In Practice October 24, 2016

Going Live With Fiduciary Changes Takes Time

The DOL’s conflict of interest reform is expected by providers to have the biggest impact on financial services since ERISA was enacted in 1974, according to research from Broadridge. 
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A new analysis from Broadridge Financial Solutions urges firms to formally map out their response to the Department of Labor (DOL) fiduciary rule prior to execution.

In other words, it’s not just enough to understand what changes need to be made to comply with the stricter fiduciary standard—it’s also crucial to plan for how such changes will be implemented, step by step. As the Broadridge analysis explains, there are multiple key dates to keep in mind when rolling out any new products, service approaches, etc.

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Prior to the preliminary implementation date of April 10, 2017, the analysis urges firms to be absolutely sure they have adopted and tested any new recordkeeping and compliance tools to adhere to and track fiduciary exposure. There is some lag-time programmed into the rule to ease compliance, but post-April 10 is not the time to learn one’s solution will not be effective in real practice on the ground. There is also the task of creating and distributing fiduciary acknowledgment letters and updating intranet and public websites.

According to Broadridge, two of the most urgent needs firms are wrestling with after digesting the DOL conflict of interest rule “center on their current business operations—specifically, an evaluation of their fund lineup and re-engineering their current process for share class conversions.”

“For firms who distribute funds through a distributor network, job one is looking at their current fund lineup and performing an in-house assessment of their compensation practices,” Broadridge urges. “Will they remain status quo or do the BIC [best-interest contract] exemption? If they are doing the BIC exemption, what data will they need to screen funds to offer the most suitable ones for their downstream investors?”

The other big effort, coming out of this, will be share class conversions, Broadridge predicts.

“In the post-DOL era, share class conversion has become a major concern. Firms need a simple, clear, and bullet-proof approach to assess the current share class of a fund against the most optimal classes available to convert,” Broadridge argues. “Tools for advisers and correspondents can provide clear paths for conversions, including documentation and archival of the recommendations.”

NEXT: Adapting to the interim period and beyond 

This is all work that should be signed off by the initial April 10 deadline, the analysis suggests. Advisers and staff, by this point, should be trained on any new enterprise point-of-sale utilities to mitigate conflict of interest and ensure proper disclosure moving forward under the rule. Finally, depending on the advisory practices and the services offered, there may be separate disclosures going to self-service and on-demand investors, and advisers must establish workflows to maintain and archive transactions on all fronts.

During the interim period from April 10, 2017, through January 1, 2018, Broadridge suggests advisers will have to be ready to create and distribute fiduciary acknowledgment letters for new accounts. Advisers leveraging the best-interest contract exemption or attempting to “grandfather” existing accounts will have to be ready to formally execute such policies. They will also have to start proactively managing any new fiduciary risk by analyzing and benchmarking fees against the market.

Broadridge goes on to predict major change and disruption for the individual retirement account (IRA) side of the market, especially as it pertains to rollovers from defined contribution plans to IRAs.

“What happens when a client leaves his current employer for a new job?” the analysis asks. “In the pre-DOL rule world, an adviser would help the client rollover assets into an IRA. In the post-DOL Rule world—where recommendations must be documented and potential conflicts of interest disclosed—it is no longer a simple ‘lift and shift’ … Moving a client into different share classes or different funds can result in higher fees which need to be clearly communicated and signed off by the client,” if not avoided entirely.

Broadridge concludes that complying with the DOL rule “offers an additional marketing touch point with your clients,” and an opportunity to strengthen relations.

“The fiduciary acknowledgement letter, BIC disclosure, and updating intranet and public websites are a few things you’ll need to create and refresh,” the analysis warns. “Updated training materials are also critical to educate advisers on new processes for ensuring suitability, capturing signature, and archiving recommendations. Data is critical to feed these communications, preferably aggregated from a single definitive source.”

The full analysis is available online here. 

Data & Research October 24, 2016

Report Offers Suggestions for Improving the U.S. Retirement System

While the United States' overall value rose slightly in the 2016 Melbourne Mercer Global Pension Index, the index report notes that as a country with a lower-middle rating of C, its retirement income system has real challenges to overcome.
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Dramatically aging populations, declining birth rates and a lack of robust retirement systems will see many countries struggle under the burden of providing adequate pensions to their senior citizens without drastic action, the Melbourne Mercer Global Pension Index (MMGPI) suggests.

The United States overall index value rose slightly in 2016, to 56.4, from the prior year’s value of 56.3 in 2015.

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However, the report notes that as a country with a lower-middle rating of C, the United States retirement income system has real challenges to overcome. In the context of the other countries evaluated, the United States was considered to be a system that has some valuable features; however, it also has major risks and/or shortcomings that need to be addressed. There is considerable work to be done to achieve the coveted “A Grade,” only ever held by Denmark and Netherlands.

This year, the MMGPI has looked at the impact of rapidly aging populations, and the preparedness of countries’ retirement systems to deal with the significant financial pressures this presents.

Author of the report and Senior Partner at Mercer David Knox said the impact of longer life expectancy, combined with global declining birth rates, is much more significant than has been recognized by many governments and communities.

“This year’s report includes a projected old age dependency ratio which will raise alarm in many regions. The range of the ratio is stark—predicting that in South Africa there will be one retiree for every 7 people of working age while in Japan the number drops to one retiree for every 1.44 people of working age by 2040,” he says.

NEXT: Aging populations’ impact on pension systems

The MMGPI shows the relative position of each country’s old age dependency ratio in respect to five key factors:

  • The labor force participation of older workers ages 55 to 64;
  • The labor force participation of older workers ages 65 and older;
  • The increase in the labor force participation rate of 55- to 64-year-olds from 2000 to 2015, which determines whether the country is actually experiencing more people working at older ages;
  • The projected increase in the retirement period from 2015 to 2035 allowing for the expected increases in life expectancy and the projected increase in the normal eligibility age for Social Security or the publicly funded pension; and
  • The level of pension fund assets expressed as a percentage of gross domestic product (GDP) in each country.

Knox says although these indicators are not foolproof, they are indicative of developments which impact sustainability and community confidence in the provision of future retirement benefits.

Life expectancies at birth have increased by seven to 14 years in most countries during the last 40 years, equating to an average of one additional year for every four years—a significant result that cannot be ignored in the ongoing reform of the pension system, the report says. Even more significantly, the increased life expectancy of a 65-year-old over the last 40 years ranges from 1.7 years in Indonesia to 8.1 years in Singapore.

“Whatever actual figure emerges in the next 40 years, there is little doubt that people are living longer in their older years,” says Knox. “Without changes to retirement ages and ages for eligibility to access Social Security and private pensions, there will be increasing pressure on global retirement systems to the detriment of the financial security provided to older members of our society.”

NEXT: What can be done to strengthen the United States’ retirement system?

The increasing life expectancy in the US, with a birth rate below what is needed to maintain the population, means that the country’s old age dependency ratio is increasing. This is problematic for the country’s pay-as-you-go Social Security system, and adjustments to that system will eventually be necessitated.

According to Professor Rodney Maddock, of the Australian Centre for Financial Studies, “We are living longer, living larger portions our lives in retirement and spending more in retirement, so we need to be well-placed to ensure fulfilling, adequately-funded retirements.”

The MMGPI acknowledges that there are areas for improvement in all countries’ retirement income systems. Possible measures to further enhance the United States’ system include:

  • Raising the minimum pension for low-income pensioners;
  • Adjusting the level of mandatory contributions to increase the net replacement for median-income earners;
  • Improving the vesting of benefits for all plan members and maintaining the real value of retained benefits through to retirement;
  • Reducing pre-retirement leakage by further limiting the access to funds before retirement;
  • Introducing a requirement that part of the retirement benefit must be taken as an income stream;
  • Increasing the funding level of the Social Security program;
  • Raising the state pension age and the minimum access age to receive benefits from private pension plans;
  • Providing incentives to delay retirement and increase labor force participation at older ages; and
  • Providing access to retirement plans on an institutional group basis for workers who don’t have access to an employer sponsored plan.

More information about the Index is here.

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