Data & Research April 11, 2012

Principal Preservation Still a Focus for Plan Participants

In a recent analysis of its client base, New York Life Retirement Plan Services found that despite a low interest rate environment, principal preservation investment solutions remain a heavily utilized retirement plan investment option.
Reported by

Since the financial crisis of 2008, on average, more than 20% of retirement assets have been invested in stable value investments and half of all participants across New York Life’s retirement platform have some 401(k) savings within a stable value investment today.  

The reliance on stable value is not attributed solely to an aging population that wants to shelter their retirement savings from the marketplace. Significant stable value usage spans all age ranges. On average, Baby Boomers—participants between 49 and 66 years of age—allocate 22% of their assets in stable value, compared with 12% for Gen X participants (between 33 and 48 years of age) and 10% for Gen Y (between 23 and 32).   

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In addition, half of all participants invested at least a portion of their defined contribution balances to stable value in 2011, according to the analysis. Baby Boomers had the highest rates of stable value use, at 58%, followed by Gen X at 46% and Gen Y at 32%. New York Life says the data is significant, given that participants are not automatically defaulted into a stable value investment, but must proactively place assets there.  

“Gen Y has not experienced a positive market cycle during their professional careers, and Baby Boomers just watched a good portion of their retirement erode in rough market conditions,” said Steven Dorval, managing director of retirement and investment strategy at New York Life Retirement Plan Services. “All participants require an investment option that will preserve principal, and at a minimum keep up with inflation. These are among the reasons stable value continues to be a core savings option.”

 

Compliance April 11, 2012

Retiree Loses Bid to Recover 2008 Losses

A dentist was adhering to his fiduciary duty to 401(k) plan participants when he decided to wait until a December 31, 2008, plan valuation to make a distribution to a retiree.
Reported by

Dr. David M. Perry acted reasonably when he determined that, due to unforeseen market conditions, paying benefits to Sandra Wakamatsu based on the 2007 valuation would prejudice the other participants in the plan, U.S. District Judge Charles R. Breyer of the U.S. District Court for the Northern District of California ruled. Given the drastic decrease in the value of the pooled account for plan assets in 2008, and the request for disbursement came only two weeks before the scheduled end-of-the-year valuation.  Dr. Perry reasonably concluded that making a distribution based on the 2007 valuation would have allowed Wakamatsu to escape her share of the losses occurring in 2008 and force the other participants to bear those losses, Breyer found.    

“It is important to recognize that applying a different valuation date did not deprive [the] plaintiff of her benefits, and instead merely ensured that [the] plaintiff bore her share of the losses that the plan suffered over the course of the year,” Breyer wrote in his opinion. “Dr. Perry acted reasonably and fulfilled his duties to all plan participants by refusing to apply the 2007 Valuation to [the] plaintiff’s claim for benefits.”  

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The court did find that there was a conflict of interest due to the fact that Dr. Perry’s wife and daughters were participants in the plan. However, considering their share of the assets was only 10%, Breyer said it was unlikely this weighed in Dr. Perry’s decision and gave it little consideration in the court’s ruling.

 

 (Cont...)

Wakamatsu retired from Dr. Perry’s dental office on October 31, 2006. In a letter to Wakamatsu dated December 10, 2008, by the 401(k) plan’s recordkeeper, her payable benefits were estimated at $195,317.82, based on the valuation date of December 31, 2007. Wakamatsu completed the required distribution request forms on December 17, 2008.    

However, after determining that processing Wakamatsu’s claim under the 2007 valuation would be a breach of fiduciary duty owed to the remaining plan participants, Dr. Perry processed the request for benefits under a valuation date of December 31, 2008, which totaled $135,449.40. Wakamatsu declined to take payment in 2009.  

Another valuation on December 31, 2009, put Wakamatsu’s account at $159,581.93. She took a distribution of $159,581.93, but filed a lawsuit seeking the $35,735.89 difference between her distribution and her account value as of December 31, 2007.  

The court’s opinion is here. 

 

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