confero A quarterly publication of Westminster Consulting
www.ConferoMag.com
ISSUE NO. 2
ANALYZING
INCOME
REPLACEMENT REPLACEMENT OPTIONS OPTIONS S SH HO OR R TT -- S S II G GH H TT E ED D
SOLUTIONS WHY CONGRESS IS WRONG ABOUT RETIREMENT TAX REFORM
+
RES IPSA LOQUITOR:
Ethical Considerations
9 1/2 QUESTIONS:
An Interview with Lisa Storey from Samaritian Medical Center
THE FUTURE OF
RETIREMENT
confero A quarterly publication by Westminster Consulting
A quarterly publication of fiduciary ideas by various contributors within the industry.
Publisher Westminster Consulting, LLC. Editor-In-Chief Gabriella Martinez Contributing Editors Sean Patton Thomas Zamiara Creative Director Gabriella Martinez Contributors Gabriel Potter, AIF Diana K. Powell, Esq. Thomas Zamiara Gabriella Martinez
Questions or Comments? email us at info@conferomag.com
The information contained in this on-line magazine is for general information purposes only. The information is provided by Westminster Consulting and while every effort is made to provide information which is both current and correct, Westminster Consulting makes no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the on-line magazine or the information, products, services, or related graphics contained within the on-line magazine for any purpose. Any reliance you place on such information is therefore strictly at your own risk. In no event will Westminster Consulting be liable for any loss or damage including without limitation, indirect or consequential loss or damage, or any loss or damage whatsoever arising from loss of data or profits arising out of, or in connection with, the use of this on-line magazine.
Contents APRIL-JUNE 2013
Issue no. 2
8
2 PUBLISHERS LETTER 3 CONTRIBUTORS 4 UPCOMING EVENTS Cover Story 10
The Future of Retirement
11
14
Departments 5
RES IPSA LOQUITUR Ethical Considerations
6
9 1/2 QUESTIONS A Chat with Lisa Storey from Samaritan Medical Center
Features 14 16
Short-Sighted Solutions Analyzing Income Replacement Options
www.conferomag.com | 1
Publisher’s Letter We open this quarter’s edition with a joint contribution from Diana K. Powell, Esq. and Gabriel Potter, MBA on the legal and ethical considerations surrounding fiduciary duty. In our recurring interview feature 9½ Questions, we have a fascinating discussion with Lisa Storey, Benefits Manager at Samaritan Medical Center in Watertown, NY on the challenges of a regional health care organization in filling skilled and non-skilled positions in an economically tested part of northern New York State. Lisa discusses the creative ways Samaritan has prepared for growth within the organization and what the future holds for Samaritan. The calendar says “Spring” but the unseasonably cold weather we are experiencing in western New York says otherwise. The days are getting longer, the Spring bulbs are pushing up their shoots, and Spring will not be held back – just delayed.
of us choose to save early on, some wait until we’re halfway there, and still others wait until the last minute to squirrel away savings with the hopes that it will carry them through the fall and winter of their lives.
his predicitions of what the future of retirement will be.
retirement
readiness,
(American Society of Pension Professionals & Actuaries) , Brian H. Graff, Esq., about why congress is a threat to our retirement fund and what we can do to help prevent this. Last but not least, Gabriel Potter will provide an overview and analysis of income replacement options available to
We’ve dedicated this issue of Confero to various around
ING’s National Training Consultant. Robert will discuss
The article, Short-Sighted Solutions, talks with ASPPA’s
So to it is with retirement. We are all getting older, some
discussions
Our cover story includes an interview with Robert Kaplan,
401(k) plans.
planning,
We hope you enjoy this issue and we continue to
government/regulatory influences, and the challenges that
appreciate your comments and support in our mission to
employers have in preparing a less than engaged workforce
provide timely and valuable information from a variety of
for retirement. With the decline of traditional pension
sources to you our clients and friends.
plans and the ever-increasing reliance on employeedriven retirement savings vehicles, 401(k) providers
Enjoy Spring!
and employers are searching for the silver-bullet that finds its target and produces the results that everyone wants: sufficient retirement planning accountability and adequate savings behavior that spell success for millions of Americans.
2 | April-June 2013
Tom & Sean
Contributors Diana K. Powell, Esq. is Senior Legal Advisor with over 20 years of experience. She was a sole practitioner who advised educational organizations, government bodies and private corporations. Diana was responsible for negotiating agreements for high-tech software corporations and contracts involving Intellectual Property issues. Diana is a graduate of the University of Rochester with a B.A. in Political Science and Albany Law School of Union University, J.D. She holds a Certificate of International Law from the University of Notre Dame, London Law Center and has studied negotiations, mediation and arbitration at the University of Cornell’s School of Industrial Labor Relations, as well as Statistics and International Studies, specializing in the Republic of China, and Educational Policy and Research Methods at the Warner School of Education at the University of Rochester.
Gabriel is a Senior Investment Research Associate of Westminster Consulting where he designs strategic asset allocations and conducts proprietary market research. He earned a B.A. in Economics and a Certificate of Business Management from the University of Rochester and an M.B.A. with concentrations in Corporate Finance and Computers & Information Systems from the University of Rochester’s William E. Simon School of Business. He is also holds an Accredited Investment Fiduciary Analyst (AIF®) designation and has been quoted in Human Resources Executive Magazine and his articles have been published through fi360 and AdvisorOne.
Gabriella is a marketing professional with over seven years of experience. She currently holds a Bachelor of Science in Multidisciplinary Studies with concentrations in Marketing, Printing & Publishing, Photographic Arts & Sciences and Psychology from Rochester Institute of Technology. She has been a featured writer and editor in several publications including Rochester Woman Magazine and Pup Culture.
Tom is one of the founding partners of Westminster Consulting and today serves as the managing partner where he currently works with corporate, non-profit and foundation clients. Tom began his career in the financial services industry managing the fixed income desk of the Regional Institutional Sales Group for the Lehman Brothers division of Shearson in Rochester NY. In 1994, he joined Prudential Securities, Inc. and helped develop the Private Client Group and Qualified Plan Consulting Group practices. A graduate of Boston College, Tom also attended The Wharton School at the University of Pennsylvania where he earned his Certified Investment Management Analyst (CIMA®) certification as well as the University of Pittsburgh’s Katz School of Business Accredited Investment Fiduciary Analyst (AIFA®) designation. Today, he also serves as a member of the Brothers of Holy Cross Investment Advisory Committee.
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RES IPSA LOQUITUR
“the thing itself speaks”
ETHICAL CONSIDERATIONS
I
By Gabriel Potter and Diana K. Powell, Esq.
t is important to recognize that the principles of fiduciary responsibility originate from ethical guidelines as well as legal outcomes. The responsibilities to fiduciaries both ethically and legally undergo constant refinement. Many of the significant modifications are due to judicial verdicts handed down by the courts. Fiduciaries and their advisors should make it a part of their process to stay informed about challenges to fiduciary duty, so they may appreciate their legal obligations.
The Case: Bidwell vs. University Medical Center A recent case, Bidwell vs. University Medical Center, details the obligations of disclosure on investment lineups, particularly qualified default investment alternatives (QDIAs) for defined contribution plans. Here’s what happened: The University Medical Center selected a conservative stable value fund to be their default fund. If plan participants did not make any choices for their retirement plan, they were defaulted into the stable value option. However, participants could also choose to actively invest their assets into the same stable value fund. This is what appears to have started the confusion. At some point, University Medical Center changed their default fund and elected the safe harbor provisions under a QDIA. The plan chose to transfer all of the assets of the original default (the stable value fund) to the new QDIA (in this case, a life cycle fund). Moving the assets may have been explicitly allowed for those participants that were swept into the plan’s orginal default fund, but not with regard to those participants who specifically elected to invest their assets in the stable value fund. Those participants found their assets moved to the new QDIA—the life cycle fund—contrary to those participants’ intentional investment choice. University Medical Center mailed a single notice to participants to inform them about the change. The plaintiffs charged that this single notice was insufficient and, therefore, a breach in fiduciary duty. They argued that University Medical Center had to prove actual receipt of the mailed notices; indeed, many plaintiffs claimed never to have received the notice.
The Verdict The US District Court ruled in favor of the defendants, including University Medical Center and noted that neither the defendants, nor the recordkeeper were liable for a breach of fiduciary duty.
Recommendations for Plan Sponsors There are two key takeaways for a plan sponsor from this case: First, the legal challenge might have been weaker if the client had made a greater effort to contact the plan’s participants. Although the defendants ultimately prevailed, the original cost in all probability would have been minimal had a more elaborate notification procedure been taken by University Medical Center, including sending the information in multiple notices, both physical mailings and electronic. Second, in an ideal world, plan sponsors work closely with their recordkeepers to make sure services provided are sufficient for their plan participants. However, we do not live in an ideal world. In the aforementioned case, a different recordkeeper with greater sophistication may have had the ability to track the source of the inflows and distinguish if the original purchases were selected by participants or default investments. Furthermore, the suit between the plan participants and University Medical Center might have been avoided entirely if the recordkeepers had differentiated between defaulted participation and those participants who had elected to invest their money in those particular funds. Making that distinction and mapping the assets accordingly could have prevented this case from reaching the courts and minimized the risks for University Medical Center. Recognizing the relationship between the principles of fiduciary responsibility, ethical considerations and legal rulings illustrates the importance of considering what’s legal and what’s ethical inherent in the process. It’s a valid question every company should take into account— balancing what’s in the best interest of the corporation and what meets the fiduciary duty owed to the employees as they save for their retirement futures. This can lead to a better practice which manages both risk and responsibility for participants in the process. www.conferomag.com | 5
9
1/2
A Conversation with Lisa Storey, HR/Benefits Manager at Samaritan Medical Center
QUESTIONS By Thomas Zamiara
S
amaritan Medical Center is a notfor-profit community medical center which offers both inpatient and outpatient health services in the Watertown/Fort Drum Area. Opening in 1881 with only five beds, Samaritan has grown to a 294 bed facility, treating both civilian and military community members. “Samaritan truly is a community asset,” said Lisa Storey, Manager/Recruiter at Samaritan. “We are the regional referral center in Northern New York servicing our civilian and military population. I’m a strong advocate for Samaritan.” Growing up in Watertown, Lisa is extremely passionate and dedicated to both the local area and Samaritan. Recently, Lisa was able to chat with Confero to discuss her role at Samaritan. Confero Magazine: Tell me about how you got into HR and your role at Samaritan.
6 | April-June 2013
Lisa Storey: I have been with Samaritan for about 20 years. Just before I started working for Samaritan I was a claims processor for a small insurance company prior to my transition to Samaritan (about 20 years ago). Samaritan was a self-funded and self-administered employer for their medical, dental, and vision benefits. I managed those programs for eleven years and then transitioned into human resource management in 2001. During that transition, I assumed responsibility for recruiting and continued to be responsibility for employee benefits. After my role changed in 2001 I realized that I had the desire to further my career in Human Resources Management. As a result, I completed my bachelors in Human Resource Management degree. My primary responsibility is benefits administration and compensation; however I still remain heavily involved in recruiting.
CM: According to Google and the Bureau of Labor Statistics, The unemployment rate as of 12/31/12 in Watertown was 8.7% and the broader Jefferson County was 10.4% This alarmingly high rate for the county (54 out of 62) has to be creating much despair and concern for both those who Samaritan serves as well as the workforce. Can you comment? LS: It varies. If I’m recruiting for a higher level position: manager, director, nursing supervisor, assistant VP, VP, or any higher level type of position, our economy and our unemployment rate certainly impacts that. Generally the higher level positions require relocation, so we’re trying to recruit people into the area. When that happens, if they do have a significant other, a spouse, or other family members who will be relocating with them, sometimes that’s one of the first questions they ask: ”What type of other employers are in the community,
other than healthcare, that my spouse might be able to look for employment?” That is a challenge for us because we do not have a lot of industry. So, if somebody is looking for employment in working for some type of industrial company, we do not have that here. Our community is highly a service oriented community primarily because of the impact of the military. Service industry? No problem. If a person is interested in working in a Walmart or Target, we certainly have opportunities in the service industry. For good paying/high paying positions that people can support their family on, it’s a little bit of a challenge. When we start talking about entry-level positions—administrative/secretarytype positions, nursing assistants, CNA’s—we’re pretty successful in recruiting in those areas. Typically, for some of our entry level positions when we post a job, we keep the position open for three days because we’ll have 60 applications within three days time. We do have some challenges, but the majority of our challenges are in parttime positions: Part-Time Supervisor/ Part-Time CNA, etc. Applicants are looking for fulltime jobs or they need the ability to work full time. CM: Talk to us about Samaritan’s outreach to Trade schools and high schools? LS: We do. We have an organization that we’re affiliated with called the Fort Drum Regional Health Planning Organization (FDRHPO). FDRHPO does outreach for healthcare careers across the organization and across the community. We provide school-aged (High School) students the opportunity to experience various healthcare clinical and non-clinical careers through mash camp. The program is a full week summer camp program, where the students rotate through different departments. We offer two levels to
include the basic camp experience and the advanced camp. To enroll in the advance camp, participation in the basic camp is required. We also have a New Visions program for health care. We’re affiliated with Jefferson Lewis BOCES and the New Visions program typically has about 25 high school students. They are college-bound seniors who are interested in healthcare careers. In some cases, they know exactly what they do and sometimes they do not. [The program] gives them an opportunity to rotate through every department in the organization and they are here for a year; it’s an excellent opportunity for them to explore all areas of healthcare. We have had students come in and stating they would like to be a physical therapist and by the time they get through our program they decide they want to be a pharmacist. CM: Skilled talent is in short supply all over the U.S. How is Samaritan seeding the area for a steady supply of skilled workers? Does it even need to? LS: We do have a CNA training program (Certified Nursing Assistant) and that program is very, very successful. We generally put eight students through every 12 weeks. We just hired another educator so we are going to be putting 16 students through every 12 weeks. It’s an entry level type of position and it works well for individuals who are looking to transition from some other career into healthcare or if they are really not sure where they want to take their healthcare career, it’s a nice position to start out with. When we are talking about RNs (Registered Nurses), we have an affiliation agreement with Jefferson College, so all of their students do all of their clinical rotations here at Samaritan. They typically graduate anywhere between 25-30 students every year. They also have a graduating class with a little less, about ten. That’s primarily where our recruiting sources come from, from an RN standpoint. We have a couple
department managers that are very proactive in looking at the big picture and they know that in order to have experienced RNs in the future … we have to grow our own. These managers are very creative in coming up with an orientation and training programs that will provide new graduates the ability to begin their nursing career in a highlyskilled area. Their orientation period is a little bit longer than a typical graduate nurse going into a medical surgical unit, but the outcome is they’re vested in the organization because the organization has invested in them. The New Graduates are screened thoroughly to determine if the nurse has the ability to function in a critical care area. Samaritan recognizes the need to grow our nurses for the future. Some challenges in our specialty areas: we can’t put a new grad in the emergency department, Labor & Delivery, or surgical services; therefore we do have a challenge staffing in these specialized areas. CM: Do you have difficulty attracting talent to Jefferson County? LS: It depends on the position. Because we are opening a new skilled facility, we hired 220 people in 90 days, which proved challenging. We still have some challenges, but the bulk of the challenges are in part-time positions—part-time supervisor, part-time CNA. People are looking for full time jobs or the ability to work full-time. CM: How has social networking affected the hiring practices at Samaritan? LS: We just started actually. It’s taken a little bit of time, but we have a webmaster now. Our webmaster has taken us to the next level: Samaritan does have a webpage and we started to tap into the social network sites to branch out and start promoting current www.conferomag.com | 7
and future healthcare careers. We are not using social networking at the level we should be, but we know that it’s important to taking our recruiting in that direction. She [the webmaster] actually tweets jobs for us on occasion and she is very active in contacting us (usually every couple days) and asks us if there is a position we want to feature on our Facebook page. So, we are starting to look at that—taking baby steps. CM: How has technology (social media, internet, etc) changed the / vetting/ hiring process? LS: From a hiring standpoint, when I moved into human resources at Samaritan in 2001, everything we did at that time was on paper. We did paper applications, we did not have an online presence, we did not have an applicant tracking system—it’s amazing how far we have come. Now today, we’ve gone through two different applicant tracking systems and we’ve actually had a couple different vendors and we’re completely online. Our application process is 100% automated—we do not even accept paper applications. Our background checks are completed electronically as well—it’s a part of our application process. Our online vendor allows us to link to a variety of different online search engines such as Indeed and Simply Hired, so we have a very large online presence just by having an applicant tracking system. CM: HR professionals in my observation are part caretaker (empathetic) in their role and part janitor (have some dirty work to do) what parts of each side do you least like? LS: I think the hardest part of any HR professional’s role is when you actually have to let somebody go. Regardless of the reason, even if someone did something pretty egregious, it’s never easy. And I feel that if you become comfortable doing that, then maybe you have been in the position a little too long. There has to be some element of empathy when you are dealing with someone’s 8 | April-June 2013
life. When you let an employee go, it’s a life-altering event. Often it is the result of performance issues, attendance issues or other behavioral based issues and the end result is something the employee created or caused. Typically, it is something that they’ve done, but it doesn’t take away from the fact that it impacts their life, it impacts their family, and it impacts their future, so those are never easy. So, I would say that is my least favorite part of the position. CM: What’s your go to question to wrap up an interview with a candidate that is all wrong for the position? LS: When we are interviewing candidates, even if we know within the first 5 minutes that they are probably not going to make it we are still pretty consistent. We still ask the same questions of every applicant every time, just from an affirmative action standpoint. Typically, the one question we use to sum things up (and we do it consistently with every applicant) is that we still have additional candidates to interview and as soon as we complete the interviewing processes and we’ve made a final selection, we will reach out to you if we are interested in having you come back for a second interview or to complete the hiring process. We try to be consistent, our hiring managers try to be consistent as well; we have 140 hiring managers. CM: Tell me your best interviewing story—comical or horrific. LS: We had a candidate, he happened to be an internal candidate that was applying for a manager position. This was an individual that has worked for the organization for 10-15 years: very experienced, very well-liked and he was very well prepared. I was amazed at how prepared he was. One of the things that he did (and I have never seen this done before): we always ask the question, “So tell me what your staff would say about you?” and he knew we were going to ask that question.
Prior to the interview, he talked with his staff and said, “Look, I want you to write down one word that describes who I am. I don’t want to see it and I don’t want you to tell me about it. I want you to put your comment in the envelope.” He asked everybody to participate and whoever had the envelope last had to seal it and then they gave it to him. So when he came into his interview, he had this sealed envelope. Now he says that he didn’t open it and he had no idea what it said. We trusted him because he is a stand-up kind of guy. It took a lot of guts, because you might think you are perceived one way and your employees might see you completely different. It ended up working in his favor, but he had no idea. It took a lot of guts for him, but it also showed that he is very comfortable with his employees. I loved it. n
Visit Samaritan online at: www.SamaritanMedical.com Facebook.com/ SamaritanMedicalCenter Twitter.com/SamaritanMed
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Washington’s
THE
14 | January-March 2012
FUTURE Of Retirement By Gabriel Potter, AIF®
I
t may be a trite sentiment, but change is the only constant. Given the changes to the retirement landscape – legal, demographic, and financial – employers and employees can benefit from the advice of a qualified guide to navigate through the changing environment, preferably one with broad experience and accepted expertise.
“ ...Retirement is going to be in our future whether we want it or not. It’s whether we’ll have a dignified and satisfying retirement.”
Robert Kaplan, the National Training Consultant of ING, is a member of the American Society of Pension Professionals and Actuaries (ASPPA’s) Government Affairs Executive Management Committee. He is also a former member of the American Institute of Retirement Education (AIRE), and former member of the Board of Directors of the National Institute of Pension Administrators (NIPA). In 2009, Bob was presented with NIPA’s Lifetime Achievement Award for his contributions to the retirement plan industry. He has provided testimony before the Treasury department on 401(k) and other retirement plan issues and is a frequent speaker at industry events for ASPPA, NIPA, and the American Bar Association.
www.conferomag.com | 11
“I very simply ask, “What are you going to do for money during your retirement years? ... Employees will kick around a lot of different areas, but when it really comes down to it they’re going to realize that they are going to have to save for themselves.” Given his expertise, Robert describes some of the changes to the retirement landscape, and does his best to foresee potential changes in the future. Over the course of conversation, he offers his advice and insights to employees, employers, and government regulators trying to make retirement in the US the best proposition it can be. Confero Magazine: The US has a fiscal problem and some have suggested changing the rules on how retirement savings and income is taxed to make up for the shortfall. How likely do you think this is? What sort of changes might you predict? Robert Kaplan: In the current environment that we’re in, nobody quite knows what the folks in Washington are going to do. If we had to take our best guess—and this is from being experienced going up to Capitol hill and being involved in some lobbying efforts and industry organizations—where I think we are with all the discussions about either limiting total deductions or trimming some of the limits, probably every deduction is going to feel the pain of tax reform. That being said, the retirement plan industry, although not a sacred cow, is very sensitive to participants who are happy with their plans, who tend to be voters, and who tend to be very vocal every time Washington talks about changes or not giving private employers the incentive to sponsor retirement plans. So, while nobody knows exactly what’s going happen, we might see some sort of minor limitation or minor cutback in the limits, but at this point I would not (and this is just a guess, nobody is an expert of this area when you’re dealing with Washington) expect the scrapping or tearing apart of the 401K or defined contribution system. The backlash from voters would probably be quite extensive and that’s something that our legislators would look forward to. CM: Given the meager US growth rates and fiscal spending concerns, what are your projections for the future? Is retirement going to get more spartan for future generations? RK: Unfortunately, as much as many participants have gut reactions when they’re in tough economic times or even employers who are cutting back on their plans would wish to work longer, I think the reality of the situation, when you start to look it, is that when people reach retirement age, unfortunately, either between themselves or a loved one or a spouse they have to take after, or a disability kicking in, or inability to perform the functions of the job that they would like to have, retirement is actually going to be more of a necessity than a lot of people who don’t have the forethought would think about. So the initial reaction 12 | April-June 2013
by a lot of folks who want to delay saving for retirement would be, “I’ll work forever.” The studies show that that’s not a realistic approach, so retirement is going to be in our future whether we want it or not. It’s whether we’ll have a dignified and satisfying retirement. CM: Employees are already falling short of their retirement goals, so what steps can employees take to mitigate the damage? RK: Well I think the most important aspect of this is the first step, and that is saving for retirement. And you’re asking the question, what can employees do? Before we get to that, I think the people in Washington who are laying out the rules, the Department of Labor and their educational outreaches, need to be very clear with employees that retirement probably is going to be in their future. They need to look at their plan. I think that needs to be taken down to the employer level with further education. The most successful individual meetings I’ve ever participated in, when anybody ever poses an objection or this won’t work, I very simply ask, “What are you going to do for money during your retirement years? How do you want to live? and then the hardest thing for people do to at that point— I’m talking about the ones who are asking the question—is to be quiet and wait for the answer, because when posed with that question, employees will kick around a lot of different areas, but when it really comes down to it they’re going to realize that they are going to have to save for themselves. Once that reality kicks in and hopefully we will do a better job of educating our youngsters and our kids about saving for retirement and starting early and the best people to do that is the current 401k participants to insist their kids, when they get into the work force, start saving. We are starting to see a lot of that kick in and we need people to recognize its not okay or it’s not an entitlement that we go to Disney World or we go to Las Vegas every year if we’re not saving enough for retirement because when the time comes to retire, we’re not going to be able to do it. And so I think educational outreach that’s much more effective needs to be started from the government, from the employers and getting people to realize, it’s up to them. CM: Another key trend is the increased legal responsibility. We’ve spent much of the past year describing the responsibilities laid out in ERISA 408(B) (2), but the industry in general isn’t very far along in compliance. Any insights or suggestions for vendors or plan sponsors? RK: Educational outreach—which has started already from all those people who are complying. The 408b2 that
you’re referring to is a service provider fee disclosures, which we all had to do with the deadline of July 1, 2012 and obviously going forward in the future any time that we’re going to do business. What the educational outreach needs to be is “hey, we’ve done what we’re supposed to do. We get all the paperwork. We need to make sure that the plan sponsors understand that they need to evaluate and create files about fees being reasonable, about fiduciary steps that they are taking.” And I can tell you from the practices that I’ve dealt with in the Advisor world, in the CPA world, and in the recordkeeper world, the ones who are the best at this are the ones who were following through on it: The ones who are compliance oriented, are educated, and making sure their clients are aware of it. They do it for self preservation, so the clients realize that when somebody comes along and says, “ I can do it better and I can do it cheaper” that that’s not always the case if they are not going to fulfill all the information and detail that the plan sponsor needs to have in their file. So I believe that that outreach has started. What we’re going to see as an industry trend is those people in the advisor world, who are not committed to working quite often with retirement plans (we call them the one or two planners who only have one or two small plans, its not major part of their practice). We are already starting to see industry data where they are disappearing. The anticipated relief in July of this year of updated, investment manager, fiduciary regulations putting more responsibility on the investment manager and on the financial advisors are going to require people to be devoted and experts in the retirement plan space. It’s going to take a little while but I believe that the steps the Department of Labor have taken with the fee disclosure and with updating the fiduciary roles are going to strengthen the quality of service providers who are available to plan sponsors in the retirement plan space. CM: Are there any suggestions you’d offer to Plan Sponsors to improve their retirement plan? Either in terms of improving the results of their employees, or protecting the interests of the company or its board members? RK: Yes. One of the key things that’s overlooked with all of this fee disclosures We talk about “fees, fees, fees”, but our friend at the Dept. of Labor could not be clearer: the plan sponsor has the responsibility to make sure they are getting value for those fees. So, as my late father used to say “cheapest is not always the least expensive.” It’s shopping for value, providing somebody that will work with the plan and then in the advisor world and that will work and educate plan participants and show the value in return for the fees that are being paid so that they can work with participants to create goals, to create model allocations, to create menus that work, to keep an eye on the investment choices. So, if I could wave my magic wand, it would be for plan sponsors to understand that they need to pick advisors and other services providers that
“What we’re going to see as an industry trend is those people in the advisor world, who are not committed to working quite often with retirement plans ... are disappearing.” provide value to the long-term success of the plan. People that will work with them to increase not only the assets in the plan, but the number of participants that are that are deferring, the average deferral amount or savings amounts that will go up and that can only come when participants are provided the education by these types of advisors who are demonstrating their value. So, that is my wish that plans would have people who are committed to the overall success and health of the plan and not just focusing on the cheapest available. CM: If you could suggest anything to Washington DC to improve the retirement landscape in the US, what would you recommend? Perhaps pursuant to some of your key themes of fee transparency and educational outreach? RK: The magic wand that I would wave over Washington would never be to require people to save a certain amount. Because my fear there is that if we start you off at let’s say 3%, you’re going to think, Washington grants that to be the right number and I think most of us realize that’s not the right number, that’s way too low. The magic wand I would have instead beating up plan sponsors who are trying to do their best with the minutia of the regulations and ridiculous penalties. For them to create a focus which would encourage more employers (only about ½ the employers in the country actually sponsor a retirement plan). So make it easier for employers so that the rules are not so onerous, so that they would be encouragement for the private sector to have more plans and reach out and not fear of making minor errors with huge penalties associated with them and risk associated with them. So that would be my wish, that Washington creates an environment where they deem it necessary for them to create rules to encourage the growth of the private retirement system, instead of trying to perfect the plans that are out there, because reaching for perfection comes with quite a price. n
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SHORT-- - - - SIGHTED Y
our future is at risk—the future of your 401k that is.
According to Brian Graff, the Executive Director and CEO of the American Society of Pension Professionals and Actuaries (ASPPA), the tax benefits enjoyed by over 60 million Americans covered by a 401K or similar plan could be affected in the tax debate in Washington. It has been over 25 years since Congress last reformed retirement taxes and Graff is concerned any new rules will disadvantage retirees. “The last time they did [retirement] tax reform they cut the 401k limit by 70%. And given how much the current budget deficit and the accumulative debt that this country has, it is a major driver for pretty much everything to be accountable,” explained Graff. “…We need to make sure that they [Congress] don’t rob Peter to pay Paul and break the retirement piggy bank of American workers.” Graff believes this particular issue is tragic because tax revenue lost from retirement deferrals is best described as illusory, because it is only a deferral. “It’s a fiction because we’re not a deduction, we’re a deferral. When the money comes out of the plan it’s going to pay the government back. But because they need that cash back [during the] ten year budget window, you don’t get credit for the fact that it’s a deferral as opposed to a pure deduction like mortgage interest or charitable deduction,” Graff explains. “So, in reality they aren’t going to raise as much money as they think and they are going to be deducting the amount of money that they raise in later years when people would have been taking that money out for retirement.” Simply put: we are borrowing tax revenues from the future to lower today’s deficits. While some may think this is a problem solely for the wealthy, Graff insists this is not the case. Of these 60 million Americans covered by a 401(k) or similar plan, 80% come from households making less than $100,000 in income. Graff explains wealthy investors will be able to retire in any eventuality, however it’s the working class American’s potential for retirement that will be most affected. He explains there are a number of proposals being brought up that are cause for concern, such as cutting annual contribution limits. The most recent proposal considers placing an annual lifetime cap of the amount 401k participants are permitted to have in their retirement account. “What does that mean for successful investors? And particularly, what does that mean for decision makers? 14 | April-June 2013
If you’re a decision maker of the company and you are told you can’t save anymore what kind of impact does that have on your willingness to borrow out offer benefits to the rest of your workers?” said Graff. In order to raise awareness, ASPPA started the campaign, Save My Piggy, this past November. This consumer-driven campaign features a variety of tools whose main goal is to convince 250,000 consumers to email congress stating, “Stay away from my 401K.” The campaign tools include: •
An active social media campaign through Facebook, Twitter and Google+
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An online member kit outlining how members can get involved in the campaign.
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A variety of content designed to go viral such as: •
An automated way to send an email to your Member of Congress.
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A humorous and animated video on what Congress is contemplating and why everyone needs to get involved and send them a message.
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A Video Game “Protect My Piggy!”
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Great information in an infographicstyle layout that shows why saving for 401k through employers is successful and essential in helping working class Americans save for retirement.
Already the campaign has begun to have an impact: helping direct any questions that arose among Congress members and staff to ASPPA—providing ASPPA and the Save My Piggy campaign the opportunity to stress the importance of these incentives. To date, over 70,000 emails have been sent of the 250,000 goal and the campaign has been featured on high-ranking media outlets such as CNBC and CNN. However, this still isn’t enough. “We need to continue to beat the drum because the process of tax reform is ongoing,” stated Graff.
For more information on ASPPA’s Stay Away from my 401k campaign visit: www.savemy401k.org
D SOLUTIONS: WHY CONGRESS IS WRONG ABOUT RETIREMENT TAX REFORM By Gabriella Martinez
www.conferomag.com www.conferomag.com| 9 | 15
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Converting defined contribution assets to a defined benefit-like income stream. Our retirement system depends heavily on defined contribution savings, but many employees prefer a stable income stream akin to the defined benefit programs of old. Imagine a typical employee ready to retire at age 65. If he wanted, he could cash out of his 401(k) or IRA account, pay the necessary taxes, and use the lump sum to purchase an annuity to provide a lifetime of income. He will need to do his homework, manage the transfer, be satisfied by the soundness of his insurer and the terms of his contract, but this is a viable way to convert retirement savings into a lifetime of income. Retirement plan sponsors can provide a similar solution on a larger scale to their plan participants. There has been an explosion of interest in new products - called income replacement products - which exist to generate a lifetime of income within the structure of a defined contribution plan. In simple terms, think of an income replacement option as standardized annuity program. Some income replacement options are like fixed annuities, with limited upside potential. Some income replacement options are like variable annuities: they invest in underlying investments (like a balanced mutual fund of equity and fixed income) with the potential for appreciation in the markets. The income replacement funds may borrow other features common to variable annuity “rider” provisions. For instance, they may guarantee a minimum market value, and provide a stable income stream based on “high-water marks” of that minimum market value. The provisions depend on the specific income replacement fund.
The advantages to income replacement plans Arguably, the greatest benefit of these products is the removal of a key liability to retirees: outliving your money. The insurer now bears the risk that an employee will continuously receive predictable benefits during a long retirement. Second, these products reduce market risk for employees. Employees have suffered through two significant market crashes in the past decade and trading volatile assets for a predictable income is a notable advantage. Third, income replacement options impose a spending discipline by making the consequences of overdrawing immediate to participants. The products generate a predictable income stream, typically around 4% to 5%, of the total market value of the underlying investment. Withdrawing beyond that amount deducts from the investment principal and lowers the future income stream. As a related advantage, an investor’s retirement budget is easier to predict since they know what their accumulating savings will generate.
Fourth, when comparing income replacement products to traditional annuities, these products are often able to create an effective economy-of-scale. Income replacement products are more expensive than a direct investment in the underlying investments (i.e. – buying shares of an ordinary balanced mutual fund), but they are often less expensive than a comparable annuity contract that an individual could purchase from an insurer. Lastly, these products work within the structure of an existing, tax-deferred 401(k). Research shows that simple, easy-to-access solutions have the greatest impact on participant behavior. Easy access to an annuity-like income stream without the inconvenience of changing accounts (or the immediate tax bill of moving assets into a taxable account) is a clear benefit to employees.
The disadvantages to income replacement plans The costs of income replacement programs must be acknowledged. First, the product providers are adopting more risk, so they must get compensated. Income replacement products have higher fees than traditional investments. Americans, in general, have not saved enough for retirement, so an additional layer of fees will deplete our resources that were already scarce. Second, greater participant education is required since these products are not equally useful to every employee. For instance, a 20 year old employee typically can bear more investment risk than a 55 year old, but they have the same income replacement option available in their 401(k) lineup. The 20 year old employee can afford the market risk of traditional investments because of their longer time horizon; the additional fees have a higher impact because of the loss of compounded returns. Participant education is also required because it is more difficult to efficiently combine annuities, as an asset class, into a portfolio. Third, these products are essentially insurance placed on top of investments. Thus, the due diligence requirement is necessarily higher than traditional investments because of the additional complexity. Employers have to demonstrate a prudent process for selecting these idiosyncratic products, and their unique features, which are difficult to compare. (The plan sponsor’s IPS should reflect the criteria for the comparison.) In the worst case scenario of an insurer default, the guarantee of stable future income is nullified and employers must clarify how the underlying investments will be assigned to employees. Fourth, using income replacement products will reduce a retirement plan’s flexibility. Logistically, these products are usually tied to a specific recordkeeper, so adding these products may limit the portability of the plan. Client retention is an unspoken incentive for recordkeepers and insurers to create and market these products. n www.conferomag.com | 17
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