Perspectives August 2, 2013

Five Strategies for Tapping the Vast DB Plan Market (And you don’t have to be an expert!)

Where there’s pain, there’s opportunity. And there are few parts of the retirement world experiencing as much pain right now as the $2.6 trillion (per Investment Company Institute data) defined benefit (DB) plan marketplace.
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Most plans are underfunded, and many are cash poor. A significant number—about one third of the market[1]— of DB plans are hard frozen, and most sponsors will eventually terminate those plans.  

Plan sponsors face serious financial pressures as a result of these issues. They clearly need help.

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That presents an extraordinary opportunity for retirement plan advisers. Those who understand the basics of the key concerns and the potential solutions can create new sources of income. For instance, advisers to DB plans can generate revenue when:

·         The DB plan comes in

·         The funds roll over to a defined contribution plan or other product at termination

·         The DB plan leads to an opportunity with the sponsor’s defined contribution plan

 

Don’t have DB plan experience? That’s OK. Many of the skills you have as a defined contribution plan adviser can be applied to helping DB plan sponsors.


[1] Analysis using projections from http://www.dol.gov/ebsa/pdf/2007pensionplanbulletin.pdf, table C14 on p. 39,  data from http://www.towerswatson.com/united-states/newsletters/insider/5858; Cerulli 2011 Quantitative report and PBGC’s report, table S-36, http://www.pbgc.gov/Documents/pension-insurance-data-tables-2010.pdf

 

Here are five steps you can take now to tap into the vast DB marketplace. 

1.        Learn the basics of what DB sponsors are going through right now. Between funding pressures, the uncertainty of if and when to terminate a frozen plan, de-risking issues and more, plan sponsors face a variety of challenges. Familiarize yourself with their challenges.  Resources like these white papers about managing volatility, transferring pension risk and building a termination strategy can help.

2.        Tap into financial-related centers of influence to identify prospects. Reach out to your current referral network and also to other professionals who work closely with plan sponsors on the financial side. Examples include accountants, attorneys and commercial bankers. They can serve as excellent referrals to plan sponsors that may have concerns about their DB plans.    

3.       Target the finance side through the chief financial officer (not human resources). Pension funding is a financial issue—not a human resources issue. Typically, CFOs or controllers are the ones grappling with funding the plan. These professionals know that DB issues can cause unwelcome surprises on balance sheets and income statements—and sometimes trigger unanticipated consequences such as benefit restrictions for employees if funding isn’t adequate.

4.       Ask about the DB plan first. Typical advisers focus only on defined contribution plans. Plan sponsors are used to calls from these advisers. Approach a plan sponsor about their DB plan, however, and you’ll instantly set yourself apart. If you request a meeting to discuss their funding concerns (the number one priority for DB plan sponsors), there’s a good chance you’ll get that meeting. And if you prove yourself on the DB side, you have a much better chance of landing the defined contribution plan, as well.

5.       Conduct a retirement plan assessment of entire program. Many sponsors haven’t considered what they want to spend to provide an end benefit or what that end benefit should provide. You can add value by helping the sponsor see how both plans can help employees achieve the sponsor’s target income replacement ratio. 

A retirement plan assessment can pinpoint the sponsor’s goals for the program, including:

  • The desired spending level for the  plan and for the retirement program as a whole;
  • Accounting considerations, such as tolerance for impacts to the balance sheet and income statement;
  • Whether the sponsor requires stability or flexibility with the required plan funding;
  • Employee considerations, such as attraction and retention goals; and
  • For frozen plans, the most efficient means (balancing timing and cost) to terminate.

 

Ease their pain

One more tip: helping the sponsor consolidate vendors for both DB and DC plans into a single, streamlined model can improve the efficiency of plan operations  and help the sponsor potentially save money. It can also boost the experience and end product for both the sponsor and the participant—while opening up even greater opportunities for you.

The DB plan opportunity is one of the biggest in the retirement marketplace today. And with relatively few advisers focusing on DB plans, the market is wide open. Follow the tips above, and explore the services available through retirement plan service providers to help develop a strategy tailored to each organization’s unique needs and goals.

 

Gary Burczek, FSA, vice president of business development, defined benefit plans, at The Principal.

Henry E. Tebben, CFA, vice president of business development, defined benefit plans, at The Principal.

 

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.

Compliance August 2, 2013

Surviving DOL Service Provider Investigations

Some practices can trip up plan providers and make them susceptible to Department of Labor (DOL) investigations, but there is some negotiating that can be done.
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During a webcast, Bruce Ashton, a partner in Drinker Biddle & Reath’s Los Angeles office, reminded attendees that the DOL asks for a huge number of documents (see “Dealing with Documentation in a DOL Investigation”). One thing the agency wants is documents describing agreements between service providers and plan clients; it is looking for a description of certain activities such as giving fiduciary investment advice to the plan, as well as descriptions of fee arrangements, particularly as related to asset management and investment advice.

The DOL also asks for the number of occasions during the number of years covered by the investigation that the service provider gave investment advice to the top 20 clients.

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Fred Reish, partner at Drinker Biddle & Reath, and chair of its Employee Retirement Income Security Act (ERISA) Financial Services practice in Los Angeles, reminded attendees that the letter from the DOL notifying a service provider of an investigation may request documents be provided in an impossibly short time. He suggested negotiating the timing of responding. In addition, service providers can negotiate the volume of materials to be provided. The agency will not negotiate on the information about the top 20 clients, but is reasonable about selecting a sample of all plan clients for other information requests.

Reish also suggested service providers have counsel “pre-audit” the materials to see what they are likely to show.

Service providers may want to request the DOL to provide a formal subpoena of the information requested. According to Reish, this will protect them from angry clients if the investigation finds something the client is doing wrong. Ashton added that service providers may want to get a subpoena since many service agreements have a confidentiality clause requiring such a thing before disclosing client information.

Brad Campbell, counsel in Drinker Biddle & Reath’s Washington, D.C. office, and former assistant secretary of Labor for the DOL’s Employee Benefits Security Administration (EBSA), said when a case is first opened, the EBSA investigation of the company is an internal function. If it finds significant violations, it will turn to the Solicitor’s Office for advice about how to solve the violations, or to determine if litigation is needed.

A 502(l) penalty is a statutory penalty that can be assessed under ERISA against a fiduciary or other parties based on an applicable recovery amount; it can be up to 20% of the recovery amount. Josh Waldbeser, an associate in Drinker Biddle & Reath’s Chicago office, said it can only be assessed in two situations—by a court or pursuant to a settlement agreement. When negotiating with the DOL, service providers should make sure they offer to resolve violations apart from a settlement agreement. He said companies have an opportunity to avoid a settlement by identifying and self-correcting any violations before or during investigations; the DOL agent cannot claim there is anything on which to settle.

Waldbeser added that agreeing to voluntarily comply is still not settling, and they should make that clear to the DOL. To avoid the line crossing into a settlement, he suggested companies be cooperative and amicable while still putting forth arguments. Experience is key to presenting arguments the DOL will consider and not view as combative. The agency would rather solve the violations without a settlement agreement.

Waldbeser said even if the investigation gets to the point of a settlement agreement to avoid litigation, the 502(l) penalty can still be avoided or negotiated. He noted that one client got the DOL to agree to let it review the agreement for a month, and the agency agreed anything fixed in that time would offset the penalty assessment. Service providers also have a right to petition to have the penalty reduced or waived on the basis of financial hardship or good faith compliance with ERISA.

Things That Can Trip Up Service Providers

Reish said in most cases, a recordkeeper is not a fiduciary, but there are situations in which they can be. It is possible the expected fiduciary regulation will point out that when a recordkeeper gives a list of investments to a plan sponsor—such as when a plan is converting onto their platform or for a startup plan—it is fiduciary investment advice unless certain disclosures are made. Also, recordkeepers who have packages of investments often refresh the package by removing underperforming funds and replacing them with better performing funds. Some of the old funds are being used in plans, so the recordkeeper is affecting plan investments. Reish noted that providers can do that if they follow the DOL’s Aetna advisory opinion, which includes giving plan sponsors reasonable notice (60 days in Aetna's case). Finally, if a recordkeeper sets its own compensation it can potentially become a fiduciary—for example, keeping float income without making a disclosure of its float policy.

Summer Conley, counsel in Drinker Biddle & Reath’s Los Angeles office, and a former DOL investigator, added that if a payroll company receives float as part of processing deferrals, the DOL said as long as it is disclosing its policy rate and time frame, and is operating in accordance with that policy, this is not a prohibited transaction. However, on the flip side, that float is considered compensation, so a plan fiduciary needs to take it into account when determining if compensation is reasonable.

For registered investment advisers (RIAs), Ashton said if the RIA is engaged to provide advice at the plan level on non-brokerage account assets, and it is negotiated to also give advice on a participant level, the RIA can charge a fee for managing participants’ self-directed brokerage accounts (SDBAs). However, if that is not negotiated at the outset and the RIA recommends it manage SDBAs as a service to the plan and participants, recommending an investment manager is a fiduciary function.

Campbell noted that if an RIA offers asset allocation models and charges participants for those in addition to getting a fee for advising the plan, that can be a prohibited transaction. He said RIAs can address this by disclosing in agreements that the fee will cover service to the plan and the availability of model portfolios. He said RIAs can also establish in the agreement that the RIA is a 3(21) fiduciary adviser with respect to those portfolios only and no other.

Waldbeser said a fiduciary adviser will have engaged in prohibited self-dealing if it recommends something that will add to its compensation, such as 12b-1 fees. A plan sponsor cannot approve the arrangement and get the RIA out of the prohibited arrangement.

According to Ashton, if a plan has a number of mutual funds, and some pay 12b-1 fees, while some don’t, and the RIA is paid via 12b-1 fees, this is a variable compensation situation that leads to prohibited transactions, because the RIA can control compensation by recommending funds that pay compensation or not. He recommended the RIA have a set fee with the plan and 12b-1 fees will offset what the plan pays; that will level fees.

Finally, Campbell noted that if a non-fiduciary service provider can talk to exiting participants about rollovers and tell them all their options, including IRAs the service provider offers, it wants to document the whole conversation, showing it has made the right disclosures. If a fiduciary service provider to the plan or participants recommends the adviser’s IRAs, it raises concerns that the adviser is raising his or her own fees. Some advisers use mitigating disclosures, but that is not a clear path that we know is safe when giving advice about rollovers. Additional guidance is needed, he said.

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