The Markets January 22, 2018

Evidence Mounts To Show Automated Plans Do Better

More than 82% of those from the Millennial generation, defined here as those born between 1977 and 1993, are now invested in a diversified portfolio.

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Jeff Kletti, head of investments at Wells Fargo Institutional Retirement and Trust, sat down recently with PLANADVISER to offer an inside look at trends and challenges taking shape within the company’s sizable defined contribution (DC) plan book of business.

Among various topics, the conversation focused in large part on plan sponsors’ embrace of passive target-date funds (TDFs), and how this trend includes some important points of subtlety that go beyond “active versus passive.” Kletti also took time to highlight the way retirement plan participants have, tied to the popularity of automatic enrollment into target-date funds, significantly improved the diversification of their retirement accounts.

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“Over the last five years, the number of participants invested in a diversified portfolio has continued to increase,” he explained. “More than 82% of those from the Millennial generation, born between 1977 and 1993, are now invested in a diversified portfolio. This is a tremendous development from the perspective of ensuring retirement investors carry an appropriate amount of risk.”

For some investors, Kletti said, the use of a TDF results in more risk being taken than otherwise would have been the case—for example, in the situation where a Millennial investor moves from favoring stable value or money market investments to accessing a balanced portfolio of U.S. and international equities within a TDF. Others actually see their risk-taking dialed back when they either choose or are swept into a TDF, say in the case of a late-career Baby Boomer moving out of heavily concentrated positions in employer stock or a small segment of the U.S. stock market.

According to the data provided by Wells Fargo, the Baby Boomer generation, born between 1946 and 1964, is lagging their Millennial counterparts when it comes to risk-optimized investing, with 76.8% invested in a well-diversified portfolio.

“About a third of participants across Millennials, Generation X (1965-1976), and Baby Boomers who self-manage the investment of their plan accounts are more conservative than a typical target-date fund appropriate to their age,” Kletti observed. “At the same time, over 50% of Boomers have greater equity exposure than an age-appropriate target-date fund, which could expose them to significant investment risk.”

The data further shows 11% of Millennials and 42% from Generation X are invested more aggressively than an age appropriate target date option.

 

Compliance January 22, 2018

Investment Adviser Added as Defendant in NYU 403(b) Suit

In a statement, Cammack said, “We believe the claims have no merit and will be vigorously defending them.”

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Participants in New York University’s (NYU) retirement plans have filed a Third Amended Complaint, for the first time naming Cammack LaRhette Advisors as a defendant in the lawsuit.

Allegations in the complaint are basically the same as in the last one: that instead of using the plans’ bargaining power to reduce expenses and exercising independent judgment to determine what investments to include in the plans, the defendants squandered that leverage away by allowing the plans’ conflicted third-party service providers—TIAA-CREF and Vanguard—to dictate the plans’ investment lineup, to link its recordkeeping services to the placement of investment products in the plans, and to collect unlimited asset-based compensation from their own proprietary products.

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The new complaint says Cammack LaRhette Advisors—now known as Cammack Retirement Group—has served as investment adviser to the plans since 2009. The plaintiffs contend Cammack is a fiduciary to the plan because it rendered investment advice for a fee.

In a statement, Cammack said, “We believe the claims have no merit and will be vigorously defending them.”

The complaint alleges Cammack gave plan fiduciaries “flawed advice.” It says the use of Morningstar weighted averages is an inappropriate benchmark for evaluating fees charged by the investment options offered in the plans because these averages include mostly retail share classes of funds that carry far higher fees than those appropriate for inclusion in massive jumbo plans, like the NYU Plans. “To use the Morningstar blended average to evaluate the appropriateness of the fees in the Plans would produce distorted results that give the incorrect appearance that high-fee funds in the Plans had reasonable fees compared to industry averages that fail to account for the massive size and bargaining power of the Plans,” the complaint says.

Plantiffs contend that Cammack’s vice president, Jan Rezler, has admitted that the use of Morningstar averages as a fee benchmark is inappropriate for large plans such as NYU’s. Yet, they allege, when Cammack actually became the plans’ investment consultant, Rezler has conceded under oath that Cammack used those Morningstar fee averages to evaluate each of the plans’ funds. “This use of an improper benchmark masked the excessive fees in the Plans’ funds and reveals a flawed benchmarking process,” the complaint says.

In addition, plaintiffs allege that despite their long histories of dramatic underperformance and exorbitant fees, Cammack never recommended removing the CREF Stock or TIAA Real Estate Accounts. They say the Retirement Plan Committee’s co-chair, Margaret Meagher, admitted that the committee never considered removing the CREF Stock Account and never asked Cammack whether they considered the prudence of the CREF Stock Account since TIAA required its inclusion in the plans.

According to the allegations, had Cammack conducted a comprehensive analysis of the TIAA Real Estate Account when Cammack was first engaged as the plans’ adviser, the fund’s exorbitant fees and decade’s worth of substantial underperformance for the period leading up to December 31, 2009 (and continuing thereafter), would have provided Cammack with all the necessary information to recommend the fund’s removal.

“As a result of Cammack’s imprudent investment advice failing to recommend the removal of the imprudent TIAA Real Estate and CREF Stock Accounts despite their high fees and histories of abysmal performance, the Plans suffered tremendous losses,” the complaint says.

In addition, the plaintiffs say Cammack has never discussed with the Retirement Plan Committee terms such as float income and securities lending and Cammack failed to take these forms of compensation into account when evaluating the reasonableness of the plans’ recordkeeping fees. “In failing to take this into account, Cammack provided flawed investment advice which the Retirement Plan Committee accepted without question,” the complaint says.

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