“What to Expect in 2011?” More Education and Fee Disclosure

In the opening panel discussion at the PLANADVISER National Conference (PANC) in Orlando on Monday, four panelists discussed the need for more participant education and the evolution of adviser compensation.

According to the four opening panelists at PANC, 2011 is going to be a busy year for plan advisers.

“You have to design [the plan] around the client and demographic….plan sponsors are holding you accountable for participant involvement and engagement; for driving that strategy.  What kind of education will you offer, what kind of communication, you need to drive that conversation.  Put it in writing, show results, be accountable for participant services,” clear words from Denise Diana, Vice President, Middle Market Leader at the Hartford.

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Diana, along with the other panelists, repeatedly emphasized the importance of educating plan participants in order for them to be more engaged in the retirement planning process.  She also said that participants are getting “noisier” and “more realistic.”  They realize that longevity management should be a concern of theirs, but due to the economic upheaval of late, participants continue to make conservative investment choices.

“We need to go forward again, get [the participants] out of the very conservative options and get them ready for retirement,” Diana said.

With such a clear need for education, why are so many participants still uneducated about the process?   

Rick Wedge, Retirement Plan Practice Leader at Northgate Benefits, says it’s often the employers’ fault.

“I think education is being offered, but not enough sponsors take us up on the offers.‘Oh it’s a bad time for us…’ The employer is preventing education,” he said.  (This point was later refuted at a panel featuring plan sponsors.)   

(Cont...) 

Wedge even said that on two occasions, he ultimately decided not to work with a plan sponsor client because they were refusing to accept any educational programs for participants – this is not something he would do lightly, he said. The alternative to turning a client away would be to offer automatic enrollment, but even that requires a minimal amount of participant education.

The panel briefly touched on the sensitive area of differentiating between education and advice.  Wedge said he thinks they are one in the same - “I tell them where to put their money.  We’re fiduciaries, and by law, have to do what’s best for them.”

Handling Transparency 

The other major topic that arose in the panel, “What to Expect in 2011,” were the issues surrounding fee transparency and adviser compensation.   

All of the panelists said the demand for transparency is growing and that ultimately, it will be a good thing.

Kenneth Cochrane, Managing Director of Pulse Logic, a market data and analysis firm for financial services, said that increased transparency will increase specialization and best practices.  He predicted that generalists will be forced out and that “regulation is good for professionals.”

In his latest survey at Pulse Logic, Cochrane found that 85% of plan advisers expect their revenues to grow in the coming year.  Half believe that fee-disclosure legislation will cause them or their clients to review plans, and the majority feel it will create new opportunities.

However, like so many other professionals in today’s tough economic times, Cochrane reminded the audience of a few hundred financial advisers that, “You, like everyone else, will be asked to do more for less.”

Court Dismisses CitiStreet ERISA Breach Claims

A federal judge in New York has tossed out allegations CitiStreet violated its fiduciary duties by misrepresenting the State Street Daily Bond Market Fund as a safe, conservative investment.

However, U.S. District Judge Richard J. Holwell of the U.S. District Court for the Southern District of New York let stand Minnesota state law allegations by plaintiff Apogee Enterprises, a Minneapolis-based glassware manufacturer, that CitiStreet could be held liable for misinforming Apogee about how long it would take to get out of the bond fund.

Apogee alleged CitiStreet said it would take 60 to 90 days when other plans were permitted to leave the fund on 48 hours’ notice; the court ruled state-law claims related to this allegation were not pre-empted by the Employee Retirement Income Security Act (ERISA).

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In dismissing the ERISA charges, Holwell found that CitiStreet was not acting as a fiduciary by providing recordkeeping and administrative services to the Apogee 401(k).

Holwell contended CitiStreet was not an ERISA fiduciary because it did not communicate directly with the plan participants even though it may have provided investment reports to the Apogee plan’s investment committee. Further, Holwell found, while CitiStreet’s alleged misrepresentations influenced the Apogee plan’s investment committee to invest in the Daily Bond Market Fund, the allegations made clear that only the committee had the ultimate authority over the plan’s assets.

Apogee had argued CitiStreet acted as a fiduciary because its misrepresentations about the fund being low-risk effectively persuaded investment committee members from moving assets out of the bond offering and that that persuasion constituted fiduciary control under ERISA (see Minn. Firm Slaps State Street with Subprime Mortgage Suit). 

In fact, according to Apogee, the fund had changed strategy and had become highly leveraged in much higher risk positions including mortgage-backed securities. When the housing market collapsed, Apogee claimed it lost $5 million in the fund.

“Making a harmful misrepresentation to a plan does not spawn a simultaneous fiduciary duty under ERISA to not make misrepresentations; otherwise anyone who swindled a plan through false advertising or a dishonest sales pitch would be a fiduciary. The statute does not go that far,” Holwell wrote in the ruling. .

Apogee’s claims against State Street were settled in a $90 million settlement that, if approved by the court, will be paid out to Apogee’s plan along with 82 other ERISA plans (see Court Rejects State Street’s Settlement Do-Over Request).

The case is Apogee Enterprises Inc. v. State Street Bank and Trust Co., S.D.N.Y., No. 09 Civ. 1899 (RJH).

 

 

 

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