open-End Fund 

Crow Point Partners LLC and Midwood Capital Management LLC have announced the pending launch of the Midwood Long/Short Equity Fund, a new open-end fund on the 360 Funds Trust.

The new fund is a conversion of an existing limited partnership, will retain its focus on small cap stocks, and is expected to launch on December 31. Crow Point will serve as adviser and Midwood will serve as sub-adviser with primary portfolio management responsibilities. M3Sixty Administration LLC will be handling administration of the new fund with its affiliate, M360 Distributors LLC, performing distribution. 

“We are very happy to partner with Crow Point and now be part of Crow Point’s public alternative fund line-up,” says David E. Cohen, Midwood’s founder and CIO. “They are an experienced alternatives adviser and they have built out a high quality and robust fund infrastructure that allows us to focus on our core competency, which is investment management.”

The Midwood Long/Short Fund, which will have an institutional and investor share class, will have a total expense cap of 2.25% on the institutional share class. The fund will be available on most major platforms.

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Categories: Financial News

Strategies for Small Employers to Hold Down Health Benefit Costs

Thu, 11/14/2019 - 18:30

A survey from Mercer found midsize and large employers are having some success in finding health benefit cost-management strategies that do not shift cost to employees.

However, it noted that the average deductible rose by more than $250 among small employers (10 to 499 employees), which typically have less ability to absorb high cost increases and fewer resources to devote to plan management.

Michael Thompson, president and CEO of the National Alliance of Healthcare Purchaser Coalitions, based in Washington, D.C., says, “We’re seeing for small employers is average deductibles over $1,000 and out-of-pocket cost that can range up to $10,000 for families. If we keep doing what we’ve been doing, employers can’t keep absorbing costs, and at some point, employees can’t.”

According to Mercer Partner and Senior Consultant Susan Klinefelter, based in Tampa, Florida, larger plan sponsors are focusing on high cost claims, but small employers have a hard time insuring them, and they generally won’t switch to self-funding health benefits. However, small employers are asking for more claims detail from insurance companies to understand what ails employees and what the employers and their partners can do to address this. “The number-one thing small employers are doing is getting more information to be a greater part of the action,” she says.

Mercer found that, among employers with 10 to 499 employees, 80% use fully insured plans. But, among employers with 200 to 499 employees, only 51% are fully insured. Those who self-fund want access to all same reports and options larger employers have.

“Even with limited resources, what is emerging is that small employers are diving into employee demographics, focusing on turnover and tenure. They are finding ways to keep older employers healthier. And, if they find turnover among younger employers, they may not offer cash as a wellness program incentive, Klinefelter explains. She adds that almost all small employers are asking for insurance credits for wellness programs, and this offers them more money to put into what employees need—massage chairs, a quiet room to relieve stress, among other things.”

Carriers are offering wellness solutions that can improve employee wellness in general, according to Klinefelter. Small companies ask insurance companies for point solutions to address diabetes, musculoskeletal ailments and cancer. For example, Omada, based on national suggestions for reducing the chance of becoming diabetic, helps employees and also helps with presenteeism and absenteeism. Livongo, if an employee is already diabetic, will make sure the employee is taking medication timely and managing his diabetes. “Small employers are looking to stave off large claims and asking carriers to include such things. The carriers are responding to keep business and reduce their own risk as insurers,” Klinefelter says.

Beyond wellness efforts

Klinefelter notes that midsize and large employers are sending employees to specialty pharmacies—something smaller employers may not have the option of carving out. However, they are educating employees about resources such as GoodRx to help employees get medications at a reduced cost.

Small employers are also asking insurers to be a part of a level-funding contract, a contract by which they will pay a set amount of premium and if the plan does better it can get a dividend back. Klinefelter explains that with a level-funding contract, the insurance provider estimates an employer’s expected cost per employee per month and charges the employer 90% or 100% of that. It then assesses how claims actually tracked, and if they come in less, the employer gets a dividend reimbursement in the upcoming year. She says insurance carriers are using it partially in a way to give employees connectivity to data and to keep employer groups renewing with them.

Mercer has seen spousal surcharges or no coverage for spouses double among small employers. And, telemedicine is offered in every market—often with no cost sharing in the small employer market.

According to Thompson, small employers are using centers of excellence in communities where employees live and work. And, he says, a lot more focus is needed on primary care. It can save on overall costs because it leads to less hospital admissions, emergency room visits and specialty care. Preventive care is covered at no cost to employees. “We need to figure out approaches to provide affordable access to everyday care,” Thomspon says.

The National Alliance has also seen some coalitions that have captive insurers with which small employers can pool together and self-insure. “There is an opportunity for small employers to play together and act like large employers to mitigate costs,” according to Thomspon.

He says there are bills in Congress that are very much focused on improving health care costs, especially drug costs. The big topic that hasn’t gotten to the bill stage but is in public discussion is a public option for health care. “We think it’s quite unlikely that the country is ready for or willing to accept Medicare for All, but a public option would potentially create competition in the health system where there is none,” Thomspon says. “Also, there has been no constraint on hospital costs, so if there is any way to constrain or limit these costs, it could play out better for employers of all sizes over time.”

Thompson speaks about how the burden of health costs is affecting employees’ future financial security. In the National Alliance’s most recent conference, one employer said it is seeing increases in 401(k) plan loans due to health care expenses.

He adds that the industry is looking at health savings accounts (HSAs) as retirement supplements, but they haven’t proven to be so because employees spend for current expenses. “Deductibles and out-of-pocket costs have increased so much it is encroaching on retirement savings,” Thompson says.

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