Compliance September 12, 2013

PANC 2013: Staying Out of Trouble

The type of adviser you are—fiduciary or nonfiduciary—dictates your business model, said Brad Campbell, counsel in Drinker Biddle & Reath’s Washington, D.C., office and speaker at the PLANADVISER National Conference in Orlando, Florida.
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In “Conflicts of Interest and How to Manage Them,” the second of a two-part panel, Campbell told attendees that it is impossible to be “a sort-of fiduciary.” Advisers should ask themselves five questions to determine their status. Is their advice 1) regularly provided? 2) for a fee? 3) individualized? 4) pursuant to a mutual understanding? and/or 5) the primary basis for a retirement plan’s decisionmaking? Such is the provenance of a fiduciary adviser, Campbell said.

Fiduciary status matters because the Employee Retirement Income Security Act (ERISA) requires a business model that is consistent with prohibited transaction rules, said Campbell.

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Fiduciary advisers cannot use some common nonfiduciary payment structures and activities, such as variable indirect compensation and principal transactions. The individual retirement account (IRA) rollover is another area of potential fiduciary risk.

The Employee Benefits Security Administration (EBSA), a unit of the Department of Labor (DOL), is a regulatory and enforcement agency that, Campbell noted, closed 3,566 civil investigations last year, and 318 of its criminal investigations led to 117 indictments. Clearly, the agency eyes service providers, and it has stated that major case enforcement is a priority in 2013. (Campbell is also former assistant secretary of labor for EBSA.)

No ERISA attorney gives you a get-out-of-jail-free card, Campbell said, but specific precautions can help an adviser avoid fiduciary and disclosure tripwires. For example, model portfolios, increasingly popular with advisers, present some compliance challenges. When an adviser acts as fiduciary adviser to a plan and its participants, how that adviser is compensated could raise red flags for prohibited transactions. The adviser must avoid any financial incentives when recommending investments, such as could occur if steering plan participants to the adviser’s own model portfolio.

Another example: If among two mutual fund families, one pays the adviser 10 basis points and the other pays 12, the adviser cannot recommend either because of the inherent conflict in variable compensation.

Compliance Sand Traps

IRA rollovers, attracting a lot of regulatory scrutiny, are compliance sand traps. “Are you actively soliciting participants, or passively receiving them when they come to you?” Campbell said. “Does the law require an adviser to say no when a participant seeks out his services?” In this gray area, Campbell cautioned, an adviser is not required to say no, “but how you say yes can be tricky.”

The DOL’s new fiduciary definition, likely to come next year, may impose tighter restrictions on unaffiliated advisers. Terming the IRA marketplace “a Wild West,” Campbell noted that DOL concern about the potential for prohibited transactions may spur the agency to address, in a helpful way, rollover solicitations in the upcoming rule. “There might be a prohibited transaction class exemption,” Campbell said. “Meet these conditions, and you can do a rollover.” The DOL’s outlining of a defined process for performing a rollover could eliminate this gray area.

Advisers’ reducing or leveling fees would do much to reduce conflict, Campbell said, adding that higher fees can be fair. The simple fact of higher fees does not always take into consideration an increased number of services, products and opportunities in the IRA that an adviser offers. “The IRA is a fundamentally different creature,” Campbell said, “and these things aren’t available in the plan, which can justify a fee differential.”

One key issue the DOL looks at is the process that people put in place to mitigate conflict, and the potential for higher fees is an easy target, Campbell said. The danger is that someone can say, “Clearly you were self-dealing, because you got paid more by virtue of using your own solution.”

“I like to point to the Ten Commandments,” Campbell said. “There’s a lot of room to live your life around those Ten Commandments” while still following the rules and staying in compliance.

Data & Research September 12, 2013

PANC 2013: Employee Engagement Strategies

Connie Weaver of TIAA-CREF explained the science behind employee engagement, the cornerstone of successful retirement outcomes. 
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At the PLANADVISER National Conference, Connie Weaver, executive vice president of TIAA-CREF, began her keynote talk by explaining that despite the many decisions plan sponsors face in programs, regulatory responsibility, plan menu and other areas, advisers cannot forget the many decisions participants face when thinking about retirement. Employee engagement is key in getting participants to face these choices and take action. “They should be making decisions, becoming a lot more aware of where they are, what they know, what they don’t know, who they can trust, how to get advice, and we’ve seen a lot of evidence that shows that if these steps are taken early on … the outcomes will be fundamentally different,” said Weaver.

Weaver said that providers, advisers and sponsors need to work together to keep participants their main focus. “It’s really a cooperative view,” she said. ””It’s an ecosystem, where if you think about the goals of the plan sponsor, the goals of people like me who are the provider, the goals of folks like you—both in a consultant capacity and an advisory capacity—[are] all revolving around that end user.”

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When creating and implementing an employee engagement program, you must take five steps:

 

  1. Understand the customer’s needs;
  2. Segment the customer base into groups based on behavioral characteristics;
  3. Draw on analytics and data;
  4. Use that data to create an engagement program; and
  5. Measure your results.

 

Weaver stressed that advisers need to understand their customers before they can tailor an engagement plan for participants. “Spend a lot of time matching the data of what people are doing with behavioral capabilities,” Weaver said. Look at both qualitative and quantitative information because understanding those needs will help when segmenting the customer base. Weaver added, “The words we use, the approaches we have, it’s all about meeting people where they are in their lives, where they are in their circumstances and what their needs are, and then starting the journey from there.”

Weaver suggested breaking down the customer base into five groups of people: dollar stretchers, who live paycheck-to-paycheck; life builders, who are focused on basic life aspirations; accumulators, : those growing their assets; transitioners, those shifting from accumulation to distribution; and the established, who are living in retirement.

Knowing where a person is in his life will help to understand how he will engage with his retirement. Dollar stretchers are significantly more likely to focus on financing basic, current needs, unlike accumulators, who are in a position to be very proactive with retirement saving. This information will help advisers to formulate an employee engagement plan. “One size will never fit all, and that’s more true today than it’s ever been,” Weaver said.

The third and fourth steps—drawing on analytics and data then creating the engagement program—are very closely connected. Being aware of analytics and data in regards to individual segments—such as age and gender—enables advisers to tailor a unique program for those individuals. Weaver advised applying this specialized information to employee communications and linking that content to your firm’s website so clients can find action-based information that is very relevant to their experience and needs.

After creating and implementing an engagement program, it is important to review the real results, looking for any problems within the program and expanding on those aspects that work well. TIAA-CREF did so after a recent program conducted at Caltech. One part of the program involved a series of workshops tailored for women. “To come in and lecture and start with a bunch of [industry jargon] terms, they shut down,” Weaver said. She advised “making it real” and taking a problem-solving approach. She explained that 90% of workshop attendees recommended them to a friend. In addition to more women seeking out education, individual retirement accounts (IRAs) increased by 122%, and contributions to those accounts more than doubled. By understanding groups of individuals and tailoring engagement programs for them, Weaver said, real results are possible. 

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