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Road Block
Adviser’s noncompete clause upheld by court
A federal court in Connecticut prohibited David B. Austin from using any confidential client information originating from his former employer, AmWINS Group Inc., at his new employer, R-T Specialty.
David B. Austin and R-T Specialty, a division of Chicago-based Ryan Specialty Group, agreed to an August 27th court order barring Austin’s use of records of approximately 266 AmWINS clients for one year. However, R-T is allowed to accept business from those clients as long as Austin is not involved.
Tim Turner, President and CEO of R-T Specialty, told a reporter that AmWINS “never proved that (Austin) violated his noncompete agreement” with AmWINS, adding that Mr. Austin “lived up to his employment agreement” with the wholesale insurance brokerage.
Austin worked for AmWINS from 2005 until May of this year. As part of his employment, Austin signed an agreement saying that he would not disclose or use any confidential information he had as an employee of AmWINS or Stewart Smith Group Inc., which was acquired by AmWINS from Willis Group Holdings Ltd. in 2005, according to the complaint.
According to court documents, soon after Austin left AmWINS and began working for R-T Specialty, AmWINS began losing clients to R-T.
AmWINS also alleges that R-T Specialty is in the practice of poaching employees from established firms in order to build its client base. According to BusinessInsurance.com, AmWINS’ complaint uses R-T’s President, Tim Turner, as an example. Turner was President of wholesale brokerage CRC Insurance Services Inc. in January, before moving over to R-T.
Three days after his departure from CRC, R-T and Turner filed a lawsuit in California against CRC to void the noncompetition and nonsolicitation agreements Turner signed when he was with CRC, according to the complaint.
“R-T Specialty has only ‘expanded’ by massive raids, previously unparalleled in scope, followed by strategic filing of lawsuits bent on voiding more than 100 employment agreements,” AmWINS said in its complaint. “Members of the industry are understandably concerned that it is open season for their employees and customers.”
Turner denied the allegations to BusinessInsurance.com. —Nicole Bliman
Rising Tide
Expense ratios for plan investments up in 2009
Participants in 401(k) plans invested in mutual funds paid slightly higher expense ratios in 2009, according to an annual report by the Investment Company Institute (ICI).
“The Economics of Providing 401(k) Plans, Services, Fees and Expenses, 2009” finds that the asset-weighted average expense ratios paid by 401(k) investors on their stock funds rose 3 basis points to 0.74%. The asset-weighted average expense ratio paid by 401(k) investors on their bond funds increased 2 basis points to 0.55%. For money-market funds, the asset-weighted average expense ratios paid by 401(k) investors fell 2 basis points to 0.36%.
According to the report, at year-end 2009, more than half of the $2.8 trillion in 401(k) assets was invested in mutual funds, primarily in stock funds.
ICI says the expense ratio increases were attributable to the effects of the stock and bond market downturn in 2008 and early 2009 because certain fixed costs were spread over proportionally fewer assets. The average stock and bond fund expense ratios paid by 401(k) investors had declined in the previous five years. The drop in money-market fund expense ratios in 2009 is largely attributed to ongoing fee waivers by firms during a continuing low interest rate environment.
The report also found that 401(k) mutual fund investors continue to gravitate toward lower-cost mutual funds with below-average turnover. Eighty percent of 401(k) assets held in mutual funds were in “no-load” funds—funds that do not have a sales charge. The remainder of mutual fund assets held in 401(k) plans was invested in load funds, but such funds typically waive their loads for retirement plan participants. For most 401(k) investors, the total expense ratio is the only investment charge they pay in the mutual funds held in their plans.
The bulk of 401(k) assets invested in mutual funds were invested in stock mutual funds. More than three-quarters of stock mutual fund assets held in 401(k) plans were in stock mutual funds with expense ratios less than 1%.
The study details many services that 401(k) plan sponsors receive, along with the complexities, regulations, and related costs of offering a plan. Fiduciaries who oversee the plan must ensure that costs for plan services are reasonable. —Rebecca Moore
Tossing It Out
Court dismisses adviser suit over Merrill WealthBuilder
Merrill Lynch’s WealthBuilder Plan did not violate the Employee Retirement Income Security Act (ERISA) because it was a top-hat plan, a federal judge ruled in throwing out a proposed class-action lawsuit against the company by three financial advisers.
In deciding the Merrill Lynch plan did not run afoul of ERISA’s minimum vesting requirements, U.S. District Judge Roger T. Benitez of the U.S. District Court for the Southern District of California asserted that it fit the guidelines for such plans because it was unfunded and intended for a select group of highly compensated employees. Participants had an average compensation of more than double that of all other Merrill Lynch employees, the court pointed out.
Benitez said that, while there is no hard and fast rule about what constitutes a “select group of management or highly compensated” employees, other judges have treated programs that limit participation to 15% or less of the workforce as being in the top-hat category. The opinion said the company indicated this was the case with WealthBuilder.
While working for Merrill, plaintiffs Trever Callan, Timothy Callan, and Ryan Callan participated in WealthBuilder and two employee compensation packages: the Financial Advisor Capital Accumulation Award Plan (FACAAP), and the Growth Award Plan.
When the Callans left Merrill Lynch to form their own financial advisory firm in 2007, they alleged the three lost some of their benefits under these plans because the plans contained forfeiture provisions that violated California’s Labor Code and Unfair Competition Law and ERISA. While the Callans admitted they received all vested awards to which they were entitled under the plans, they contended the forfeiting of unvested awards was illegal.
In dismissing all plaintiffs’ claims, Benitez found that California’s Labor Code only prohibits the forfeiture of “wages,” and plaintiffs did not have a wage interest in the Merrill plans.
Not only that, but Benitez ruled that the company did not violate ERISA’s minimum vesting standards when it came to the FACAAP or Growth Award Plan because neither plan was governed by ERISA. —Fred Schneyer
The case is Callan v. Merrill Lynch & Co., S.D. Cal., No. 3:09-cv-00566-BEN-BGS.
Fine Tuning
PSCA finds sponsors focusing on investments
The Profit Sharing/401k Council of America’s (PSCA) 53rd Annual Survey of Profit Sharing and 401(k) Plans indicates plan sponsors are concentrating more on investments.
The survey found plan investments are being monitored more often, with 64.4% of plan sponsors reviewing investments quarterly. The majority of plans have an investment policy statement (85.8%, up from 54.3% 10 years ago). Twenty percent of plans made changes to their investment lineup in 2009.
According to a release of results, plan sponsors are working to help participants make better investment choices. Nearly a third (31.4%) of plans currently offer a professionally managed alternative, up from 26.2% in 2008. Advice is offered in 60.1% of plans, up from 51.8% in 2008. A little more than one-fifth (21.6%) of participants used advice when it was offered. The survey found participant usage tends to be greatest in small plans.
The availability and use of target-date funds continue to grow, with 62.3% of plans now offering them. The average allocation of plan assets to target-date funds has more than doubled since 2007 to 10.3%.
The survey also found:
• Two-thirds (66.7%) of companies retain an independent investment adviser to assist with fiduciary responsibility. For 54.2% of those companies, the advisory fee is a fixed amount and for 36.1% the fee is a percentage of plan assets.
• The number of funds offered to plan participants appears to be leveling out after many years of steady increase. Plans offer an average of 18 funds for both participant and company contributions. The funds most commonly offered are actively managed domestic equity funds (87.3% of plans), actively managed international equity funds (86% of plans), and indexed domestic equity funds (82.4% of plans).
• The average plan has approximately 60% of assets invested in equities. Assets most frequently are invested in actively managed domestic equity funds (28.9% of assets), target-date funds (10.3%), and stable value funds (9.7%).
Auto-enrollment and Roth use continues to increase
PSCA found the use of automatic enrollment and Roth 401(k) accounts continues to increase. Nearly four in 10 plans (38.4%) have an automatic enrollment feature. Among plans that permit participant contributions, 41.3% allow participants to make Roth after-tax contributions (up from 36.7% in 2008).
The survey also found automatic enrollment is most common in large plans; 53.7% of plans with 5,000 or more participants report having automatic enrollment. The most common default deferral is 3% of pay, present in 58% of plans, and 53.1% of plans automatically increase the default deferral percentage over time. The most common default option is a target-date fund (57%).
In plans that offered a Roth account, 13% percent of participants made Roth contributions.
Eighty-nine percent of U.S. employees at respondent companies are eligible to participate in an employer-sponsored defined contribution plan. On average, 87.3% of eligible employees have a balance in the plan. Twenty-two percent of plan participants are no longer actively employed by the plan-sponsoring company.
Participants who retired in 2009 participated in the plan for an average of 15.3 years.
Other survey findings included:
• Profit-sharing plans tend to offer the most generous contributions, averaging 8.1% of pay. The average company contribution in 401(k) plans is 2.1% of pay and in combination plans it is 4.7% of pay.
• Hardship withdrawals are permitted in 85.6% of plans. The most common reasons for permitting hardship withdrawals include purchase of a primary residence or to prevent eviction or foreclosure (97.9%), medical expenses (97.2%), and post-secondary education expenses (93.5%). A little less than 2% of participants took a hardship withdrawal in 2009, when permitted.
• Loans are permitted in 90.2% of 401(k)s, 86.6% of combination plans and 35.5% of profit-sharing plans. Half (51.9%) of plans with loans permit only one loan at a time. In plans with a loan feature, an average of 23.1% of participants have loans outstanding, with an average loan amount of $8,760. Loans account for 2.5% of total plan assets among plans with loans.
• 34.2% of plans have a safe harbor plan design, 23.4% of plans use a safe harbor match, and 10.7% use a safe harbor non-elective contribution.
• 39.5% of plans provide immediate vesting for matching contributions, while 23% provide immediate vesting for profit-sharing contributions. Among plans that do not have immediate vesting, graduated vesting is the most common arrangement for all plan types. —Rebecca Moore
Who Knows?
Investors are “clueless” as to who operates under “fiduciary standards”
A recent survey found that the vast majority of investors do not know which financial professionals are held to official “fiduciary standards.”
The poll of 1,319 investors conducted by ORC/Infogroup revealed a population of investors who are largely confused about which financial professionals are required to operate under a “fiduciary standard,” requiring the financial professionals to put their client’s interest ahead of their own.
Such unanimous replies are not common in surveys, but 97% of investors agree that, “when you receive investment advice from a financial professional, the person providing the advice should put your interests ahead of theirs and should have to tell you upfront about any fees or commissions they earn and any conflicts of interest that potentially could influence that advice.”
Likewise, investors often think they are getting fiduciary advice, when that is not necessarily the case:
• Three out of five U.S. investors mistakenly think that “insurance agents” have a fiduciary duty to their clients.
• Two out of three U.S. investors are incorrect in thinking that stockbrokers are held to a fiduciary duty.
Barbara Roper, Director of Investor Protection, Consumer Federation of America, said:
“This survey confirms that investors are clueless when it comes to the different standards of care that apply to brokers and investment advisers. They don’t even understand the differences between brokers, investment advisers, and financial planners, let alone that they are subject to different legal obligations to the client when they perform the same services. This lack of understanding is not because investors are stupid; it is because, bluntly stated, the policy itself is stupid. No one in their right mind would create a system in which individuals who call themselves by titles and offer services that are indistinguishable to the average investor are subject to two different standards when they do so, but this is precisely the world that SEC policy over the past two decades has helped to create. Now, Congress has given the SEC a chance to fix those past errors by adopting a policy that makes sense to investors and puts their interests first.”
—Nicole Bliman
Guided Choice
More 401(k) sponsors provide general education than individual advice
Far more organizations provide defined contribution retirement plan participants with general educational materials about the plan and investing than provide participants with individual investment advice, according to a poll by the Society for Human Resource Management (SHRM).
An SHRM news report said the poll reveals that 87% of organizations that provide their employees with a 401(k)-type plan make some type of investment education available to plan participants. Among those that offer investment education, the top formats are: brochures or other written materials delivered online or through mailings (98% of respondents); computer modeling, including Web-based interactive tools (90%); call centers or help desks to answer questions (87%); group seminars (80%); and individual sessions (60%).
The top subjects of investment education are plan information, such as the terms of the plan (97%); a listing of all funds available in the plan (97%); general financial and investment information, such as assessing risk tolerance (94%); interactive tools, such as those that help participants estimate retirement income needs (87%); and non-individualized asset allocation models (59%).
According to the report, 51% of organizations provide or make available some form of investment advice, such as guidance to help plan participants make decisions about fund selections and contribution rates. Among respondents that offer investment advice, the most common formats for delivering this advice are: brochures or other written materials (82%); computer modeling, including Web-based interactive tools (81%); call center or help desk (74%); individual sessions (71%); professionally managed accounts (68%); and group seminars (57%).
SHRM said not-for-profit organizations (88%) are more likely than publicly owned for-profits (53%) to report using individual sessions to present investment advice.
The most common subjects of investment advice are fund investments (94%), contribution level (90%), and asset-class allocation (88%).
Thirty-nine percent of respondents say they provide investment advice directly by the plan as defined under applicable U.S. Department of Labor rules and regulations (for example, individualized recommendations to invest, purchase, or sell investments and funds based on the needs of a plan participant). Twenty-three percent say they provide investment advice through an independent third party, where a third party serves in an Employee Retirement Income Security Act (ERISA) fiduciary capacity, and 21% provide investment advice by or through an independent third party where a third party does not serve in an ERISA fiduciary capacity.
Forty-two percent say they currently provide computer-model-based advice, pursuant to a Pension Protection Act-eligible investment advice arrangement, while 6% say they do not currently provide that but plan to in the future. Fifteen percent currently provide level-fee-based advice, pursuant to a PPA-eligible investment advice arrangement, and 8% do not currently, but plan to in the future.
—Rebecca Moore
Study Finds Market Opportunity for High-Balance Rollovers
Research from Spectrem Group found high-balance retirement plan participants are not showing much loyalty to their plan providers when rolling over their money.
Just 25% of plan participants who performed a rollover of $200,000 or more since mid-2008 rolled all or some of the funds into an account held by their existing plan provider, according to the report “High-Balance Rollover 2010.” In addition, less than two-thirds (59%) of high-balance participants used an adviser in the rollover process.
Spectrem Group estimates the high-balance IRA rollover market, which includes both high-balance rollovers and the consolidation of IRA accounts totaling $200,000 or more, consists of more than 935,000 individuals with assets of $365 billion, according to a press release.
The research found 53% of high-balance participants rolled over at least part of their balances to firms where they held other investments, and 39% transferred funds to firms where they had an existing IRA. Of those who did not use an adviser during the rollover process, 22% requested a hard-copy rollover application directly from their providers and 19% handled the process online. —Rebecca Moore
Reaching Out
Schwab study reveals ways to increase participant engagement
A majority (55%) of 401(k) plan participants surveyed say they would use free personalized advice if their employer made it available.
However, an analysis of actual participant behavior in Schwab-administered plans reveals less than 10% of people with access to advice actively use it. Noting that, for the majority, their employer-sponsored 401(k) plan is their only source of retirement savings, Steve Anderson, Head of Charles Schwab Retirement Plan Services, told PLANADVISER this “gap creates a huge opportunity for employers in partnership with their providers to increase participant engagement.” Seventy percent of survey respondents indicate their 401(k) is their only or primary source of retirement savings.
Charles Schwab’s study, “The New Rules of Engagement for 401(k) Success,” found that use of professional advice has a positive impact on participant savings, investing behavior, and outcomes. Seventy percent of participants who receive 401(k) advice make changes to their deferral rates, and their savings rates nearly double as a result, jumping on average from 5% to 10% of pay.
The average participant who has not received professional advice is invested in fewer than four (3.7) asset classes, where advice-based portfolios at Schwab have a minimum of eight asset classes to be properly diversified. In addition, the study found the vast majority (92%) of advice users stayed the course in their 401(k) portfolios from July 2008 through February 2009 and were fully invested for the market rebound through the remainder of 2009.
The majority of survey respondents cited “approaching retirement” as the top reason to seek help with planning, but Anderson says this is too late. “What we would want to see is participants of all ages becoming involved in the plan which will be a big part of their financial future,” he said.
Anderson noted that, despite where we’ve been in the past few years, 34% of respondents say they trust their employers as a top source of savings and investment education, and 85% think their employer has their best interest in mind. “That’s why I think we can have a real dynamic play in marketplace with sponsors partnering with providers increasing participant engagement by engaging in advice,” Anderson said.
According to Anderson, making advice a one-on-one experience is where sponsors will really get traction. Fifty-one percent of respondents say they prefer a personalized touch over online tools (23%) or brochures (4%). “The sooner we do it, the bigger the benefit to participants,” Anderson concluded.
Insights on participant use of advice
Charles Schwab’s study found less than half (47%) of 401(k) participants surveyed feel very confident when it comes to making investment decisions and 53% say they find retirement benefits even more confusing than health-care benefits.
However, although, 74% of Schwab’s plan sponsor clients currently are offering 401(k) participants access to investment advice, the majority of participants are not using it.
Reasons cited by participants as to why they do not engage in 401(k) advice even if it is available include: 27% are getting financial advice outside of the workplace; 26% have more immediate concerns, such as day-to-day financial matters; 23% don’t think they have saved enough money to warrant spending time to get help; 49% want to have more than $100,000 saved before taking the time to get advice.
Sixty-five percent of survey respondents said they need some kind of motivation to use advice, and more than one-third (34%) of them want proof that advice would improve their investment returns.
According to the survey, 74% of participants indicated they trust personal financial advisers and 59% trust financial institutions as a source for savings and investing information and guidance.
Other than “approaching retirement,” other top life events prompting respondents to seek help include changing jobs (29%), stock market volatility (28%), and loss of spouse or partner (23%).
Anderson says that, among 401(k) investors who have received advice in the last two years, 52% are confident in making investment decisions, compared with 35% who want advice but have not received any. In addition, he notes that 69% of advice users believe they are good at saving in their 401(k) versus just 44% who want advice but have not received any.
Participant survey data were derived from responses of 1,005 U.S. consumers who are employed full- or part-time and participate in their company’s 401(k) retirement plan. The online survey was fielded byKoski Research from June 9-17, 2010.
Plan and participant analytics represent 911 qualified defined contribution plans and 755,000 participants serviced by Schwab Retirement Plan Services, Inc. Data were collected between January 1, 2005, and June 30, 2010.
—Rebecca Moore
Many Advisers Hesitant To Use Social Media
Although there are financial advisers who have adopted LinkedIn and other sites as part of their business, the vast majority remain on the fence.
In the “Independent Advisor Outlook Study” conducted by Charles Schwab in July, advisers first were asked which social media sites they use and for what purpose. LinkedIn, the site used by more than 75 million professionals to “exchange information, ideas, and opportunities,” was the clear winner, with 51% of respondents already using it for professional and/or personal use. Facebook came in second, with 45% having an account (however the majority uses it strictly for personal use). Thirty-five percent of advisers use YouTube—again, mostly for personal use. Fourteen percent of respondents use some sort of personal blog and 10% have started using Twitter.
Perhaps the debate over social media will be centered on what exactly is the use of it. The vast majority of respondents replied that they were “Skeptics” or “Tentative Users” when asked the question, “How would you describe yourself in terms of using social media in general?” Thirteen percent described themselves as “Eager Learners,” 10% as “Early Adopters,” and 2% as “Evangelists.” —Nicole Bliman
Sudden Exposure
Is Cameron Diaz more dangerous than she looks?
Doing a cybersearch for Cameron Diaz can be risky business, McAfee finds. It’s no question that the blonde and blue-eyed beauty has a large number of fans—doing a Google search for “Cameron Diaz screensavers” produces more than 100,000 results. Perhaps that’s why cyber villains have decided to prey on those inclined to do a search for Diaz. McAfee found that one out of 10 Diaz search results (for things such as “Cameron Diaz” or “Cameron Diaz and downloads,” “Cameron Diaz and screen savers,” “Cameron Diaz and wallpaper,” “Cameron Diaz and photos,” and “Cameron Diaz and videos”) is hiding malicious software, making her the most dangerous celebrity to search for on the Web.
In its fourth edition of the “McAfee Most Dangerous Celebrities” study, Diaz replaced Jessica Biel as the most dangerous celebrity this year. Biel is still on the list, however, in the number three spot.
McAfee analyzed popular culture’s most famous faces before making the list; they looked at not only Hollywood stars, but also athletes, musicians, and politicians.
Others joining Diaz and Biel on the “Most Dangerous” list include actors and actresses: Julia Roberts (number 2), Brad Pitt (5), Jennifer Love Hewitt (7), Nicole Kidman (7), Tom Cruise (8), Penelope Cruz (9), and Anna Paquin (10)
Not surprisingly, three supermodels are also in the top 10: Gisele Bundchen (4), Adriana Lima (6), and Heidi Klum (9).
The riskiest athletes to search for are tennis stars Maria Sharapova and Andy Roddick (numbers 13 and 14, respectively). David Beckham and Tiger Woods were further down the list at numbers 29 and 33, respectively.
Coming in safer were popular teen icons Zac Efron (number 40), Miley Cyrus (44), and Justin Bieber (46).
The “safest” searches were of politicians, so fans of President Barack Obama (number 49) and Sarah Palin (50) can rest assured that those screensavers aren’t likely to give you a virus.
At least the Internet is getting safer in general, according to McAfee.
“This year, the search results for celebrities are safer than in previous years, but there are still dangers when searching online,” says Dave Marcus, a security researcher for McAfee Labs. “Cybercriminals are getting sneakier in their techniques.” —Nicole Bliman