Compliance October 1, 2015

House Committee Vote Snubs DOL Fiduciary Proposal

The Republican-controlled House Financial Services Committee approved H.R. 1090, the “Retail Investor Protection Act,” for potential consideration by the floor.
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A vote by the Financial Services Committee of the U.S. House of Representatives grabbed financial media headlines Thursday, unfolding largely on partisan lines and raising the possibility President Obama could eventually be forced to veto legislation aimed at halting the Department of Labor’s (DOL) fiduciary rulemaking.  

Given President Obama’s strong top-down push for employee benefits reform and a friendlier Senate, conventional wisdom says H.R. 1090 probably won’t get much further.   

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Still, it was an important move and sympathetic lawmakers handed enough support for H.R. 1090, known as the Retail Investor Protection Act, to push the bill out of committee. As approved, the bill would essentially halt the Department of Labor’s fiduciary rulemaking efforts to strengthen conflict of interest protections for retirement savers under the Employee Retirement Income Security Act (ERISA) until such time as the Securities and Exchange Commission (SEC) progressed in its own fiduciary reform applying generally to brokers and producing advisers.

The vote was clearly anticipated by some industry groups, who shared commentary almost as soon as the yeas and nays were tallied. For example, Consumer Federation of America (CFA) Director of Investor Protection Barbara Roper suggested “today’s vote forces us to choose between seeing the glass as half-full or half-empty. Certainly it is disappointing that a majority of Committee members voted in favor of a bill that would call a halt to regulatory efforts to ensure that all retirement savers get advice that serves their best interests.”

According to Roper, “the pretense that this is being done to protect retail investors is particularly galling.” On the other hand, Roper said, all but one of the Democrats on the committee voted against the measure, which she said “once claimed strong bipartisan support.” 

NEXT: Industry still split on likely fiduciary outcome 

“Clearly, Democratic support for the Department of Labor rulemaking has solidified as members have recognized that the rule that has been proposed is balanced, that the Department is open to making reasonable changes to make the rule more flexible and streamlined, and that retirement savers cannot afford to wait for an SEC rulemaking that may never come,” she said. “We are grateful to the many members of the Committee who voiced strong support for the DOL effort.”

The Financial Planning Coalition, comprised of the CFP Board, the Financial Planning Association and the National Association of Personal Financial Advisors, also issued a statement following the House Financial Services Committee’s vote in support of H.R. 1090. The coalition doesn’t mince words, suggesting the legislation is designed to do little more than impede the DOL's needed fiduciary rulemaking.

“The need for a strengthened fiduciary rule under ERISA is long overdue,” the Coalition suggests. “As H.R. 1090 heads to the House floor, we urge Congress not to intervene—through this bill or any other vehicle—and to let the DOL do its job and protect retirement investors. As recognized by 25 members of the House Financial Services Committee, the DOL is the expert agency charged with implementing fiduciary-level advice for tax-preferred retirement assets under ERISA. That fiduciary principle—wisely recognized by Congress in 1974—is even more important in today’s retirement marketplace in which retirement investors are largely responsible for their own retirement savings.”

Of course, for every group pushing back on H.R. 1090, another could be found to support it. This week at the PLANADVISER National Conference, attendees widely disagreed with the DOL’s fiduciary rulemaking effort, and said they would support efforts to halt it, legislative or otherwise.

The Markets October 1, 2015

PANC 2015: Set It and Forget It Investments

Target-date funds can be an automated way to solve participant savings behaviors—unless they’re used incorrectly.
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People don’t always use target-date funds (TDFs) appropriately, said Wei-Yin Hu, vice president of financial research at Financial Engines, speaking at the PLANADVISER National Conference in Orlando, Florida, on Tuesday. TDFs are “a nice all-in-one solution,” he said, “and can provide a long-lasting investment outlook. But are people getting the benefit?”

Unfortunately, about 40% of participants drop out of the vehicle, some because of market turmoil, when they lose 5% or 10%. “They don’t have anyone to call,” Wu said, “and they do things on their own that hurt them.” By comparison, managed accounts as a solution see less drop-off, he observed. “Nothing is perfect, but there is a sharp difference.”

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Another problem: partial allocation. Typically, participants put only a part of their portfolio in TDFs, Hu said, citing statistics showing that just 4% of assets in TDFs are used appropriately. The funds are predominantly used by young, newly enrolled participants with smaller balances. People leave over time and do not go in with large balances. 

Participants grow reluctant to keep all their assets in one investment, Hu observed. “If there’s one thing they learned, it’s ‘Don’t put all your eggs in one basket,’ without realizing there are exceptions.”

The design of these funds is good, but actual participant behavior is where they fall down. “People can’t talk to a TDF and are tempted to chase performance and panic in down cycles,” Hu said.

Analyzing TDF usage is the most valuable skill a plan adviser brings when working with the plan sponsor to get to the right qualified default investment alternative (QDIA), according to Ben D. Jones, managing director at BMO Global Asset Management. “Unfortunately, a lot of plan sponsors don’t give that decision the reverence it deserves,” he said. “They choose the recordkeeper solution or the cheapest solution.”

The key, Jones said, is determining the plan objectives. How paternalistic is the plan? Does the sponsor want to have a guided plan, or is it more interested in being self-directed?

NEXT: TDF usage, selection and monitoring are ways to add value.

Plan advisers can add a lot of value by providing scenario analysis and analytics to walk plan sponsors through the decision matrix, Jones said. Plan sponsors are unlikely to revisit a decision, so it’s advisable to have different trigger points throughout the life cycle of that client to revisit the funds and make sure the plan objectives are still met. “Many TDFs have changed their [investment] philosophy entirely over the last decade,” Jones pointed out.

Advisers have the hardest job of anyone in the industry, trying to select the appropriate TDF for a plan, said James Macey, senior vice president/portfolio manager at Franklin Templeton Investments. TDFs have myriad complexities to analyze, from the variety of asset classes they invest in to the underlying managers, differences in glide path construction and methodology, proprietary versus nonproprietary or strategic versus tactical. “What is the right amount and balance of those things?” he asked.

“We as an industry need to do a better job on the participant side,” Macey said. “Plan sponsors need to educate their work force; advisers need to do a better job, and portfolio managers have to do a better job helping to explain the risks and rewards.”

Evaluating target-date funds is an evolving process, Macey said. Firms differ on how they evaluate TDFs, but most importantly the smartest advisers understand that choosing solely on performance and fees is no longer on the table.

Another pitfall is participants who benchmark their TDFs to the Standard & Poor's (S&P) 500. “Then,” Macey said, “they freak out over low returns. But the S&P is not an appropriate benchmark for a TDF, and certainly not when [a participant is] older.” He also emphasized that good advisers understand past performance foretells nothing.

Ultimately, Hu reminded the audience, the plan sponsor wants employees to get to a successful retirement. “We as advice providers report to our plan sponsor clients on how we impact participant outcomes,” he said.

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