There’s a Limit to Reliance on Service Providers

Service providers for defined contribution plans have increasingly taken on responsibility for the plans.

However, there’s a limit to how much a plan sponsor should rely on service providers to handle and advise about administration and investments. The case of Tussey v. ABB is a lesson for retirement plan committees, Fred Reish, chair of the Financial Services ERISA team, at the law firm of Drinker, Biddle & Reath, told attendees at the 42nd Annual Retirement & Benefits Management Seminar, hosted by the Darla Moore School of Business of the University of South Carolina, and co-sponsored by PLANSPONSOR.  

Reish noted that in the Tussey case, ABB plan participants sued the company, its retirement plan committee, the plan’s recordkeeper and others, and that the court found the defendants violated their fiduciary duties to the plan by failing to monitor recordkeeping costs, failing to negotiate fee rebates for the plan from the recordkeeper or other investment companies, and selecting more expensive share classes when less expensive share classes were available (see “Upfront: Breach of Duty”). Reish pointed out that the committee had a report from a consultant saying fees for the plan were reasonable, but it never asked what the recordkeeper was being paid.   

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

“Tussey created a ‘duty to ask’,” Reish said, noting that many plan sponsors think service providers are fiduciaries to the plan, but most are commercial businesses working in their own interests. Plan committees have the responsibility to determine what the service providers are being paid and whether the fees are comparable with market value, he added.  

Reish speculated: Do sponsors know about different share classes and revenue sharing? In addition, courts are beginning to say plan sponsors have to consider the purchasing power of the plan, and not only know average expense ratios for certain fund types, but average expense ratios for fund types for plans of similar size. This is why plan advisers and consultants need to step in and educate plan sponsors and help them with negotiations, Reish said.

Many Expect to Carry Debt into Retirement

About half of retirees (49%) carry debt into retirement, says a survey conducted last month by Securian Financial Group.

The survey, “Retirement Time Bomb: Mortgage Debt,” found that of those carrying debt into retirement, more than half (55%) carried $25,000 or more and more than one-fifth (21%) held $100,000 or more in debt. The percentage of pre-retirees who expect to carry mortgage debt into retirement increased 123% since the last survey in 2009. More than 67% of Boomers currently expect to carry mortgage debt into retirement, compared to 30% in 2007 and 2009.

“Mortgage debt is a dark cloud over pre-retirees’ financial futures,” said Michelle Hall, manager of Market Research at Securian. “Before the Great Recession, they may have expected to sell their homes at a profit and add it to their retirement nest eggs. Years of home devaluations and high unemployment dramatically changed many Boomers’ financial plans.”

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

Forty-six percent of the pre-retirees surveyed said they expect to carry various types of debt into retirement. Nearly half (48%) expect their debt to equal or exceed their savings at retirement.

The most frequently-named types of debt held at retirement in 2013 were: 

  • Mortgages (59%);
  • Credit cards (59%); and
  • Auto loans (31%).

 

While many expect to carry debt into retirement, the 2013 survey found that fewer retirees actually did. Just under half of the 526 retirees (49%) carried any kind of debt when they retired, this compared to 71% in the 2007 and 67% in 2009.

About one-third (32%) of the retirees said they incurred debt after retiring. Nonetheless, more than half (53%) said debt is “something you should avoid if at all possible.”

The survey results can be found here.

«