Compliance October 12, 2017

PANC 2017: Helping Your Clients With Governance

Having structured processes in place is key.
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At the 2017 PLANADVISER National Conference, experts on the “Helping Your Clients With Governance” panel discussed the impetus behind litigation against retirement plans, and the reasons why the Department of Labor (DOL) conducts plan audits. Certainly, the majority of the lawsuits being filed against plans relate to fees—particularly revenue sharing fees, said Phil Senderowitz, managing director of Strategic Retirement Partners.

With respect to revenue sharing, Joe Connell, a partner with Sikich Retirement Plan Services, said the courts and the DOL are both scrutinizing how revenue sharing fees are paid and shared among participants. For example, if participants in an actively managed fund pay revenue sharing fees, but the same employer’s participants in passively managed index funds pay none, advisers and the retirement plan committee need to discuss this, lay forth justification for the disparity and document the decision, both Connell and Senderowitz said.

“Even if the plan sponsor client decides to keep the revenue-sharing fees, as long as it discusses [the decision] and documents that it had a rational thought process for keeping them, it will be fine,” Senderowitz said.

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“Some plan sponsors are moving to all-index fund lineups, but I think that is dangerous,” he continued. “There is no downside to having a diversified lineup.”

Connell said he has guided clients through four DOL audits in the past two years, and what he has discovered is that DOL agents are not investment professionals. Rather, they are “concerned with processes,” Connell said.

Senderowitz agreed, noting that documentation and adherence to the plan document, which should be thorough, are both key. For example, if an employee wants his bonus withheld, the plan document should address that scenario, he said.

Even though it is not required by the DOL, having an investment policy statement (IPS) “that covers your definition of compensation and eligibility” is also a good guardrail against litigation and audits, Connell said. However, he cautioned, if a plan has one, it needs to abide by it and continually monitor it in quarterly reviews.

Senderowitz agreed that following an IPS is crucial. “If your plan sponsor client is audited by the DOL or faces a lawsuit, it will face different levels of scrutiny. The DOL is checking boxes.”

NEXT: The most common errors

Another area where advisers can help plan sponsor clients stave off governance and litigation risks is by “benchmarking provider fees by conducting requests for information [RFIs] every two to three years to ensure the fees are competitive,” Connell said.

With regard to the most common governance mistakes plan sponsors make, Connell has found that many committees fail to take minutes or to realize that, if their plan has more than 100 participants, it is subject to auditing. This is why Sikich Retirement Plan Services “creates a fiduciary vault for every client that includes the minutes and that documents the history of the relationship,” Connell said.

Mistakes that Senderowitz has found include “small clients not paying attention to terminated employees. They need to get rid of those balances,” he advised.

As to resources that advisers can provide to their plan sponsor clients and plan committees, these abound, Connell said. Recently, the DOL has recently been holding five to six day-long Meeting Your Fiduciary Responsibility workshops around the country, each year. Offered for free, he said, the workshops concentrate primarily on fees and equip participants with a certificate for  attending. In addition, the DOL has a booklet, “Meeting Your Fiduciary Responsibilities,” which Connell makes sure he gets into the hands of each of his plan committee members—then has them sign an acknowledgement saying they understand the concepts it lays forth.

“In addition, defined contribution investment only [DCIO] managers, such as Thornburg Investment Management, have many client-ready tools and resources,” Connell said. “Some of these are six- to eight-minute BrainShark-style videos that are easy to use and [that] provide participants with a certificate. In addition, Fi360 has a fiduciary training course that costs $200 a person.”

To this point, Strategic Retirement Partners has developed a course in partnership with Wagner Law Group. These six- to eight-minute videos are followed by a quiz that participants need to pass, Senderowitz said.

Further, advisers “need to have a discussion with the plan sponsor clients about cybersecurity,” Connell said. “The DOL has not issued a policy on this, but The SPARK Institute has guidelines available on its website.”

The bottom line, Connell said, is that the DOL “really wants to see that plan sponsors have a culture of compliance, that they are looking out for the best interests of the participants. You need to educate plan sponsors that their providers are not fiduciaries to the plan—they are.”

 

The Markets October 12, 2017

PANC 2017: Guide to the Markets

J.P. Morgan Funds economist Dr. David Kelly sees the greatest opportunities in emerging markets and Europe.
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In his “Guide to the Markets” presentation at the 2017 PLANADVISER National Conference, David Kelly, Ph.D., CFA, and managing director, chief global market strategist and head of J.P. Morgan Funds’ global market insights strategy team, likened the U.S. economy to a “healthy tortoise” that will produce 2% annual gross domestic product (GDP) growth but, over the near term, will be unable to reach 4% or even 3%.

“[After] a 37-year bull run in fixed income, yields are now very low,” Kelly said, forecasting that the slow GDP growth will inevitably lead to a 2% return in fixed income over the next five years. Despite projections that stock earnings will be strong in the third quarter of this year, investors “will be lucky to earn 5% in equities in 2018. Valuations—a Shiller’s 30.1 price/earnings [P/E] ratio—are looking high, in the ninth year of a bull market. This is the third-longest stock market expansion since the Civil War,” he said, adding that, when the market inevitably contracts, “this will create a problem for long-term investors.”

However, drilling down on international equity earnings and valuations, Kelly said, “You need to look overseas. Emerging markets and Europe both have room to grow and will do better over the next five years, potentially delivering 10% returns a year. I don’t think the world economy has looked this good in a long, long time, so global central banks don’t need to keep helping it. In fact, they will begin to subtract assets. The U.S. Federal Reserve is now finally trying to normalize its balance sheet. The Fed’s securities are maturing, which will cause it to reduce its balance sheet by $450 billion a year, which will boost interest rates.”

Kelly noted that the Fed has announced it will raise the federal funds rate one more time this year, and he believes it will do so another three times in 2018 and 2019 each. “The market hasn’t priced this in yet because the cash market has been depressed by the actions of central banks,” he said.

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NEXT: Stocks with promise

Examining returns and valuations by sector for U.S. stocks also yields promise, Kelly continued. Year to date through June 30, technology stocks delivered 17.2%, consumer discretionary stocks 11.0%, industrials 9.5%, materials 9.2%, financials 6.9% and real estate 6.3%, he said. “Creating a portfolio that includes U.S. stocks that are overweight and underweight will help you.”

Nonetheless, in the near term, Kelly believes that the infrastructure rebuild that will occur following the devastating Hurricanes Harvey, Irma and Nate could result in GDP growth of 2.5% to 3.5% in the third quarter. However, because of the long-term suppression in GDP growth, there is a 5% chance for recession in the fourth quarter, a 20% chance in 2018, a 40% chance in 2019 and a 50% chance in 2020.

Kelly gave a number of reasons for why GDP growth is being stifled, including a Congressional Budget Office (CBO) forecast of a federal budget deficit of -3.6% of GDP in 2017, growing to a deficit of -5.2% by 2027.

And, despite the argument by the current U.S. administration that an increase in GDP will pay for a corporate and personal tax cut, “with U.S. unemployment at a 48-year low of 4.2%, and 2 percentage points below a 50-year average of 6.2%, we are at full employment. Data released at 8:30 this morning by the Bureau of Labor Statistics showed that there are 1.89 million people in the U.S. filing for unemployment—the lowest since 1973. We are scraping the sediment of the labor market barrel. Unless we change immigration laws, GDP growth will slide down to 1.5% to 2.0% a year,” he said.

Regardless, retirement plan advisers need “to remind people of the importance of being invested in the long run, which will inevitably result in the difference whether they can retire to ‘Mudville’ or Malibou,” Kelly said, reminding advisers that “diversification is critical. Over the past 15 years, a diversified portfolio has delivered average returns of 7.5% a year. This year, it will be 11.5%. Going forward, it may do less well” but is still important. Between 2002 and 2016, cash has delivered average returns of 0.8%, “so it still makes sense to invest in something.”

 

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