The Markets September 2, 2015

Market Volatility Drives Record Participant Call Volumes

It’s both a positive and a negative sign that retirement plan participant call volume hit record levels at Empower Retirement last week. 
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According to Ed Murphy, president of Empower Retirement, defined contribution (DC) plan participants called the recordkeeping provider at a record pace on Monday the 24th of August.

Participants were clearly reacting to sharp drops in the S&P 500 and the Dow Jones Industrial Average, Murphy tells PLANADVISER.  

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“In terms of calls answered from participants, it was the busiest couple of days we’ve probably ever seen.” Murphy says. “Heading into the end of the week, things started to return somewhat to normal.”

By Thursday, call volumes were 20% above a typical day, and on Friday things returned to normal.

“Frankly, the message we were communicating to the market was, don’t panic,” Murphy explains. “As the week went on the message started to sink in, especially for your audience, the retirement savers. If you look at the markets today, September 1, in the afternoon, the DJIA has already been down more than 400 points, but we’re seeing call volumes that are only just slightly above normal.”

For those who hoped the last few weeks of market volatility would settle and give DC plan participants a chance to reassess, we’ve been disappointed through Wednesday, September 2. However, as Murphy notes, there is “not as much emotion rising to the surface this week,” even as markets continue to whipsaw, “and this is a good thing.”

Given the ongoing market movement, it’s a little hard to assess the decisionmaking of those participants who called Empower last week, Murphy says. Some were clearly worried and looking to flee to cash, while others were simply calling to reconfirm their long-term plans in the face of new variables.

“We all know the value of having an adviser in this type of an environment,” Murphy adds. “Empower has done its own proprietary research, showing those who work with a paid adviser have an income replacement rate that is 30 points higher than those who don’t work with an adviser. This holds when you adjust for income too; it’s still materially higher for those who work with advisers.

“The reason behind the wealth gap is exactly what we are discussing now,” Murphy continues. “Those people who have a cool-headed and well-understood plan to invest for the long term, and who are supported by an adviser, are not the ones pulling their money out of the market at a loss right now.”

NEXT: For some, it could be time to for cash 

While the theme of the week for long-term investors is “don’t panic,” there may be emerging reasons for DC plan participants to adjust their long-term approach.  

“The tough thing is separating these helpful and healthy adjustments in the long-term outlook from knee-jerk reactions to short-term market headlines,” Murphy says. “Clearly only seeking out advice during times of serious turbulence is not going to be the best way to build a strategy that truly reflects your long-term investing goals and personal aspirations for being in the market.”

More and more it seems that volatility is here to stay, demanding a reassessment of risk-taking in DC accounts coming off a six- or seven-year bull market. Indeed, the whole month of August turned out to be pretty grim for returns. The Wilshire 5000 Total Market Index fell $1.6 trillion in August, making it the worst dollar loss since October 2008. On a percentage basis, the index fell -5.95%, to close the month at 20,445.40, which cemented it as worst performing month by percentage since May 2012.

According to Wilshire Associates, “financial concerns dramatically shifted from Greece and the Fed to the other side of the globe as China’s devaluation of the Yuan sent currencies and stocks on a roller coaster ride that included a string of six straight negative days totaling a Wilshire 5000 decline of $2.8 trillion before rebounding $1.4 trillion in two days.”

Somewhat calmer conditions seemed to prevail by the start of September, but we are no longer in the investment environment of 2013 and 2014, Murphy agrees. This means some people, especially those closing in or retirement, should be making adjustments to their portfolios.

For the typical DC plan participant, who is not a skilled portfolio manager, “it’s probably for the best if they are enrolled in a qualified default investment alternative [QDIA] that is going to enact all this thinking automatically,” Murphy concludes.

NEXT: Only a few years from retirement?  

Chris Carosa, author of several books on saving and retirement and contributor to FiduciaryNews.com, says the ongoing “September slump” should serve as a wake-up call for those DC plan participants who are “fully invested and only a few years from retirement.”

For this group, it very well may be time to start building up cash holdings, Carosa says. It’s a strategy shared in his book “Hey! What’s My Number? How to Improve the Odds You Will Retire in Comfort.”

“If on the day you retire the market tanks, you don’t want to be forced to take money out of your long-term investments, like many others are doing as we speak,” Carosa explains. “To protect yourself, start building out your cash account when you reach the five-year mark before retirement.”

The strategy may help participants “ride out a downturn with cash,” allowing their long-term investment dollars to remain invested.

As a rule of thumb, Carosa suggests DC plan participants start taking cash incrementally, “until you have between two years and five years of income needs in safe liquid assets.”

“Earning a return on those assets is not the most important thing,” he adds. “Making sure they don't lose value and are readily accessible is. Why two to five years? Most severe down markets recover after two years, so you’ll be able to ride out storms. But new retirees need to assume they'll live another 30 years, so the bulk of their retirement assets should remain invested for the long-term.”

For those folks still five to 10 years away from retiring, “stay the course,” Carosa says. “Better yet, if you can, try to make sure the bulk of your assets are with value-oriented equity managers. Unlike index funds and momentum-style managers, value managers tend to gravitate towards stocks that don't go down as much when the market goes down.”

Compliance September 2, 2015

Court Questions Ability to Recover Pension Overpayments

Questions about whether funds can be identified in the participant’s possession and when the statute of limitations started to accrue have pushed forward an ERISA lawsuit.
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A federal district court judge has moved forward certain claims brought by a plan sponsor against a retired plan participant from whom it is seeking recovery of pension overpayments.

U.S. District Judge Catherine D. Perry of the U.S. District Court for the Eastern District of Missouri, concluded that Pfizer’s Employee Retirement Income Security Act (ERISA) claims for restitution and unjust enrichment survive to the extent they seek to recover specifically identifiable funds (or the traceable proceeds of such funds) in Virginia V. Weldon, M.D.’s possession and control. She dismissed state-law claims as preempted by ERISA. 

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Perry denied Weldon’s summary judgment motion to dismiss the case, which alleged the claims were time-barred by ERISA statutory limitations. The court decided “genuine disputes of material fact remain as to when the cause of action accrued, and whether plaintiffs’ delay in bringing their claims was unreasonable.”

Perry cited the U.S. Supreme Court ruling in Great West Life & Annuity Insurance Co. v. Knudson, in which the high court determined that for purposes of restitution in equity, a plaintiff could seek to impose a constructive trust or equitable lien on money or property identified as belonging in “good conscience” to the plaintiff and that could be clearly traced to particular funds or property in the defendant’s possession. A court of equity would then order a defendant to transfer title or give a security interest in the property to the plaintiff, who was considered the true owner. However, “where the property sought to be recovered or its proceeds have been dissipated so that no product remains, the plaintiff’s claim is only that of a general creditor” and no equitable lien or constructive trust can be imposed. “Thus, for restitution in equity, the action generally must seek not to impose personal liability on the defendant, but to restore to the plaintiff particular funds or property in the defendant’s possession.”

Perry rejected Weldon’s assertion that Pfizer’s claim must be dismissed because it has failed to identify the location of the specific funds sought, concluding that identification of the location of the funds is not necessary at the pleading stage. 

Pfizer had charged that, by refusing to repay the overpayment, Weldon violated the terms of the plan. However, Perry noted that Pfizer did not identify a plan provision requiring repayment by Weldon of any benefit overpayments.  “Although the terms of the plan may be referenced to show that Weldon was overpaid and to determine the amount of the overpayment, without a specific provision requiring repayment, it cannot be alleged that Weldon is violating a plan term,” she wrote in her opinion.

Concerning the statute of limitations on the ERISA claims, neither party disputed that a five-year statute of limitations applies, but they disagreed about when plaintiffs’ claims accrued. In 2006, Weldon had reported to Fidelity, which was responsible for distributing payments, that she thought she was being overpaid, but a Fidelity representative told her she was not. It wasn’t until a reconciliation in 2009 that Fidelity discovered Weldon had been overpaid and contacted Pfizer about it. Pfizer filed the lawsuit in 2014. Perry denied Weldon’s motion for summary judgment based on the statute of limitations because disputed issues of material fact remain as to the time of accrual.

NEXT: The case 

When Weldon retired she elected to receive her pension benefits in set monthly payments over a period of three years. In 2006, after the plan benefits had been fully paid over the specified three years, the monthly payments continued to arrive.

Weldon and her financial adviser brought the payments to the attention of Fidelity, which the company had contracted to address, among other things, customer questions about pension payments. A Fidelity representative told them that Weldon had selected a single life annuity and would receive payments for the rest of her lifetime. The opinion noted that after this assurance, Weldon significantly bumped up contributions she made to charities.

Plaintiffs Pharmacia Corporation Supplemental Pension Plan and Pfizer, Inc. alleged that Weldon should be required to reimburse them for more than $1.3 million in pension distributions that they mistakenly paid to her.

In September 2009, Fidelity was working on a reconciliation project between its historical records system and its disbursement system, and discovered that Weldon’s benefit payments had mistakenly been paid to her since January 2006. It notified Pfizer, which told Fidelity to stop making the mistaken payments.

Pfizer sent a letter to Weldon notifying her of the overpayment and requesting that she reimburse more than $1.3 million to the plan. Correspondence between Weldon and her attorney and Pfizer continued for several years.

The plan and Pfizer brought suit in 2014, asserting a variety of claims under ERISA and state law. 

The opinion in Pharmacia Corporation Supplemental Pension Plan and Pfizer v. Weldon is here.

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