Compliance August 9, 2017

First Signs Emerge of DOL Fiduciary Rule Transition Extension

The DOL submitted a very brief document to a Minnesota district court apparently confirming the substantial development that it will seek to extend the fiduciary rule transition timetable. 
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A “notice of administrative action” submitted by Department of Labor (DOL) attorneys to the U.S. District Court for the District of Minnesota indicates the regulator will extend the transition period preceding full implementation of the expanded fiduciary rule.

This is the venue in which one of the many examples of anti-fiduciary rule litigation is still pending, in this case the suit filed by Thrivent Financial. The filing from DOL does not itself contain the substantial detail that will presumably be included in the paperwork the regulator says it has submitted to the Office of Management and Budget. The full language will apparently be available sometime on August 10th.

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The development comes mere days after the conclusion of an aggressive request for information process that drew thousands of additional retirement and investment industry comments, not just on the subject of extending the transition period but also on potentially reworking some of the basic provisions of the signature Obama-era rulemaking. Now the DOL will seemingly waste no time in meeting the widespread demand shared in the RFI responses that, at the very least, the timeline for coming into compliance with the strict new fiduciary standard and its accompanying exemptions should be lengthened.

Here is what the new document says DOL is up to: “United States Department of Labor and R. Alexander Acosta, Secretary of Labor (collectively, the “Department”), hereby notify the Court that on August 9, 2017, the Department submitted to the Office of Management and Budget (“OMB”) proposed amendments to [the following] exemptions, entitled: Extension of Transition Period and Delay of Applicability Dates From January 1, 2018, to July 1, 2019; Best Interest Contract Exemption (PTE 2016-01); Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs (PTE 2016-02); Prohibited Transaction Exemption 84-24 for Certain Transactions Involving Insurance Agents and Brokers, Pension Consultants, Insurance Companies, and Investment Company Principal Underwriters (PTE 84-24).”

Please note, more reliable information about exactly what is happening will be available once the paperwork submitted to OMB is published in the Federal Register. 

The Markets August 9, 2017

False Sense of Security Surrounds Active Fixed-Income Allocations

Experts with Charles Schwab warn that a decade of generally stable credit markets has some investors feeling a false sense of security about “stretching for yield” within near retirees' target-date funds. 
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Jake Gilliam, senior multi-asset class portfolio strategist, Charles Schwab & Co., recently spoke with PLANADVISER about some of his chief concerns with recent developments in the fixed-income marketplace.

Particularly when it comes to the fixed-income allocations of target-date funds, Gilliam says he has noticed plan sponsors and participants carry something of a false sense of security. Since the financial crisis of a decade ago, in an effort to combat years of incredibly low interest rates, some active fixed-income strategies held in TDFs have taken on additional risk within their portfolios. “As a result, some TDF fixed-income exposures risk the potential of behaving more like equities than bonds, should significant market stress return,” Gilliam suggests.

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“And the timing couldn’t be worse for many retirement investors,” he feels, “An elevation in fixed-income risk can jeopardize accumulations when participants, especially the Baby Boomers, are at their most vulnerable, as they near retirement.”

As an illustration, Gilliam discusses what it takes today versus a decade ago to secure a 5% yield through fixed-income investments. In 2007, it could be done while taking virtually no credit risk using more or less only U.S. Treasury securities. A mere two years later, investors needed to utilize U.S. corporate investment-grade bonds to achieve that same coupon level, Gilliam notes, and today in August 2017 a similar 5% coupon requires “venturing into Ba-rated U.S. high-yield bonds, representing a significant elevation in credit risk relative to U.S. Treasurys.”

The real concern is that greater exposure to higher-yielding corporate bonds can “notably dampen a fixed-income allocation’s diversification benefits to equity investments.” Crucial for plan advisers and sponsor clients to note, Gilliam says this stretching for yield is very common in the TDFs that are most popular in the U.S. defined contribution plan market. 

“Consider the historically negative return correlation of the Bloomberg Barclays Capital U.S. Aggregate Bond Index to the Standard & Poor’s (S&P) 500 Index,” Gilliam continues, “which has allowed the bond index to perform as an effective cushion against stock market downturns. Investment-grade and high-yield corporate credits have failed to offer the same degree of protective attributes, instead moving more in tandem with stocks. This greater correlation to what is often the riskiest part of participants’ retirement savings may subject them to greater downside exposure just when they need the most protection—when equity markets turn volatile.”

Gilliam urges advisers and their clients to weigh these questions in an effort to reassess fixed-income risk: “What is the strategy’s yield, and how is it being generated? What is the strategy’s credit exposure across securities, and how does this differ from the benchmark? How have these attributes changed across different bond market cycles? What is the potential risk to participants, particularly those nearing or in retirement?”

“Plan sponsors and advisers may also find it useful to review if and how a fixed-income strategy’s risk exposure may evolve at various points along the glide path,” he concludes. 

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