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Insight on Plan Design & Investment Strategy
Updated: 2 years 15 weeks ago

PCS, Aspire Combine to Provide Fiduciary Specialist Services

Mon, 2019-08-05 23:05

The question of how recordkeeping industry consolidation has impacted the daily work of retirement plan sponsors has remained top of mind since Principal’s acquisition of Wells Fargo Retirement and Trust—a deal ranking among the largest recordkeeping industry M&A transactions on record.

Even before the Principal-Wells Fargo deal grabbed headlines, the topic of recordkeeper M&A activity has been on the radar for nearly a decade. Indeed, some industry watchers say the ball started rolling when MassMutual snapped up The Hartford’s retirement plans business in September 2012. Soon after that came the announcement that Transamerica Retirement Services and Diversified—both owned by parent company Aegon—would become a unified brand under the Transamerica Retirement Solutions heading.

Against this backdrop, the announcement that PCS Retirement, LLC (formerly known as Professional Capital Services, LLC) acquired Aspire Financial Services almost seems inevitable. According to Mark Klein, CEO at PCS who will maintain the title of CEO for the combined organization, these two companies “grew up together.”

“Pete Kirtland [CEO of Aspire] and I have known each other for many years,” Klein tells PLANSPONSOR. “He was the guy who actually sold us our first recordkeeping system, InvestLink. In that sense, we’ve been friendly, and sometimes not so friendly, competitors over the year. We are thrilled that our combined, 300-person organization will continue to provide conflict-free recordkeeping services to 16,000 plans and 750,000 eligible participants representing more than $23 billion in assets under administration.”

Klein suggests the combined entity “will continue leading the charge in integrating retirement with wealth management platforms,” enabling clients to have a holistic view of all assets.

“Aspire has been the pioneer in flat-fee pricing, choice architecture and a best-of-breed service delivery model,” Klein says. “For the non-ERISA and ERISA qualified plan markets, as well as the individual end market, the combined platform is now uniquely aligned with legislative tailwinds in favor of the establishment of retirement plans by small companies and growth in automatic enrollment.”

Inside Details of the Deal

According to Klein, once it became clear that Aspire’s leadership was considering selling the practice, the firm attracted the attention of a number of bidders—“quite a few actually.”

“In the end, the management at Aspire felt like this was the right spot for them, joining PCS,” Klein says. “As soon as we heard they were interested, we jumped all over it from our side. The interaction between the firms has been fantastic so far. We’ve never done a deal of this magnitude before, nor have they, but we can see already that everyone is really looking forward to learning from each other and doing everything we can to make the new collaboration successful. We have encountered and resolved similar issues as firms, so there is an immediate familiarity from one team to another.”

Klein adds that his firm has “invested a lot in measuring key performance indicators and in building out the customer relationship management solutions featuring automated workflows.” He says Aspire, on the other hand, has “done a lot more on the individual account side.”

“PCS has done a lot that can complement them on the fiduciary support side,” he adds. “With the complementary capabilities, the hope and expectation is that 1 plus 1 is more than 2 in this case. Furthermore, there are expense synergies and revenue synergies that we foresee coming pretty soon right off the bat.”

In terms of new areas of focus for the combined entity, Klein says he expects “data sharing” will be a focal point for innovation. He also highlights that Aspire has an established a presence in the K-12 403(b) plan space and the 457 plan space.

“We see that as a green pasture that is really in need of the types of solutions we offer, which are low-cost and fund-agnostic,” Klein says. “We’re really excited about the opportunity to enhance these offerings and seeing what we can deliver to these new markets.”

Optimism About the Future

Bob Francis, known currently for his consulting role at Wise Rhino, has been a member of the Aspire board since 2011. From his perspective, he says he is quite optimistic for the prospects of the combined PCS-Aspire organization.

“Recordkeeping is a business that requires scale now more than ever,” he says. “In daily valuation recordkeeping, there could not be a truer statement to make. So, their coming together makes a lot of sense and it allows them to make a much more efficient and stronger enterprise. It’s a large acquisition for PCS, so they are clearly taking the scale play very seriously.”

According to Francis, the new combined entity will have a suite of solutions and services that will stand out as unique, even from some of the very largest recordkeepers also making a play for scale.

“This deal puts PCS and Aspire in a unique situation,” Francis says. “They are big enough now to get the real benefits of scale, but they remain nimble enough to do things and made decisions that can be much harder for the largest platforms—with all of their legacy systems and all of their downstream inertia.”

One other aspect to comment on is the approach to fees and transparency, Francis adds.

“The ability to charge participant-based fees is almost a must-have characteristic in this environment,” Francis suggests. “The notion of charging basis points for assets as a recordkeeper—it’s just so antiquated to the point that it’s almost indefensible, quite frankly. The PCS and Aspire platforms were built from the start on this idea—on transparency and not on an asset-based pricing model.”

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Pension Plan Sponsor Dupes Employees Out of ‘TPA Fee’

Mon, 2019-08-05 12:25

The owner and operator of Ferguson Electric and Ferguson Mechanical, both headquartered in Plainville, Connecticut, waived his right to be indicted and pleaded guilty to one count of money laundering stemming from a scheme in which he stole more than $3.3 million dollars from his employees.

According to John H. Durham, United States Attorney for the District of Connecticut, between approximately 2013 and 2017, the pension plan sponsor caused to be deducted approximately $1.60 to $3.15 per hour from each of his employee’s fringe benefits package as a “third-party administrator fee” for the employees’ pension plans. He knew that the funds were not used to cover any administrative fees for the employees’ pension plans. 

Instead, the “third-party administrator fee” was paid to TPA of Connecticut, a company that the plan sponsor established and controlled. TPA of Connecticut, in turn, sent the monies to DJS Associates, a Florida company that the plan sponsor formed for the purported purpose of performing business-consulting services for him and his companies. However, no such services were performed and he used the funds for personal expenses.

Through this scheme, the plan sponsor stole a total of $3,357,516 from more than 300 employees.

A federal district court judge scheduled sentencing for October 24, at which time the plan sponsor faces a maximum term of imprisonment of 10 years.

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Retirement Plan Non-Participants Likely to Participate Later

Mon, 2019-08-05 12:19

A report from the Investment Company Institute (ICI) shows that the overall retirement plan participation rate—which is a snapshot of how many workers are taking advantage of an employer plan at a single point in time—can misrepresent retirement preparedness. The reason, it says: Just because some workers aren’t participating in a plan today, doesn’t mean they won’t participate later in life.

American workers’ participation in employer-sponsored retirement plans is significantly higher than suggested by the most commonly cited statistics, with nearly two-thirds of workers between ages 26 and 64 participating in such plans, either directly or through a spouse, according to ICI’s “Who Participates in Retirement Plans, 2016.”

The participation rate rises to more than three-quarters if younger and lower-income workers—those who are the least likely to be able to or want to save for retirement—are removed from the analysis.

ICI explains that the need for a more reliable measure of retirement plan participation has increased given recent changes to the survey that provides the most commonly cited statistics on retirement plan participation, the Annual Social and Economic Supplement (ASEC) to the Current Population Survey (CPS). Comparisons with tax data suggest that the ASEC understated the participation rate by about 5 percentage points from 2008 to 2013. Between 2013 and 2016, the difference increased to 18 percentage points following a revision to the survey questionnaire used for the ASEC.

ICI used newly available data—tabulations of administrative tax data published by the Internal Revenue Service (IRS) Statistics of Income Division (SOI)—to analyze participation in employer-sponsored retirement plans. It found that among all workers ages 26 to 64 in 2016, 64% participated in a retirement plan either directly or through a spouse. That number ranged, however, from 55% of those ages 26 to 34 to 69% of those ages 45 to 64; and from 24% for those with adjusted gross income (AGI) less than $20,000 per person to 86% for those with AGI of $100,000 per person or more.

Younger and lower-income households are more likely to report that they save primarily for reasons other than retirement—for example, a home purchase, for the family, or education. Older and higher-earning workers are more likely to save primarily for retirement.

ICI points out that many of the younger and lower-income workers who do not participate in a retirement plan today will participate later in their working career, as younger workers do not remain young and many lower-income workers do not remain lower-income for their entire career.

“By the time they retire, the vast majority of American workers will accumulate resources in employer plans,” says ICI Senior Economic Adviser Peter Brady. “This is not well understood for two reasons. First, participation is often understated in household surveys … used to study participation. Second, many younger and lower-income workers who are not participating in retirement plans today will do so later in their careers.”

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SURVEY SAYS: Will Social Security Be There for Your Retirement?

Mon, 2019-08-05 05:30

Last week, I asked NewsDash readers, “Do you think Social Security benefits will be available when you retire?”

The good news is that only 12.1% of responding readers said “No.” The greatest percentage of respondents (45.5%) indicated they believe Social Security benefits will be available and similar to current benefits, while 41.4% believe Social Security will be available, but at reduced benefits. One percent of responding readers haven’t decided.

In verbatim responses, there was belief by many that Congress will pull it together to make Social Security sustainable. “No politician or political party wants to be known as the ‘Social Security killer,’” one reader said. “SS will die when all members of Congress decide they don’t want to be re-elected,” said another. But, most believe there will be a cut to benefits. Many believe applicants will be subject to a means test, which some agree with, but many think will punish those who have been diligently saving for retirement. Respondents offered several suggestions for changes that could be made to make Social Security more sustainable, including taking away the cap on income that can be taxed for it. Editor’s Choice goes to the reader who said: “It better be – I’ve paid enough into it!”

Thank you to all who participated in our survey!


Our government needs to think smarter and work together to streamline this issue, and many other issues, and do more for the hardworking American people.

I am already collecting Social Security, but believe that benefits for high-income individuals will be cut back as the system comes under more stress. Politically, Congress must continue Social Security, but will scale it back in ways that hurts the fewest number of voters possible (i.e., wealthy individuals).

I believe that SS will be around long term. With the birth rate decrease the benefit may have to change in the future as not as many people are paying into the system to sustain the current level of benefits. I’m 60 so if any changes occur I believe they would grandfather those receiving the benefit and not reduce the current payout. It is good that they closed some loop holes that were draining the system like those born before 1954 that can claim the spouses benefit and pend theirs until age 70 to get the richest benefit.

I believe there will eventually be a Social Security means test, effectively penalizing those of us who have been responsible and saved for our retirement.

The Social Security system is unfair and unbalanced. I pay a lot into it but probably won’t get a lot out of it.

The system will be shored up somehow and the budget deficit will triple.

I’m normally an optimistic person, but as a Millennial, I don’t think I can rely on Social Security benefits when I’m ready to retire. Thankfully, I’ve been saving for my whole career so far with this assumption, so if benefits are around when that time comes, I will be pleasantly surprised!

I think benefits will be determine by a means test.

The system is sustainable, but there will have to be changes.

But it will be means tested so you may have an objective to not qualify by being too rich (by the govt’s standards). By the way, I think this is wrong – raise my taxes if you think I have too much money don’t take benefits away as that is sneaky

A modest increase in the current tax and a substantial increase in the taxable earnings base will solve threats of insolvency. The rate should be reviewed every five years to consider further modest adjustments.

The program as it is simply is not sustainable. If it survives, I believe there will be across the board cuts and it will become a means tested benefit, making it unavailable to many.

It would be a shame if I retire and get nothing after paying in for over 40 years. Thankfully I have a pension and 401(k) plan at work. The government keeps dipping into SS with no oversight, and we can’t stop them! I am more concerned about health care cost in retirement!

If (and that is a big if) Washington decides to seriously address the state of Social Security, it can live on in a solid state. There are simple steps that can be taken, but first they need to convince the American people to support them.

Since those that are collecting currently would never have their benefit changed, I think those who work in the public sector that still have DB plans or others with a retirement over a certain amount are probably going to be dropped off to be able to pay those that only had DC only plans or none at all.

If politicians want to continue to be re-elected, they will need to maintain SS. We all know who votes in elections, and you want to keep those people happy. I still don’t know why they haven’t made the simple fix yet of removing the cap on SS. Tax all income for SS, but keep benefits as they are now. We will start to see if it is true that the rich don’t have a problem with being taxed more.

I think I will be able to receive SS benefits but I do all my retirement planning without them.

It will exist if only because it would be political suicide for either party to let it die or kill it off.

I do believe there will be something available for my generation (about 30 years from retirement) but not as we know it today. It just can’t maintain at this rate without change.

What scares me more are the people who believe that Social Security was set up as a primary plan, and then complain that it isn’t enough to live on.

If we keep the money in the Social Security system so that it can provide the benefits promised, I think it will be ok. I do expect at some point, the Social Security retirement age will increase again. People are living longer so some changes seem appropriate.

Social Security is likened to a Balanced Budget. Political Hot Potatoes those in power dare not to challenge. It might take away their non-Social Security System.

I assume only the lowest earners will receive a benefit and the higher wage earners will have the amounts significantly reduced or taken away completely.

SS will die when all members of Congress decide they don’t want to be re-elected.

Looks like it will not be possible without increasing premiums or debt, possibly lowering the maximum covered earnings level so it would protect the same benefit to those with lower incomes.

I just think the Social Security system will be sustained as it is a major source of consistent income for many retirees.

Since I plan to start taking SS in or around the end of 2020, I certainly hope it’s still there! When I was in my 20s, the “saying” went at the time that it would be gone by now; what’s old is new and we’re still thinking this.

I have about 12 years until I can draw on Social Security so I sure hope it is still around in its current state. Every little bit helps. I am certainly not planning on it to fund my retirement but it would provide a little bit of “pin money” to sock away in an old coffee can. My son, however, is only 23 years old. I predict him surviving a zombie apocalypse before he benefits from Social Security in his retirement.

The closer I get to retirement age, the more I think it will be there for me. Regardless of what you think you can’t totally depend on it.

I’m old enough to begin drawing, so I’m confident that when I retire I’ll receive as much as expected. I’m not as confident that I’ll continue to receive that amount for the duration of my lifetime. Elected officials refuse to deal with the upcoming crisis. With the growing deficit and current extreme partisanship there will be no compromise or working together to solve the problem until the point in time that it can’t be ignored. I suspect there will be an attempt to add means testing. Which I view as a mistake. It would reward those who didn’t save adequately for retirement and penalize those who did.

I think it will still be around, and I’ll take it early or on time before I start tapping into my own retirement savings!

I would like to see a report of how much is going in (contributions), earnings and where is it currently going (distributions). Much like an investment savings statement.

Although I think the system will be similar to the current system, there may be more “means testing,” resulting in lower payouts or more taxes for people like me who prepared for retirement.

Yay! I am retiring next month! So excited that the day is finally approaching.

Anyone with any financial sense can see that revenues need to increase and the growth in program benefits need to be curtailed. The problem: politicians are the only ones that can implement these common sense adjustments.

It’s been so poorly managed with no foresight regarding our changing population (why is it a surprise that boomers are drawing payments & there aren’t enough people to keep up with filling the coffers? we knew this!) — I have no hope that in 25 years when I could apply for benefits that it will still exist. I would much prefer to take my SS taxes & put them into my own retirement account or HSA, where I have much better odds of being able to utilize the money in retirement.

Congress will continue it in some fashion. They need to get re-elected.

Due to the mismanagement of the system by our government, I think they will have to reduce benefits to keep it solvent. Given the current attitude in Washington that it is an entitlement, we will be lucky to get 50% of what we should get. I would love to see our Senate and Congress have their entitlements cut.

It better be – I’ve paid enough into it!

I think the government will rob Peter to pay Paul in order to keep the program going. No lawmaker will propose or vote for a bill that reduces or eliminates benefits because it would be political suicide. Not saying that something shouldn’t be done to “fix” the system, but I cannot see lawmakers actually making the tough choices. They will indebt our country even more because their solution to every problem is to throw money at it hoping that will solve the problem.

I expect that the Social Security Retirement Age for my children will be much later than mine. With longer life expectancies, payment of benefits starting at 62-67 is not sustainable.

I will be eligible to retire in 11 years. Depending on who will be the next President of the United States will have a great impact on how much Social Security will be available. Many of the Democratic candidates are talking about giving the benefits I paid in to Social Security over my lifetime to those who have never contributed or who will never contribute a single penny. That is the money that I contributed to my retirement and hoped would be there for me, just like my father did when he retired. Now I am saving every penny that I can just so I have money that I know will be there for me.

While mathematically unsustainable, I think it’s foolish to think it’s an all or nothing outcome – there’d be huge protests if it disappeared, and huge protests if withholdings were increased to support unreduced benefits. As with most liabilities coming due in the next 25-50 years, compromise will be absolutely necessary.

I retire in 2 years at age 70. I doubt changes will be made by that date. But in the future, we will need to: 1) raise the minimum age to 70; 2) stop increasing benefits because people deferred receipt; 3) implement a means test. The wealthy don’t need it – the tax they paid was their admission to the economic system that made them rich.

We as a country need to stop talking about it and do something!

Whether we like it or not, changes need to come to the Social Security system. Since the program was never intended to support everyone, I believe an income and means test should drive how much of a benefit is payable. Those more well-off would receive less. It’s just like any other tax citizens pay to keep the country running.

A very simple solution to the SS crisis – which is due to many things, but mainly fewer people working then collecting – is to raise the ceiling in which people stop contributing to SS from their salary. If they would raise that ceiling to $200,000 / $250,000 much more money would flow into the system and put any crisis way, way down the line.

Social Security can be saved in many ways – one by removing the cap on taxable earnings. The tax can also be increased. It is a necessary safety net for many who have little or no retirement savings, as well as those plan participants in 401(k) plans, which are dependent upon positive market changes.

Political suicide to let SS drop. I just hope someone realizes it before they do it.

No politician or political party wants to be known as the “Social Security killer.” It will be worked out, although I am counting on my benefits being less than projected when I retire in 20 years or so.

When planning for retirement 20 years ago, I assumed Social Security would not be available. Now that I’m 15 years out from retirement, I think it will be available; however, I have doubts whether it will survive to my kids.

I recently heard that the Millennial group is almost as large as the baby boomers. If this is the case, and they pay their fair share as the baby boomers have, with a few tweaks to the system, maybe it will survive.

I think benefits will be reduced again, but I hope not affecting retirees in the near future, as I expect to retire within 2 years! We have managed to save a significant amount on our own, but we are still counting on SS to be an added cushion so we can have more fun in retirement!

People are living much longer — paying in less to Social Security and receiving more during retirement years. Adjustments will be necessary to keep it viable for future generations.

The sooner the better for adjustments to assure benefits can continue as promised.

I believe that the credits required to receive benefits could be increased to 60 credits or 15yrs.

Politically, Congress will not allow anything to happen to social security.

There are several options for congress to use to shore up Social Security and I believe as we reach a crisis point they will act. Also, I’m close to retirement age so my answer is also based on my belief there won’t be benefit cuts imposed on those already collecting from the system.

I’m selecting “with reduced benefits” as I believe the normal retirement date will be raised from its current level.

Shouldn’t be that hard to fix with tax increases — increase the wage base — and a few small benefit tweaks

It’s not will I have Social Security benefits available, but how much and how long will benefits be available. We need changes and the longer we wait, the more painful it will be to all.

It is a program with too great an impact on all Americans and it would be detrimental to the U.S. economy if it didn’t continue to provide comparable benefits.

Neither Social Security nor 401(k)’s are stable as of today. What is the solution? There isn’t any. Poverty, homelessness, medical costs, climate change all affect our future. So Social Security seems a pretty small issue compared to what is currently going on in society today

Without changes to either mirror a system like Railroad Retirement or increase funding (by increasing rates or increasing federal funding) the system will run out of money. With the current political split on raising taxes there doesn’t seem to be the appetite for either of those funding sources so Social Security will sunset.

At a time when 401(k) plans have largely replaced pension plans, Social Security can and should provide minimum stability for retirement, it is absolutely essential to many who have do not have other retirement assets, for whatever reason that may be.

Unless there is an overhaul of the system, it will be broke within the next ten years.

As long as I can vote and breathe the air, SS will be there.

Discussion of SS running out has been around since I was in high school in the late 80s. Nothing new, it just cannot be sustained without an overhaul – which has never happened.


NOTE: Responses reflect the opinions of individual readers and not necessarily the stance of Institutional Shareholder Services (ISS) or its affiliates.

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Final ARP Rule Opens Door for More Employers to Offer Retirement Plans

Fri, 2019-08-02 12:26

Industry insiders believe that while the Department of Labor’s (DOL’s) new rule on association retirement plans (ARPs) is somewhat disappointing in that it did not pave the way for open multiple employer plans (MEPs) for employers without a common nexus, it is a positive step in the right direction of providing yet another cost-effective option for small businesses to offer retirement plans.

The rule, which will go into effect on September 30, will permit employers to connect with associations of employers in a city, county, state or multi-state metropolitan area. They will also have the option of banding together by industry. This is the first time that employers will have the opportunity to join a MEP based on geographic location, says Erin Turley, a partner with McDermott Will & Emery in Dallas.

For instance, a local chamber of commerce might sponsor an association retirement plan, says Drew Carrington, head of institutional defined contribution at Franklin Templeton in New York.

In fact, right after the final rule was issued by the DOL, the Las Vegas Metro Chamber of Commerce announced it would be the first in the nation to create an association retirement plan. The chamber says it is doing so because the pooled assets will give small business members a better deal from investment advisers as well as lower fees.

“The Las Vegas Metro Chamber is proud to work with the Department of Labor to be a national leader in marking the new association retirement plans available to small businesses in Nevada,” says Mary Beth Sewald, president and CEO of the chamber. “This is an innovative solution to help small businesses give their employees access to retirement plan choices often only available to large companies.”

“It is a step in the right direction of marking retirement plans available to more employers and enable the establishment of small plans [by employers that] may not have the expertise on plan design or investments to get the benefits of economies of scale,” Carrington says. This might appeal to those small businesses that currently do not offer a retirement plan, as well as prompt those that do have a plan to weigh whether this arrangement might be more cost effective, he says.

“The real benefit of the association retirement plan rule is to expand the availability of retirement plans,” Carrington says.

Kevin Murphy, head of defined contribution strategic accounts at Franklin Templeton adds: “We view this as very positive for small businesses and advisers focused on small businesses to offer plans with all of the bells and whistles found in large plans, that is, institutionally priced plans. In fact, we see this as a fantastic opportunity for advisers.”

In addition, the rule also allows retirement plans to be sponsored through professional employer organizations (PEOs), i.e. third-party human resources providers offering services to small and midsized plan sponsors. “The rule is likely going to be significant for PEOs because it clears up a grey area under which they have been operating,” Turley says. “Previously, they only had a safe harbor to operate under the IRS code. Now, they can operate under ERISA [the Employee Retirement Income Security Act]. This will give PEOs and their clients peace of mind.”

However, there is one downside to the association retirement plans, she adds. “One of the drawbacks is that the main fiduciary of an association MEP cannot be a financial institution, insurer or third-party administrator, which are the precise entities that typically provide these types of plans,” she says. “The DOL’s reason for doing this is to protect people from fraud. There has been bit of a checkered history with respect to MEPs because they don’t have as much oversight [as traditional retirement plans do] because of their disassociated governance structure.”

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Retirement Industry People Moves

Fri, 2019-08-02 11:27

Art by Subin Yang

Custodia Adds Former Pfizer HR Chief to Advisory Council

Custodia Financial has appointed Chuck Hill, former chief human resource officer of Pfizer Inc., to its Strategic Advisory Council (SAC). In his role on the SAC, Hill will support distribution efforts for Retirement Loan Eraser across his broad network of senior human resources (HR) executives and industry practitioners.

While at Pfizer, Hill was responsible for all enterprise human resource programs, including compensation and benefits.

He joined Pfizer’s human resources (HR) team in 1987, supporting the Pharmaceutical Sales Force. After that, he held a number of roles including HR director of Pfizer’s Global Manufacturing facility in Groton, Connecticut; vice president of HR, Corporate Finance; and senior vice president HR, Worldwide Biopharmaceuticals Businesses. Prior to joining Pfizer, Hill served for eight years in the United States Air Force as an instructor fighter pilot and flight commander. He served as the executive sponsor of the Pfizer Colleague Council, Veterans in Pfizer, which works to maximize the unique role that veterans and active military personnel play in driving workplace and marketplace outcomes.

“Having a former CHRO and plan sponsor with Chuck’s experience, network, and values on the SAC is imperative for Custodia and for the employers we serve,” says Tod Ruble, CEO of Custodia Financial. “Chuck understands from years of experience the goals, challenges, and risks that large plan sponsors face, so his voice on the SAC—and advocacy in the marketplace—will be invaluable.”

“Upon learning about Custodia’s mission, I felt drawn to the critically important work that Tod and the team are doing. Preventing leakage caused by loan defaults is a challenge that should be on every large plan sponsor’s radar,” says Hill. “I’m thrilled to be working with the Custodia team to raise awareness among HR executives that Retirement Loan Eraser is an effective solution that automatically improves employees’ retirement outcomes, while minimizing fiduciary risk.”

IRS Names Leader for Tax Exempt/Government Entities Division

The Internal Revenue Service (IRS) has selected Tamera Ripperda to lead the Tax Exempt and Government Entities (TE/GE) division
In TE/GE, Ripperda will take over as commissioner for Sunita Lough, who will become the IRS deputy commissioner for Services and Enforcement on September 1. TE/GE oversees issues including exempt organizations, employee plans and government entities. 
“Tammy brings a variety of skills and expertise to the diverse set of programs overseen by TE/GE,” Rettig said. “She has a strong record of successfully handling critical programs and working closely with people inside and outside the IRS.”
Ripperda became SB/SE Deputy Commissioner in 2016. During this period, she spent 14 months as a director in the Tax Reform Implementation Office (TRIO) where she helped oversee the implementation of the Tax Cuts and Jobs Act (TCJA) of 2017. Prior to 2016, Tammy was the Director of TE/GE Exempt Organizations (EO), where she oversaw tax administration and policy for 1.6 million exempt organizations, and held other positions. 
“TE/GE plays a critical role serving key areas for the nation, ranging from tax-exempt groups and retirement plans to Indian tribal governments and tax-exempt bonds,” Ripperda said. “I look forward to working with our TE/GE employees and partner groups to continue finding ways to serve these important communities.”
Tammy began her IRS career in 1988 as a Revenue Agent in St. Louis. She has a bachelor’s degree in accountancy from Southern Illinois University.

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Capital One’s All-ETF Digital 401(k) Business Spins Off

Fri, 2019-08-02 09:05

Employees of Capital One’s all-exchange-traded fund (ETF) digital 401(k) business, ShareBuilder 401k, along with outside investors, have bought the business from Capital One and rolled it out as a separate company.

“We accomplished great things being part of Capital One, including year-over-year growth, adding impressive talent to the team, and helping more business owners and their employees plan and save for the future,” Stuart Robertson, president of ShareBuilder 401k, tells PLANSPONSOR. “We pioneered using 100% ETF index funds and also pioneered putting plans online. Using digital and investing best practices to help people save is our core strength—providing low-cost funds paired with exemplary service. That is where we are going to double down.

“The other thing to know is that we act as a 3(38) fiduciary, which brings comfort to plan sponsors,” Robertson continues. “After much consideration, I, a few of my advisers and investors, and, ultimately, Capital One, agreed that the potential to invest in and grow the business, and ultimately reach more business owners and workers, would be best reached by taking the business independent.”

He notes that there is tremendous opportunity to expand 401(k) coverage: “There are 30 million U.S. businesses but only 575,000 401(k) plans. Many small businesses don’t even know they can offer a retirement plan. We are going to continue to use social and digital media, along with videos, to make folks aware that they can do so, at a reasonable cost.”

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DOL Exemption Paves Way for Auto Portability

Thu, 2019-08-01 15:26

The Department of Labor (DOL) this week issued its final prohibited transaction exemption (PTE) for automatic portability. This action has removed the requirement that participants consent to have their small balance of $5,000 or less in a safe harbor individual retirement account (IRA) automatically rolled into their new employer’s retirement plan.

Last November, the DOL issued an advisory opinion on auto-portability, offering a safe harbor for plan sponsors and recordkeepers that pursued this course of action, by its naming Retirement Clearinghouse the fiduciary. However, participants still needed to give their consent, says Spencer Williams, founder, president and CEO of Retirement Clearinghouse. “Sponsors and recordkeepers were in a ‘wait-and-see’ limbo, because that advisory opinion was only half the loaf.”

Williams says he thinks the DOL decided to make the concessions it did “because our program is highly automatic, and it’s clearly in the best interest of participants to have an old account sitting in a safe harbor IRA moved to their new 401(k) plan.”

To date, Retirement Clearinghouse has a pilot program with one U.S. employer that has 250,000 employees. His company matched its records of those employees against the couple hundred thousand small-balance IRAs for which it is the recordkeeper, Williams says. It found 6,500 matches where participants had both accounts, and, of those, 1,300 gave Retirement Clearinghouse their consent to have their small IRA balance moved into their 401(k) plan.

With both the advisory opinion and the exemption now in hand, Williams says, “We see the market finally opening up.” He estimates that there are 5.5 million instances annually of a small balance being rolled from an employer’s 401(k) plan into an IRA. It is his company’s intention to now reach out to plan sponsors and recordkeepers to gain that business, thereby helping to prevent plan leakage and solve the problem of missing participants, Williams says.

Retirement Clearinghouse calculates that auto-portability could cut back on cash-outs of small accounts by two-thirds, saving $784 billion in retirement savings.

“Defined contribution plan sponsors across the country now have the established guardrails they need to safely adopt auto-portability,” he adds. “The regulatory framework established by the auto-portability advisory opinion and the final exemption provide legal protections for plan sponsors to help small-balance participants preserve their retirement savings by enhancing their plan services to include auto-portability as their new default process when their participants change jobs.”

Williams says he is very encouraged by the DOL’s PTE and that he has been working on this issue for five years. “We are very passionate about creating a new benefit for participants and solving the leakage issue.” He says it is feasible that other companies could move into this space but that, to date, he is unaware of any competitors.

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Firms Team Up to Offer New Student Loan Repayment Benefit

Thu, 2019-08-01 14:44

Retirement planning and investing firm FOCUS4Financial (F4F) has teamed up with Thrive Flexible Matching to offer a new employee student loan repayment benefit.

The Thrive Flexible Matching student loan debt solution looks to combine an employee’s contribution and employer match from the company’s 401(k) or 403(b) plan, allowing eligible employees to reallocate shares of their retirement planning contribution and company match towards their student loan debt, according to F4F. Once adopted, workers can control how their retirement funds and company match are allocated, either exclusively towards their retirement savings or student loan debt, or a combination of both.

The total amount available for the employer match is governed by the company’s existing retirement plan. There’s no increase to an employer in terms of the dollars currently allocated toward matching benefits. For example: if the current match is 1:1 up to 5%, it will still only match the dollar amount of that percentage regardless of how the employee chooses to distribute the funds. Thrive processes and applies payments to the student loan.

Thrive says employers can deploy the Thrive Flexible Matching program without requiring any amendments to their underlying retirement plan documents or changes to their existing retirement plan vendor relationship. The program operates as a non-Employee Retirement Income Security Act (ERISA) “side-car” benefit to a company’s existing 401(k) or 403(b) plan and is free of any fiduciary conflict.

“Helping employees lower long-term debt while simultaneously saving for a secure retirement is the best of both worlds and aligns with our overall objective of improving retirement planning outcomes,” says Bob Malcolm, principal at FOCUS4Financial.

More information about the solution and the firms’ partnership can be found here.

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Investment Product and Service Launches

Thu, 2019-08-01 12:27

Art by Jackson Epstein

Dimensional Announces New Investment Solutions Group

Dimensional is creating an Investment Solutions Group within its Investment team and promoting its co-heads of Research. Marlena Lee will serve as head of Investment Solutions, and Savina Rizova will become the sole head of Research. Lee and Rizova both hold PhDs from the University of Chicago Booth School of Business.

The Investment Solutions Group will include employees who have been part of the firm’s Portfolio Solutions team as well as additional colleagues from across the Investment team and Global Client Group. The changes have been taken into effect starting on August 1.

“With the creation of this team, our clients will be able to draw on specialized expertise from Portfolio Management, Trading, Research, and now Investment Solutions to help address a wide range of investment-related topics,” says Co-CEO and Chief Investment Officer Gerard O’Reilly. “Marlena and Savina have proven themselves as strong leaders. We look forward to providing clients with additional value and sharing our research and insights more broadly.” 

Vanguard Reopens Fund and Broadens Access to Others

Vanguard has announced the reopening of the $36.6 billion Vanguard Dividend Growth Fund (VDIGX) to all investors, effective immediately. 

Vanguard closed the fund to most new accounts in July 2016, seeking to protect the interests of existing shareholders by reducing cash flow after a period of rapid growth. Cash flow has subsequently subsided and market conditions have changed since the fund’s closing. 

“After careful analysis of the fund’s current cash flows and asset level, and following consultation with the fund’s adviser, we’re confident that there is ample capacity to reopen the fund,” says Matthew Brancato, head of Vanguard’s Portfolio Review Department, who noted that the reopening should not be construed by investors as a “buy signal” for the fund or dividend stocks in general. 

Introduced in May 1992, the actively managed Vanguard Dividend Growth Fund is designed to provide investors with some income while offering exposure to dividend-focused companies across all industries. Reopening the fund will have no impact on its investment objectives, strategies, and policies, says Vanguard, and Wellington Management Company LLP remains the fund’s investment adviser.

Vanguard also announced plans to broaden access for sophisticated investors to two actively managed alternative investment funds, Vanguard Alternative Strategies Fund (VASFX) and Vanguard Market Neutral Fund (VMNFX). The minimum initial investment requirement for retail investors for both funds will be reduced from $250,000 to $50,000, which is the same as the newly launched Vanguard Commodity Strategy Fund (VCMDX). Vanguard’s three alternative investment funds, managed by the firm’s Quantitative Equity Group, will share a standard minimum.

Concurrently, Vanguard Alternative Strategies Fund will be opened to financial advisers, institutional investors, and Vanguard Flagship and Vanguard Personal Advisor Services clients. The fund is currently available only to institutional investors enrolled in Vanguard Institutional Advisory Services and as an underlying holding of Vanguard Managed Payout Fund. These changes will go into effect in the fourth quarter of 2019.

Franklin Templeton Reduces Fees for Three LibertyShares ETFs

Franklin Templeton has announced fee reductions for three Franklin LibertyShares exchange-traded funds (ETFs) available to U.S. investors.

Management fee reductions will be made to Franklin LibertyQ U.S. Equity ETF (FLQL) and Franklin LibertyQ Emerging Markets ETF (FLQE). In addition, the fee waiver for Franklin Liberty International Aggregate Bond ETF (FLIA) will be reduced. All reductions are effective as of August 1.

Each fund expense ratio dropped 0.10%. The net expense ratio for Franklin LibertyQ U.S. Equity ETF was at 0.25%, and as of August 1, is now 0.15%; while the Franklin Liberty International Aggregate Bond ETF was once set at 0.35% and is now 0.25%; and the Franklin LibertyQ Emerging Markets ETF is currently 0.45%, but used to be 0.55%.

DoubeLine Capital Adds R Shares to Five Mutual Funds

The DoubleLine Funds Trust, the open-end mutual fund family advised by DoubleLine Capital LP and related companies, has launched R6 class shares for five of its funds, available to certain 401(k) and other employee retirement plans.

R shares are a retirement share class offered via employer-sponsored benefit plans such as 401(k) plans. DoubleLine’s R6 shares do not have a sales load.

According to the firm, the five mutual funds and their R6-share ticker symbols are DoubleLine Total Return Bond Fund (DDTRX), the DoubleLine Core Fixed Income Fund (DDCFX), the DoubleLine Low Duration Bond Fund (DDLDX), the DoubleLine Flexible Income Fund (DFFLX) and the DoubleLine Shiller Enhanced CAPE Fund (DDCPX). These funds are also available in institutional (I) and retail (N) share classes, says DoubleLine Capital.

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Retirement Plan Excessive Fee Cases Continue to Move Down-Market

Thu, 2019-08-01 12:10

A class-action lawsuit has been filed against TriHealth Inc. regarding administrative and investment fees in the TriHealth Inc. Retirement Plan.

The complaint states, “for every year between 2013 and 2017, the administrative fees charged to plan participants is greater than 90% of its comparator [, or peers’,] fees when fees are calculated as cost per participant or when fees are calculated as a percent of total assets.”

By way of a commercially available program that the lawsuit says is commonly used by financial advisers and retirement plan fiduciaries to benchmark costs, the complaint shows that in 2017, for example, TriHealth’s plan carried a cost of 86 basis points (bps) per participant. This compares with the mean of 44 bps across 27 peer plans. As a total of plan assets, in 2017, TriHealth’s plan cost 86 bps compared with a mean of 41 bps.

“The total difference from 2013 to 2017 between TriHealth’ fees and the average of its comparators based on total number of participants is $7,001,443. The total difference from 2013 to 2017 between TriHealth’s fees and the average of its comparators based on plan asset size is $7,210,002,” the complaint states. TriHealth’s plan was benchmarked against peer plans with an asset range of $250 million to $500 million.

According to the complaint, the plaintiffs—participants in the plan—had no knowledge of how the fees charged to and paid by TriHealth plan participants stood up against any of TriHealth’s comparators.

The lawsuit also claims TriHealth plan’s fees were excessive when held up against other comparable mutual funds not offered by the plan. “By selecting and retaining the plan’s excessive cost investments while failing to adequately investigate the use of superior, lower-cost mutual funds from other fund companies that were readily available to the plan or foregoing those alternatives without any prudent reason for doing so, TriHealth caused plan participants to lose millions of dollars of their retirement savings through excessive fees,” it alleges.

TriHealth is accused of failing to employ a prudent and loyal process by not critically or objectively evaluating the cost and performance of the plan’s investments and fees in comparison with other investment options. “TriHealth selected and retained for years as plan investment options mutual funds with high expenses relative to other investment options that were readily available to the plan at all relevant times,” the complaint states.

Among other things, the lawsuit asks for an order that requires TriHealth to make good to the plan all losses resulting from each breach of fiduciary duty and to otherwise restore the plan to the position it would have occupied but for those breaches. It also requests an order to remove the fiduciaries who are accused.

When the wave of excessive fee cases began against retirement plan sponsors, most targeted large or mega plans, based on assets. However, in recent years a number of cases have been filed against so-called “small” plans. For example, the Greystar 401(k) Plan, with less than $250 million in assets, was the target of a complaint filed earlier this year. Similarly, fiduciaries of the approximately $500 million 401(k) program offered by Pioneer Natural Resources USA settled a lawsuit that was filed a year ago.

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An Investing Strategy to Improve Church and Public DB Plan Funding

Wed, 2019-07-31 13:28

In a new paper, “Pension Investing: An Alternative Strategy for Public and Church Defined Benefit Plans,” River and Mercantile Managing Director Tom Cassara lays out the case for a new way for these types of pension plans to invest, similar to an approach that the consultancy suggests for corporate pension plans.

Cassara says he has served church pension plans for many years, but since joining River and Mercantile a year ago, he has become more conversant in the use of equity derivatives. Generally, church and public pension plans and the consultants who serve these plans are not familiar with the use of these types of instruments.

This inspired Cassara to develop a new investing approach for these types of plans consisting of an underlying fixed income investment strategy comprised of high-grade, longer-term securities that deliver higher yields, paired with equity derivatives that provide contractual exposure to the equity markets, but in a way where risk can be managed. The primary goal of this approach is to provide insurance protection against market downturns in exchange for giving up some of the upside when market returns are good.

Non-Employee Retirement Income Security Act (ERISA) church pension plans and public pension plans are managed differently than corporate pension plans that fall under ERISA, Cassara tells PLANSPONSOR. “Non-ERISA church plans are backed by the church organization, and the public plans are backed by the entity they serve, so they have a little more financial freedom,” he says. “ERISA mandates a certain funding ratio, whereas these plans have more freedom on their minimum funding to support future benefit payments. The rules regarding them tend to be a little more forgiving on minimum funding status, so they tend to be a little less funded than their corporate counterparts.”

How church and public pension plans typically invest is in a well-diversified portfolio with the objective of maximizing returns and minimizing risk through a myriad of investment styles, Cassara says. Their emphasis is more on returns than on liabilities, he explains, and they do invest in the private markets, including equity, debt and hedge funds.

“We tend to be more comfortable with an investment strategy where we hit more single than doubles [in terms of returns on the upside], in trying to avoid falling backwards into what I call a ‘death spiral,’” Cassara says. “The portfolio we have put forth is one where we have invested in high-quality fixed income vehicles, typically bonds issued by investment-grade corporations, public entities and governments, that are longer-dated and produce higher yields. That would provide a good amount of cash flow and a reasonable rate of return.

“On top of that, we would reach out to the futures market to gain equity exposure–not to ride the market’s fluctuations but to create a collar,” Cassara continues. “Each collar would be unique for each organization and designed differently.” One could provide insurance protection against a 10% decline in the equity markets, for instance, he says.

To pay for that premium, River and Mercantile proposes selling off some of the securities delivering upside.

The goals is to help church and public pension plans “be more confident about where their returns will be and to try to advance the funded status of their plans in a more measured way, with limits put in place to protect the plans from any of the downs the economy could bring,” Cassara says.

River and Mercantile has just completed its back testing on this approach and is only just now starting to discuss it with these types of pension plans, he says.

As he writes in his paper, “A vast number of pension plans rely on diversified portfolios dominated by global equity allocations and a significant percentage of alternative investments (hedge funds, private equity, private debt)—yet funding ratios have remained stagnant even in the face of the longest equity bull market in history. We believe that an investment strategy which encompasses more predictable returns and increases protection against shocks to its funded ratio via a recession or economic downturn is most prudent for plans to consider on behalf of their participants.”

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New Service Helps Participants With Distribution Decisions

Wed, 2019-07-31 10:20
Edelman Financial Engines has introduced Fiduciary Distribution Review, a program that gives retirement plan participants the opportunity to sit down with an Edelman financial planner in a one-on-one session to discuss their various distribution options.

By learning about the employee’s situation and goals, the planners are able to apply their deep knowledge of the employer’s 401(k) plan to give the employee recommendations that are in the employee’s best interests. The advice takes into account each individual’s forecasts of post-retirement income, including Social Security benefits and in-plan income options.

“Employers spend large amounts of time and money providing employees with access to high-quality and low-cost investment options in their plan,” says Christopher Jones, chief investment officer at Edelman Financial Engines. “They also provide crucial fiduciary oversight to ensure financial providers are protecting employees’ best interests. Over 3,200 companies have hired Financial Engines because of our industry-leading financial planning and investment advice, and our new Fiduciary Distribution Review program helps ensure that employees don’t squander their chances of achieving retirement security through poor decisions around plan distributions.”

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SEI Investments Agrees to Settle ERISA Self-Dealing Suit

Wed, 2019-07-31 10:02

SEI Investments Company has entered into a settlement agreement to resolve claims in an Employee Retirement Income Security Act (ERISA) self-dealing lawsuit.

According to the Settlement Agreement, the defendants will pay $6.8 million to a Qualified Settlement Fund.

In addition, SEI agrees that the following procedures shall apply to the management of its 401(k) plan on a prospective basis for a period of no less than three years beginning no later than the settlement effective date:

  • Defendants shall retain the services of an unaffiliated investment consultant to provide an evaluation of the design of the plan’s investment lineup and to review the plan’s investment policy statement;
  • SEI shall continue to pay all recordkeeping fees associated with the plan that it is currently paying and that would otherwise be payable from plan assets; and
  • SEI shall ensure that all of the plan’s investment committee members will participate in a training session on ERISA’s fiduciary duties.

The lawsuit claims the defendants offer “only designated investment options that generate fees for SEI and its affiliates and treat the plan as a captive customer of SEI in order to prop up SEI-affiliated investment products and advance SEI’s business objectives.”

The complaint further states that SEI investment products “are not competitive in the marketplace.”

“Participants would have been better served if defendants had investigated and retained non-proprietary alternatives,” the complaint states.

The Settlement Agreement needs to be approved by the court.

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Participants Need More Education About Distribution Options

Wed, 2019-07-31 09:13
Many retirement plan participants are unaware of the various distribution options available to them when they leave a job, Edelman Financial Engines learned in a survey.

Forty-two percent of those between the ages of 35 and 65 who left a job where they had money in a 401(k) plan were unaware that they could have left the money in the plan. Twenty-eight percent didn’t know that some retirement distribution choices trigger tax liabilities and penalties, and 51% didn’t know that it is possible to move money from an individual retirement account (IRA) to their 401(k).

Sixty-nine percent of participants have not consulted with a retirement adviser about their various distribution options. Among those who took a distribution before retiring, 26% did so without any help from an adviser or without consulting any resource.

“There is a lot of confusion and a general lack of awareness among employees about their 401(k) distribution options when they retire or change jobs,” says Ric Edelman, co-founder and chairman of financial education and client experience at Edelman Financial Engines. “There can be huge consequences from making the wrong decision, ranging from taxes and penalties to higher fees and risky or poor performing investments.”

Edelman’s findings are based on a survey of 1,071 individuals between the ages of 25 and 65 conducted in February and March using the Qualtrics Insight Platform with a panel sourced from Lucid Marketplace.

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HSA Bill Could Expand Their Use for Retirement Savings

Wed, 2019-07-31 08:00

A recent legislative bill and guidance from the Internal Revenue System (IRS) may expand the advantages of health savings accounts (HSAs), averting workers from utilizing dollars on preventive care medicine and instead on health care for retirement.

The Health Savings for Seniors Act, introduced in the U.S. House of Representatives this past month by Representative Ami Bera, D-California, and Representative Jason Smith, R-Missouri, would permit American workers enrolled in Medicare to open and contribute to an HSA, without changing their coverage.

According to HealthEquity, Inc., which participated in drafting the legislation, the bill could save $1,800 for an average household led by someone age 65 or older, with a household income of $48,000. Additionally, the new piece of legislation could save more than $40,000 in income taxes over the course of a Medicare recipient’s retirement.

The introduction of the bill follows recent guidance issued by the IRS, which adds specific preventive care benefits for chronic conditions such as diabetes, asthma, depression and heart and liver disease provided by an HSA-compatible or high deductible health plan (HDHP). Rather than spending at least 25% of their HSA balance on prescription drugs, employees could pocket these dollars for health care retirement savings.

In prior guidance, the IRS did not classify services or benefits intended to treat existing illnesses, injuries or conditions as preventive care. This resulted in diagnosed employees failing to seek or utilize necessary medication and services that would aid a chronic condition, in order to avoid high costs associated with care. This inactive approach would then lead to health consequences requiring more expensive and extensive services, such as heart attacks, strokes, or amputations.

“What this regulation did was take a look at some of these health conditions, because if you don’t take certain medications, you may be adding more symptoms to chronic conditions. Some of these chronic conditions should be using preventative services,” says David Speier, managing director, Benefits Accounts, Willis Towers Watson.

Speier notes how the the regulation could encourage more plan sponsors to offer HSAs, as many were hesitant in the past due to their restrictions. Instead, employers would adopt health reimbursement arrangements (HRAs), which did not hold the same constraints.

“With an HRA, the employee cannot save for retirement,” he adds. “One of the big advantages is, if we can get more employers to adopt HSAs, then most can save for retirement instead.”

Adding to its savings advantages, HSAs are 100% tax-free and can stash dollars without taxation, advantages that may gain traction among plan sponsors and workers given the latest guidance. According to a 2018 Willis Towers Watson survey, 69% of employees chose not to enroll into an HSA because they didn’t see the benefit, understand HSAs or take the time to learn about them. Speier mentions how the IRS guidance and recent bill could shift this attitude towards the savings vehicle.

“Even basic concepts on HSAs aren’t necessarily understood by employees,” he says. “It’s giving them those tools and resources to understand that.”

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Alegeus, Picwell Partner to Provide Health Benefit Decision Support

Tue, 2019-07-30 12:35

Alegeus, a provider of consumer-directed health care solutions, has partnered with Picwell, a next-generation decision support company, to enable Alegus clients to help consumers make smart benefit choices during open enrollment.

Alegeus’ clients can fully integrate Picwell’s artificial intelligence-driven and white-labeled technology into their existing enrollment experience via their benefit administration platform, or they can embed Picwell’s capabilities directly within their open enrollment communications and campaigns.

Alegeus notes that a recent poll about open enrollment experiences in 2019 found that 30% of employers did not help their employees with their benefit choices, and nearly half of consumers were dissatisfied with their benefit experience. Additionally, 25% were unsure whether they were enrolled in the right combination of health plan and accounts.

According to a survey released by Lively, 30% of adults say they completely understand their health benefits and 32% say they somewhat understand them. That means that 38% did not understand their health benefits at all.

Respondents to Lively’s survey reported confusion over high-deductible health plans (HDHP) and health reimbursement accounts (HRAs). The survey found that young people (ages 18 to 24) have far less understanding of preferred provider organizations (PPOs) (18%) and health maintenance organizations (HMOs) (19%).

“We match consumers to the right plan during enrollment by predicting future care considerations, estimating out-of-pocket expenses, and accounting for personal preferences,” says Matt Sydney, Picwell CEO. “We use an advanced data science methodology, that represents billions of medical claims for more than 40 million people, to evaluate the factors consumers care about and produce a holistic set of predictive outcomes.”

“Leveraging machine learning, creating dynamic models and applying artificial intelligence to big data sets will help employers and their employees make better choices while shaping the future of health care benefits,” says Steven Auerbach, chief executive officer of Alegeus. “As part of Smart Account Initiative, the Picwell technology will help our clients deliver an open enrollment experience that drives results and a seamless consumer experience.”

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Maryland Pension System’s Assumed Rate of Return Reduced Again

Tue, 2019-07-30 12:32

The Board of Trustees of the Maryland State Retirement and Pension System (MSRPS) voted to reduce the System’s actuarial assumed rate of return on its investments from 7.45% to 7.40%.

The System’s lower rate will be effective beginning in fiscal year 2021.

“The Board’s prudent action is in recognition of ongoing changes in the financial markets, while continuing to achieve the investment returns required for the system over the long term,” says State Treasurer Nancy K. Kopp, chair of the MSRPS Board of Trustees. “Our goal is to continue to improve the strength of our retirement system and to keep our promise of a secure retirement that our members have worked so hard to earn in their years of service to the public.”

The Board said it based its decision on an analysis by its actuary.

Among the 127 plans the National Association of State Retirement Administrators (NASRA) measured in 2017, nearly three-fourths reduced their investment return assumption since fiscal year 2010. NASRA found public plans that reduce their return assumption in the face of diminished near-term projections will experience an immediate increase in unfunded liabilities and required costs.

Researchers from the Center for Retirement Research at Boston College found a decline in assumed rates of return due to lower assumed inflation combined with a change in asset allocations, resulting in a higher expected real return, has increased long-term costs for public pensions. The researchers say the decline in assumed rates of return is due to lower assumed inflation, so the increase in costs is much smaller than if the decline in the assumed return was due to a lower assumed real return.

The Board of Trustees of the MSRPS reduced the system’s assumed rate of return in 2013 to 7.55% from 7.75%. In 2017, it again reduced it from 7.55% to 7.45%.

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DOL Offers Relief to MEPs That Did Not File Correct Form 5500s

Tue, 2019-07-30 12:24

The Department of Labor (DOL) issued Field Assistance Bulletin 2019-01, which provides guidance and temporary penalty relief related to certain Form 5500 Annual Return/Report requirements for multiple employer plans (MEPs).

In 2014, as part of the Cooperative and Small Employer Charity Pension Flexibility Act (CSEC Act), Congress added Section 103(g) to the Employee Retirement Income Security Act (ERISA). The new section required MEPs to “include a list of participating employers and a good faith estimate of the percentage of total contributions made by such participating employers during the plan year.”

During a review of Form 5500 data in 2018, the DOL identified 185 MEP filings for the 2016 plan year as being compliant and 101 MEP filings as non-compliant. Examples of non-compliant filings included forms in which: (1) the filer replaced employer names with either abbreviated names or initials, client numbers, or other labels such as “Client 1;” (2) the filing reported only the last 4 digits of employer identification numbers; (3) the filing included an attachment with no information and a note “Details available upon request;” and (4) the filing incorrectly listed a professional employer organization (PEO) as the only participating employer.

In discussions with the National Association of Professional Employer Organizations (NAPEO), the PEOs and their representatives raised a number of objections to the ERISA Section 103(g) filing requirement.  They contended that filing the participating employer list imposes material costs and burdens on PEO-sponsored plans, and they argued that making the employer list public was not in the best interest of plan participants and beneficiaries. The DOL received and considered similar objections in connection with the Paperwork Reduction Act (PRA) notice associated with the publication of the interim final rule implementing the CSEC Act requirement.

The DOL says it continues to believe that the reporting requirements made effective for MEPs by the 2014 interim final rule implementing ERISA Section 103(g) are a reasonable and appropriate way to implement Congress’ directive in the CSEC Act. It does not believe it has the authority under ERISA Section 110 or ERISA Section 104, when read together with ERISA Section 106, to treat information otherwise required to be filed with or as part of a plan’s annual report as confidential or nonpublic information.

So, in light of the possibility that some plan fiduciaries may have misunderstood the annual reporting requirement, the DOL now says it will not reject a Form 5500 or Form 5500-SF filed on behalf of a MEP for the 2017 plan year, or any prior plan year, or seek to assess civil penalties against the plan administrator under ERISA Section 502(c)(2) with respect to such filings, solely on the basis that the plan administrator failed to include complete and accurate participating employer information in accordance with ERISA Section 103(g). The DOL is granting this relief provided that the annual reports filed for the plan for the 2018 and following plan years comply with the requirement in ERISA Section 103(g).

Also, in light of the July 31, 2019, due date for calendar year plans to file their 2018 Form 5500 or Form 5500-SF, the Department is granting MEPs a special filing extension of up to 2½ months to file their 2018 annual report in compliance with ERISA Section 103(g). MEPs should check the “special extension” box under Part I, Line D on the 2018 Form 5500/5500-SF and enter “FAB 2019-01” as the description to use this extension. MEPs using this special extension do not need to file a Form 5558 with the IRS.

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Court Decides Medical Center Plan is a Church Plan Under ERISA

Tue, 2019-07-30 11:17

In a lawsuit challenging the church plan status of the St. Elizabeth Medical Center Employees’ Pension Plan, a federal court judge has granted summary judgement to the medical center defendants.

The court previously ruled that the plaintiffs in the case had standing to sue on behalf of the plan since they had shown a substantial risk of harm by the plan’s underfunding. U.S. District Judge David L. Bunning of the U.S. District Court for the Eastern District of Kentucky also dismissed claims against plan committee members regarding required reporting under the Employee Retirement Income Security Act (ERISA).

In his latest opinion, Bunning cites the U.S. Supreme Court decision regarding various church-plan cases in which it said ERISA Section 3(33) means that a church plan falls into the ERISA exemption if the plan is established and maintained by a church or association of churches or maintained by an organization with the principal purpose of administering or funding the plan. The defendants argue that the at-issue plan committee is such a principal-purpose organization.

According to Bunning, this principal-purpose organization statutory language has been distilled into a three-part test, which other courts have used to determine whether a plan maintained by a principal-purpose organization falls within the church-plan exemption:

  • Is the entity a tax-exempt nonprofit organization associated with a church?
  • If so, is the entity’s retirement plan maintained by a principal-purpose organization? That is, is the plan maintained by an organization whose principal purpose is administering or funding a retirement plan for entity employees?
  • If so, is that principal-purpose organization itself associated with a church?

Bunning found the first portion of the three-part inquiry is satisfied. Among other things, he cited that St. Elizabeth is a tax-exempt nonprofit entity; St. Elizabeth was founded in 1861 by the Franciscan Sisters of the Poor and the property was acquired “in the name of this Catholic religious order;” sponsorship of St. Elizabeth was transferred to the Diocese of Covington in 1973, and continues to this day; the Bishop of Covington is the only person with “the authority to dispose of . . . hospital properties upon dissolution of St. Elizabeth;” and the governing documents of St. Elizabeth give the Bishop of Covington control over aspects of St. Elizabeth’s operations and indicate clear association with the Catholic Church.

The plaintiffs suggest that the plan committee cannot be a principal-purpose organization because it is not, by definition, an “organization,” according to the court opinion. However, Bunning looked to dictionary definitions of “organization” and found definitions merely require a group of people with a specific purpose. Bunning found that the plan committee meets the two requirements necessary for an entity to be an “organization” within the scope of the ERISA exemption. Bunning also used dictionary definitions of “maintain” and language of the plan documents to determine that the committee maintained the plan.

To determine whether the committee is a principal-purpose organization, Bunning looked at the language of the exemption which indicates that a principal-purpose organization is an “organization” with the “principal purpose” or “function” of “administering” or “funding” a retirement-benefits plan. While the defendants admit that the committee does not fund the plan, Bunning found that that the committee’s principal purpose is “administration” of the plan. Looking to the plan documents, as he did in determining whether the committee “maintains” the plan, Bunning concluded that the committee’s principal purpose is “administration.” The plan document itself indicates that the objective and goal of the committee is to “manage and administer the plan.” The resolution creating the committee indicates the same—that the objective of the committee is to “administer” the plan.

“As the Court previously found that St. Elizabeth is associated with the Catholic Church, and the Committee is an ‘internal subset’ of St. Elizabeth, the Court also finds that the Committee is associated with the Catholic Church and, therefore, satisfies the third prong of the test,” Bunning wrote in his opinion. He found this conclusion is also supported by plan documents governing the committee, which say: “[t]he Committee shall consist of not fewer than three (3) members who believe in and follow the tenets of the Catholic Church,” and indicate its role is to “administer the St. Elizabeth Medical Center Employees’ Pension Plan in a manner consistent with the tenets of the Catholic Church.”

Bunning dismissed other claims because it found ERISA does not apply to the plan.

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