confero A quarterly publication of Westminster Consulting
www.ConferoMag.com
ISSUE NO. 1
BOSTON COLLEGE:
CENTER FOR
RETIREMENT STUDIES
PLAN DESIGN
TO IMPROVE
RETIREMENT
READINESS
WASHINGTON’S WASHINGTON’S IMPACT IMPACT
ON THE MARKET 9 1/2 QUESTIONS
A Chat with Cindy Rubino from Contractors Register
TALES FROM THE TRENCHES Q&A with William Hughes of Business Allies Group.
RES IPSA LOQUITUR
Will the Dodd-Frank Act of 2010 Bring True Economic Recovery?
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 Editor Sean Patton Thomas Zamiara Creative Director Gabriella Martinez Contributors Gabriel Potter, MBA Diana Keery-Powell, Esq. Thomas Zamiara
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 January-March 2013
Issue no. 1
8
2 PUBLISHERS LETTER 3 CONTRIBUTORS 4 UPCOMING EVENTS
11
Departments 5
Cover Story 14
Washington’s Impact On The Market
Plan Design For Retirement Readiness
11
Boston College Center For Retirement Studies
RES IPSA LOQUITUR Will the Dodd Frank Act of 2010 Bring True Economic Recovery?
6
Features 8
14
9 1/2 QUESTIONS A Chat with Cindy Rubino from Contractors Register.
18
TALES FROM THE TRENCHES Q & A With William L. Hughes, Managing Partner Of Business Alliance Group Llc.
www.conferomag.com | 1
Publisher’s Letter
Retirement Research on page 11. We hope to be hearing more from them in future issues. A couple of regular pieces you will see from issue to issue is a casual, informal interview with an HR or Finance Executive called 9½ Questions on page 6, a discussion of the current legal/regulatory landscape entitled Res Ipsa Loquitur on page 5 (read on to see what that means), and an in-depth first-person account discussing issues and challenges facing plan sponsors titled Tales from the Trenches on page 18. We hope you enjoy this and we look forward to your comments and suggestions as we prepare for future issues.
Welcome to the first issue of Confero.
Please be sure to sign up for our mailing list to have the
Confero, comes from Latin meaning “to bring together, contribute, collect”. This idea of “contributing” was the basis for this publication that was conceived a mere six months ago; bringing together original content, critical thoughts, interviews and other topics around employee benefits, retirement plans, and fiduciary concerns.
issue sent directly to your mailbox and visit our website www.conferomag.com for stories exclusive to the web. On behalf of all of the Associates and the Partners of Westminster Consulting and the staff of Confero we wish you a healthy and prosperous New Year.
Gabriella Martinez, Westminster Consulting’s Marketing and Social Media Coordinator is Confero’s Editor-inChief and has created an outstanding first issue.
Our
cover story, Washington’s Impact On The Market on page 14, is particularly timely given the recent election and the whirlwind around the “fiscal cliff” negotiations. One of our featured articles discusses the interesting and scholarly work being done at Boston College’s Center for
2 | January-March 2012
Tom & Sean
Contributors Diana K. Powell, Esq. is Senior Legal Advisor with over x 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 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.
www.conferomag.com | 3
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RES IPSA LOQUITUR
“the thing itself speaks”
WILL THE
DODD-FRANK ACT OF 2010 BRING TRUE
ECONOMIC RECOVERY? By Diana K. Powell, Esq.
T
he financial crisis of 2008 propelled the Congress of the United States of America to respond by taking action in order to try to find solutions for the nation’s economic problems. The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act was the product of Congress’ response to the crisis. However, nearly two years after the passage of the Dodd-Frank Act, questions still persist. Is the Act the codification of economic ideals that will positively transform the United States’ economy, or is the Act just another knee-jerk reaction of new Federal corporate regulations in response to market turmoil? The Dodd-Frank Wall Street Reform and Consumer Protection Act (July 21, 2010) mandates that the United States Securities and Exchange Commission (SEC) propose and adopt rules for more than ninety provisions of the Act. This also includes discretionary rulemaking authority for several other provisions within the Act. According to the SEC, only 75% of those mandatory rules have been written and adopted as of September, 2012, over two years after the Dodd-Frank Act was signed into law. This delay is a source of concern and increased speculation for all participants in the process. Economic regulatory reform in response to economic crisis can be found to have occurred multiple times throughout history. Within the past 400 years, the government bodies of Western Europe and Great Britain have enacted such reforms to prevent or cull economic catastrophe. In his 1998 book, Anglo-American Securities Regulation: Cultural and Political Roots, 1690-1860, Stuart Banner explains that “new regulation tended to come immediately after price declines.” The question before us now is this:
Is the Dodd-Frank Act a well-planned, well-thought-out economic plan which will ultimately lead to the sought after recovery of the United States’ economy or something entirely different? Scholars continue to debate this question. Minnesota Law Review scholars have compared the Dodd-Frank Act to the Sarbanes-Oxley Act of 2002 (SOX). The reviewers looked at whether the Dodd-Frank Act was yet another example 1 of “quack corporate governance,” in the same vein as SOX. Their answer was affirmative. The researchers found there is evidence to support the determination that DoddFrank actually complicates the economic recovery process through a series of mandates that will hinder our recovery and cost billions of dollars to implement. Further, the conflict between the states’ rights to regulate corporations incorporated within their borders and the addition of laws and regulations imposed by the federal government is setting up a future battle between state regulation and an overall federal regulation of corporations. The Minnesota Law Review asked, “Has Dodd-Frank further eroded the system of competitive federalism that is the unique genius of American corporate law by displacing state regulation with federal law?” Only time will tell. It is to be determined whether legal appeals to the DoddFrank Act will be successful. What is certain is that times of economic crisis will continue to plague the US economy. What is uncertain is whether the Dodd-Frank legislation will help or hinder the present push to reform and repair our economy and the effect it will have on our economic future. n 1
Stephen M. Bainbridge, Dodd-Frank: Quack Federal Corporate Governance Round II, 95 Minnesota Law Review 1783 (2011).
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9
1/2
A Conversation with Cindy Rubino, HR/Benefits Manager at Contractors Register
QUESTIONS By Thomas Zamiara
Confero Magazine: What has attracted you to work in human resources? Cindy Rubino: Well, actually what attracted me was working on our 401(k); it’s what drove me to go the HR route. I really enjoy working with employee benefits and working on the 401(k) was my first real exposure to employee benefits. I just really enjoyed working with the plan, the administration of the plan, and plan design—I just really enjoyed all that. CM: What has your career path looked like up to this point?
6 | January-March 2012
CR: I went to school, undergrad for accounting, and I started working in a big six accounting firm and discovered very quickly that public accounting was not for me. I went into the private sector and I worked in various accounting roles: I worked at an investment firm, I worked in a private accounting firm, I worked for IBM, Readers Digest and then I landed here [Contractors Register] as a supervisor; it was my first supervisory role in accounting. During the course of that , I did get a masters degree in Internet Business Systems. Unfortunately, I graduated right around the time when the bubble burst so I never was able to
use the degree for much, until I came here. That degree helped me when I was looking for HIS and I was able to be a part of that team when we were looking for an HR system. I always was trying to get out of accounting, so when I came here and I had the exposure with 401(k), I thought that employee benefits and HR would be a good transition. Plus, with my accounting background it helps with budgeting; I can look at benefits from a financial perspective as well. CM: I envision the human resource department with two doors: the hiring door and the firing door.
How do you balance my ‘goodguy’/’bad guy’ view of the role of HR? CR: Well, you want to be an advocate for employees, but you also have to keep the best interests of the company at heart. So, you try to work with people as much as you can and help them overcome their challenges if they are having performance issues. ... People always want you to take their side when they come to you and sometimes you do have to deliver a bad message to them— you can’t always tell them what they want to hear. And it’s tough, you know, you get a lot of pushback from people and especially with administering the medical plan, there’s stuff that’s not covered and people want it covered and they don’t understand why they are getting this bill—well it’s not covered on our plan. CM: Regulations aside, how do you stay current and pumped up on all things HR? CR: Oh yeah, absolutely. Society for Human Resource Management (SHRM) is a huge resource and I try to stay on top of, they have local events. Because my focus is predominately employee benefits, I am pursuing the Certified Employee Benefit Specialist (CEBS) designation. So, I’m working on the retirement piece of that. I’ve become a member of the NY Metro Chapter of the International Society of Certified Employee Benefit Specialists. I have been to some really great programs they’ve had in Manhattan to help you stay on top of health care reform, in particular, is huge and their events have been really, really great — I always comeback recharged from those, even the online courses I take. I’ll get a lot of department of labor invitations and there are a lot of webinars I try to take too. CM: Do you use social media in your job? CR: Yeah, I do. LinkedIn is huge with forums for HR. There are a lot of HR groups/forums out on LinkedIn that I am a member of. This month has been hard,
because of open enrollment. It’s been a very busy time so I haven’t been out on social media in a few weeks, but I always try to stay current with all the groups that I am a member of such as discussion forums, the EBS, The Foundation of Employee Benefits Specialists, they have something called Listserves that you can go out and pose a question and you can see if people respond with little answers and stuff and that’s helpful, it’s been helpful. But yeah, social media is definitely huge. CM: There was an article in Forbes this past July (by Julie Connor, contributor) which talked about a survey that was conducted which revealed the amount of time employees spend during the day on non-work activities; specifically it noted that 64% of employees visit non-work related websites every day at work. It also revealed that Facebook was the one website that 41% of the respondents said was their preferred “off task” destination. While organizations endeavor to trust their employees to be responsible – this stuff goes on everyday. How do you deal with this? CR: Well, I think social media has definitely hit productivity, but here employees can’t get onto social media sites—most sites are blocked. There’s very few sites that they can get on outside of our network, but it doesn’t stop them from using their smart phones though. We rely on our managers and supervisors to monitor that. We haven’t really had a problem that I am aware of; I know that there have been a couple people who have been spoken to about usage of smart phones and surfing the web while they are at their desk, but I don’t think here that’s a huge problem because of the filtering.
that next year; maybe it won’t be so labor intensive. Yeah, I would have to say that’s my most challenging, most dreaded. CM: What aspect of your job, if it was your only task that day, would makes you look forward to the day? When we have our quarterly 401(k) meetings. I love 401(k). 401(k) is my favorite benefit. CM: What does Cindy’s job look like 10 years from now? CR: 10 years from now, it will definitely be more automated. There will be less manual processes involved, especially with open enrollment. We’d like to have more integration between our HIS and our carrier sites. My biggest goal is just automation. You know, get rid of the manual processes. If you automate, it gives you more time to devote to employee relations and handling inquiries and plan design and even strategy and trying to come up with strategy for 5 years and healthcare reform and all that other stuff. It’s a good thing, I welcome automation. CM: Question 9 ½: Have you had a chance during this conversation to check out my wall of Facebook? CR: No, would you like me to?n
For More Information Contractors Register, Visit:
www.thebluebook.com
CM: What aspect of your job, if it was your only task that day, would keep you from getting out of bed in the morning? CR: Oh my gosh, open enrollment. We do it manually, we have a paper enrollment. We’re hoping to change
www.conferomag.com | 7
8 | January-March 2012
PLAN DESIGN TO IMPROVE
RETIREMENT READINESS By Gabriel Potter, MBA
N
ot so long ago, an American worker could reasonably expect a steady Social Security check, a pension, and whatever savings they had accumulated to support their retirement. With pensions losing popularity and projected cuts to Social Security, employees in the future will have to rely a lot more heavily on their own retirement savings, typically earned through a 401(k) or similar program. These defined-contribution programs move the central burden of retirement planning back towards the employee by empowering them to select their own funds, set their own goals, establish their own risk tolerance, and so on. However, the evidence demonstrates employees do not use these programs to their full advantage. The good news is plan sponsors and employers have been given tools (and safeharbor protection, courtesy of the Pension Protection Act) to make some smart plan design choices. There are plan design features which can counteract several common complaints and ensure employees are getting the most out of their retirement plan.
Complaint #1: “I don’t know which fund to pick.” Most employees are not financial professionals, and the vast array of investment options in a retirement plan can be intimidating. Many employees are understandably apathetic about making additional time commitments simply to understand the options for a distant retirement. Conversely, employees are no better served if they do decide to enroll in their retirement plan without understanding the options. Employers who want to make life simpler for their employees may be well served by adding a Qualified Default Investment Alternative, or QDIA, to their plan. By default, an employee is automatically enrolled in this investment, and it is designed to be appropriate for meeting workers’ long-term retirement savings needs. Practically speaking, a QDIA usually comes in 2 forms: a balanced fund with both stocks and bonds, or a target-date retirement fund which automatically increases the amount of fixed income as a retiree gets closer to retirement.
www.conferomag.com | 9
Complaint #2: “I don’t know if I’m saving enough.” If we rephrase this complaint as a question “Am I saving enough to retire?” the regrettable answer for most American workers is “No, you’re not.” Consulting firms and investment managers have differing targets for how much “enough” is. For example, Aon Hewitt recommends accumulating eleven times your personal income by retirement at age 65. Another popular rule of thumb is the 4% rate (i.e. if you have $1 million saved, you can withdraw $40,000 each year safely). One thing everyone agrees upon is Americans, in aggregate, are not saving enough to fund retirement.
“employees are overwhelmed and favor the simplicity of automatic features” Employers who want to encourage their employees to participate in the retirement plan can use an auto-enroll feature which places employees, by default, into the retirement plan. Similarly, employers can also implement an auto-escalate feature which automatically increases the percentage of retirement savings contributions annually, up to a pre-set maximum (e.g. 15% of salary). The auto-enroll and auto-escalate features cannot guarantee employees are saving enough. After all, employees can opt-out of the plan. The best solution is for an employee to actively engage with their participant education program or meet with a financial advisor. However, recent studies suggest these plan features are increasingly popular with employers and their implementation is having a positive, measurable difference in retirement readiness for employees.
Complaint #3: “Am I getting the most I can out of this?” An attractive retirement plan is a key element for employers trying to attract and retain key employees. Many employers go beyond plan design improvements, and offer tangible incentives for employees who participate in the retirement plan. Specifically, many employers offer a company match on employee contributions in the retirement plan. While a company match policy is a benefit, not all match policies are equal. Obviously, increasing the company 10 | January-March 2012
match (say, from 5% to 7% of annual salary) adds a direct benefit. Less obvious is the type of match: employers may select automatic matching or discretionary matching, which depends upon the profitability of the company and the decision of an investment committee. It is essential for discretionary match policies to be made public sufficiently early so employees can be informed and encouraged to participate in the retirement plan. Clarity on these decisions also ensures employees are fully leveraging the benefits of the retirement plan.
Promoting better outcomes The best aspect of these plan design improvements is they are automatic. In other words, utilizing these features requires the minimum commitment of time. It may, in fact, take more time for an engaged employee to tailor their contribution levels & investment allocation to their specific needs (or to opt-out), but an engaged employee would have had to devote time to retirement planning anyway. In this case, the only additional cost in time spent opting out is borne by unengaged employees who did not need to participate in the retirement plan — a rarity in modern America. However, most employees are overwhelmed and favor the simplicity of automatic features, so the overall time savings is often worth the modest inconvenience to the minority of employees who require no retirement savings. Collectively, these features act as guiderails for employees, encouraging them towards better outcomes.
For More Information Here Are Some Useful Links:
Plan Sponsor.com www.plansponsor.com/To_Auto_Enroll_or_ Not_to_Auto_Enroll.aspx
401KHelpCenter.com www.401khelpcenter.com/press_2012/ pr_lincoln_071112.html
SHRM.ORG www.shrm.org/hrdisciplines/benefits/Articles/Pages/401(k)-Match-Back.aspx
Boston College:
CENTER FOR RETIREMENT RESEARCH
Written By Diana K. Powell, Esq.
W
hile retirement is the responsibility of every American, current research shows the typical American is not properly prepared to retire. However, with modest changes to behavior the retirement problem can move towards a resolution. Boston College’s Center for Retirement Research works to do just that. The Center for Retirement Research at Boston College (CRR) was established in 1998, along with two other centers: the National Bureau of Economic Research and the Michigan Retirement Research Center. Together, they make up the Retirement Research Consortium (RRC), made possible through cooperative agreements and a grant from the Social Security Administration. The CRR has become a first-class research facility under the leadership of Alicia H. Munnell, the Peter F. Drucker Professor of Management Sciences at Boston College Carroll School of Management. Currently, the CRR has a staff of 22 full-time employees and 5 to 10 part-time student research assistants. The college’s mission, according to their 12 | January-March 2012
website, is to forge a strong link between the academic community and decisionmakers in the public and private sectors around the critical importance of the nation’s future. Historically, the main areas of research for the CRR are Social Security, State and Local Pensions, Health/Long-term Care, Financing Retirement and Older Workers. “We define our purview very broadly, in that even though we are in a specific topic about retirement income security we are really interested in anything that could potentially affect money and retirement. So that gets us into studying a lot different areas, not just what’s going on with Social Security and what’s going on with private and public pensions,” stated Andrew Eschtruth, the center’s Associate Director for External Relations. As noted, Social Security is a particularly important research area. “Social Security of course is always prominent given that it has such broad coverage of the U.S. population and that it’s the backbone of retirement security for pretty much everybody, even people with upper middle class incomes,” said Eschtruth.
According to Eschtruth, research with older workers emerged naturally because the researchers began to worry the combination of Social Security and pension funds would not be enough to comfortably live on in retirement. After the financial crisis of 2008, the CRR focus is on state and local pension plan funding. Also, the shift away from defined benefits towards defined contribution plans is an area of increased focus for the researchers at the CRR. “[The 2008 Financial Crisis] laid bare some of the problems and challenges of the system, in a way that was less visible before the recession and financial crisis,” explained Eschtruth. “It really accelerated some of the vulnerabilities of the system that we thought would take longer to fully develop or fully become visible.” The CRR’s study of 401(k) plans noted the ongoing shift from defined benefit plans to defined contribution plans. Their study measured contributions to the plans, and projected out the number of years until retirement, to determine if participants could in fact have enough to live on without sacrificing their present
Pictured Above: Alicia H. Munnell, the Peter F. Drucker Professor of Management Sciences at Boston College Carroll School of Management.
standard of living. The 2008 crisis meant the retirement savings, which were already too small, got even smaller—this exacerbated the retirement savings issue in America. In order to measure retirement preparedness, the CRR created a tool called the National Retirement Risk Index. Every three years a different sample of people is taken from the Federal Reserve’s Survey of Consumer Finances (which represents a national sample of households) and a projection is made to determine what their incomes will be in the future when they are of retirement age. A comparison is made between the target benchmark and their projected future income to determine how many people have fallen short. Eschtruth explained this index was developed to specifically spotlight retirement security and how the nation is fairing over time. “It’s a way of taking the temperature of individuals and how well people in general were preparing for retirement over time.” The goal and focus of this index is to see if people maintain the same living standard in retirement as when they were working.
The findings of the Center’s National Retirement Risk Index are startling: they have seen the index rise in a period from 2007 to 2010 by 9%; the percentage of households falling short went from 44% up to 53%. This represents the biggest rise in the shortest amount of time since these kinds of records were kept, becoming a huge concern for researchers. They are working on finding real solutions which real workers can use to meet the financial challenges which lay ahead for retirees. One of the ways in which the CRR is working to resolve these challenges is by improving and expanding financial education and literacy of workers within the next four years. “We like financial education, but we like it harnessed specifically to the service of better decision making,” Eschtruth explains. “If providing people with certain information can be packaged in a way that leads to better decisions, then it’s effective. We are less concerned with people just knowing more information.” While the CRR does not directly lobby, they do provide research on many public policy issues to help educate decision-
makers. According to Eschtruth, “[The CRR has] directly contributed to some specific reforms passed at both the federal and state levels.” The CRR will continue its goal of summating information to its key elements, stripped of extraneous detail, to provide clarity and better outcomes. n
For More Information On Boston College’s Center For Retirement Studies, Visit:
http://crr.bc.edu
Be sure to take a look at Squared Away, the CRR’s new financial education website (currently in a beta version) which provides trustworthy tools and information to help consumers make smart financial decisions.
http://squaredaway.bc.edu www.conferomag.com | 13
Washington’s
IMP
14 | January-March 2012
PACT On The Market By Gabriel Potter, MBA
E
very four years, the US electorate gets the opportunity for a fresh start. On Election Day, Americans had a chance to review their instructions and the chance to replace the policy makers in Washington. On the surface, the status quo has been essentially maintained, but the interpretation of these results informs the base-case scenario of US policy.
The Good News As a rule, markets hate uncertainty. At a basic level, uncertainty is what investors suffer through to warrant a return on their investment. Second, it’s hard to derive a logical price for a security if the inputs to a pricing model (e.g. tax rates or projections for GDP growth) are unstable. The good news is that some elements of US policy became much more certain on November 7th. Broadly speaking, the government’s effect on the economy is primarily a function of monetary policy (i.e. how much money is in circulation) and fiscal policy (taxes and spending). As a result of the election, there is substantially more clarity on the direction for US monetary policy. Monetary policy is driven by competing desires for stable prices (i.e. controlling inflation) and high employment. Our current Federal Reserve Chief, Ben Bernanke, has signaled that he will stand down in 2014, but since the reelection of the President, it is likely the accommodative policies will continue. In addition, there is consensus his replacement will most likely be current Federal Open Market Committee member, Janet Yellen. Mrs. Yellen has already indicated comfort with the existing zero interest rate policy, so long as inflation remains below 3%, and
unemployment remains above 7%. In other words, the “dovish” monetary policy — accepting higher inflation in an attempt to maximize employment, is a probable policy target for the near to medium term. Given the re-election of President Obama, legislative milestones which would have been threatened under Romney’s administration now appear stable. As the Republican candidate, Mitt Romney vowed to undo the Affordable Care Act (i.e. “Obamacare”), but the law itself will likely stand unchanged for the near future, despite state driven challenges to implementation. On a related note, challenges to the Wall Street Reform and Consumer Protection Act (i.e. “Dodd-Frank”) may be only marginal. This broad reaching legislation was drafted without specific detail, so full implementation and analysis of its effects will take time. For example, the law authorizes the SEC to impose “fiduciary duty” standards by broker-dealers to their customers, but the precise language surrounding this instruction has not yet been drafted. Nevertheless, the law itself should persevere without the threat of repeal.
There are elements to US policy which, following the Presidential debates and other expressions, were not subject to material change no matter who became President or which political party dominated Congress. For example, many pundits noted key positions on international policy, such as free trade agreements and guidelines for armed intervention at global hotspots like Syria and Iran, were largely similar between President Obama and Governor Romney. Partisans often frame a political choice as a binary
www.conferomag.com | 15
“Both sides could interpret the election results as an affirmation of their respective mandates, despite the fact they are in polar opposition to one another.” selection between extreme positions, but, in reality, the candidates’ preferences may have only a marginal effect on the likely outcome. For argument’s sake, an extreme simplification of each candidates’ energy policies might be stated thusly: Romney’s vision promoted the expansion of fossil fuels like oil, coal and natural gas whereas Obama’s vision was either hostile towards fossil fuels or, at best, an “all-of-the-above” approach which placed equal importance to renewable energy sources such as solar, wind, bio-fuels, and so on. Despite the President’s re-election, the expansion of domestic fossil fuel energy, as a result of technology improvements like hydraulic fracturing (“fracking”) and directional drilling, is still the most likely outcome. Douglas Coté, US Chief Market Strategist at ING, explains, “America will be energy independent by the end of the decade, but it could happen sooner with more accommodative government policies toward offshore drilling, fracking for natural gas and coal.” The political benefits of domestic fossil fuel energy may simply be too great to ignore, despite the environmental lobby within the President’s political base. Coté continues by stating, “Trade could be dramatically increased, raising economic growth. Since this expansion is creating an incredible amount of jobs, it is highly unlikely that Federal policy will stop the progress.” As usual, the recent election was subject to many predictions regarding the political outcome. This year, the most accurate election forecasts came from data aggregators (like Sam Wang of Princeton, Nate Silver of the New York Times, Real Clear Markets estimates, etc.). These aggregators did not generate any polling data; rather, they aggregated the results of other research to generate accurate forecasts. Since a change of the “base case” scenario of US policy is, in essence, a prediction of collective behavior, achieving a consensus between market strategists is an attractive attribute when establishing a new base case. There are no guarantees, but given independent consensus from market strategists, investors can be reasonably confident that the policy directions outlined above are probable outcomes.
The Bad News The Dow Jones Industrial Average lost more than 300 points after Election Day, as investors were reminded of upcoming Fiscal Cliff negotiations. The Fiscal Cliff represents the expiration of the Bush tax cuts plus required spending cuts scheduled for January 1, 2013. Both actions stifle economic activity, but may ultimately be necessary to achieve long term fiscal solvency (i.e. not spending more than we take in). It is a delicate balancing act: deficit spending is keeping GDP above recession levels, but at a 16 | January-March 2012
cost to future generations’ ability to borrow, high interest rates, and long term solvency. Implementing the tax hikes and spending cuts as scheduled would have generated a 3% drop in economic activity — more than enough to push the US into a recession. Congress and the Administration must now try to narrow the difference between long term spending and revenue without damaging current growth prospects and the associated tax potential from that growth. If the Fiscal Cliff was so important, then why did Congress wait until after the election to resolve it? It’s all about mandates. The election maintained the status quo: a Democratic White House and Senate, and a Republican House of Representatives with a majority of governorships. Both sides could interpret the election results as an affirmation of their respective mandates, despite the fact they are in polar opposition to one another. Investors cannot help but be reminded of the toxic brinksmanship surrounding the August 2011 debt ceiling crisis between Congress and the President. The crisis offered hints for a “Grand Bargain” to reform the tax system, boost revenues, and slash entitlement spending, knocking future debt levels down by trillions of dollars, but lack of compromise scuttled those plans. Instead, the crisis ended with modest cuts in spending, a downgrade to our debt rating, deterioration to our credibility and a sequestration compromise which led directly to the Fiscal Cliff. The Fiscal Cliff negotiations act as harbinger for future negotiations, so the stakes were high. Both sides spent much of December 2012 competing for leverage. The key negotiators, President Obama and House Speaker Boehner, initially appeared to be bridging the gap between spending cuts and tax reform which may have achieved compromise similar to the 2011 Grand Bargain. By mid December, House Speaker Boehner abandoned the measured pace of mutual concessions and instead initiated an uncertain plan to achieve negotiating leverage with passage of a Plan B option. The Plan B option was ostensibly more palatable to the conservative wing of his party because it limited tax increases to those with incomes above $1 million (far from the President’s floor of $250,000), but it still failed to achieve enough support to warrant a vote on the floor of Congress. The Speaker, having left the negotiating table and failing to pass his own bill, shifted the issue to the Senate in hope of a speedy resolution. Although the deadline for the Fiscal Cliff was technically broken, Senator Majority Leader Harry Reid and Minority Leader Mitch McConnell were able to put together a deal with fairly overwhelming support from the Senate, passing with an 89 to 8 vote. By the end of New Year’s Day, the House voted 267 to 167 to accept the Senate’s compromise deal.
The deal stops tax increases for most Americans, although households making more than $450,000 will return to Clinton era rates and many deductions phase out for households making more than $250,000. Regarding spending, the bill can only be seen as a stop-gap measure since most spending cuts are deferred for two months. A more comprehensive deal was too ambitious to hope for given the divide and the proclivity of both sides to adopt strong-arm tactics, as seen during the 2011 debt ceiling crisis. Ironically, the 2011 debt ceiling debate is the reason that some strategists like Andres Garcia, Global Market Strategist at JP Morgan, are more optimistic that a comprehensive plan can ultimately be resolved in stages. Negotiations can work from the existing foundations of the nearly completed deals between the House Republicans and President. Speaking in December, Garcia suggested that any large deal may roll out in stages stating, “I don’t think they’ll be able to do it in December, but they can make a short term deal so that people in January don’t see their paychecks decreased significantly with tax increases.” Speaking in December, Libby Cantrill. Senior Vice President at PIMCO, agreed for the possibility of a multistage fix, stating, “the fiscal cliff will be resolved by the end of the year, likely in a two-step deal: a short-term, ‘mini’ deal, which prevents the economy from falling off the cliff, but represents some fiscal contraction in 2013, coupled with a framework for a bigger debt deal in 2013 with likely effects not realized until 2014 and beyond.” However, Garcia cautioned the delay in resolution has already had a chilling effect on corporate investment plans and hiring plans and, thusly, growth and employment. Echoing his sentiment, the November 2012 Wall Street Journal reports, “Uncertainty around the U.S. elections and federal budget policies also appear among the factors driving the investment pullback since midyear… Companies fear that failure to resolve the fiscal cliff will tip the economy back into recession by sapping consumer spending, damaging investor confidence and eating into corporate profits.” Recent reports have confirmed that consumer confidence has been bruised by the enduring sense of crisis on Capitol Hill. Uncertainty in tax rates for the middle class also softened retail purchases during the all-important holiday shopping season which had only modest (0.7%) growth. Opinions differ as to whether we reach a recession now that a deal has been struck. ING’s line of thought suggests the 2012 election’s marginal impact to Fiscal Cliff discussions may be the last straw to send us into recession, but the underlying weakness in fundamentals would be the true culprit; it may be too late to avoid a recession no matter what happened in Washington. The US political system, by design, is filled with checks and balances such that no single person asserts too much influence; the President’s
ability to change the economy is overrated. Coté contends that odds for recession are high, because of low US growth rates and the administration’s insistence on increased marginal tax rates, an anathema to growth. Furthermore, weakness in corporate earnings growth, a sharp slowdown in key economies (e.g. China), and a recession in the Eurozone had already set the circumstances for recession, regardless of which Presidential candidate took office. Other asset managers, namely PIMCO, have long argued for a reduced set of long term expectations from capital markets — a “New-Normal” — since the financial crisis started 5 years ago. Cantrill foresees a “tenuous economy” going forward even with a deal on the fiscal cliff, but her projected loss of -1.5% of GDP in 2013 from a negotiated deal might be soft enough to avoid outright recession. The relatively bullish base case espoused by Garcia and others at JP Morgan reflects their belief that investors, driven more by fear than greed, have focused too much on worst-case scenarios and discounted the catalysts for improvement, such as a housing market resurgence after years of government accommodation. Alternatively, there are fundamental improvements which may boost growth, such as expanding free trade and domestic energy production, which do not predominantly depend on Washington. The Fiscal Cliff has been a great source of uncertainty because it was the first issue to require immediate attention, and it has had great symbolic value. The polarizing campaign and the recent history of intransigence suggest continued acrimony and heavy handed tactics from both sides. Future issues of spending and growth, including an imminent revisit to the debt-ceiling in early 2013, have been shaped by the Fiscal Cliff debate and aftermath.n Articles by our Contributors Doug Coté
Chief Market Strategist at ING Investment Douglas Coté, CFA, is the ING Investment Management U.S. Chief Market Strategist. With daily, weekly and monthly market commentaries, as well as speaking engagements, training seminars and conference calls, Doug provides in-depth analysis and practical support to help advisors maintain effective long-term, goal-oriented investment strategies.
http://goo.gl/FgzwX
Andrés Garcia
Global Market Strategist at JP Morgan Andrés Garcia is a Strategist on the J.P. Morgan Funds Global Market Insights Strategy Team. Andrés’ background in institutional sales trading and research are the cornerstones of his strong market knowledge.
http://goo.gl/QcjDz
Libby Cantrill
Senior Vice President at PIMCO Libby Cantrill is a senior vice president based in New York and works in PIMCO’s Executive Office, focusing on public policy issues and working with public pension clients. She has eight years of investment experience and holds an MBA from Harvard Business School.
http://goo.gl/eDZrU
www.conferomag.com | 17
TALES FROM THE
TRENCHES Q & A with William L. Hughes, Managing Partner of Business Allies Group LLC
William Hughes
What is Tales from the Trenches about? In short, it is about you. Our readers – institutions, employers and other plan sponsors – have had their share of challenges, given the tumultuous market environment and shifting regulatory requirements. It is comforting to know your peers face these challenges and, more importantly, it is useful to know what approach they took and the final result. If you have stories you’d like to share, please email us at info@conferomag.com
For our first Tales from the Trenches article, we talked with William Hughes, who acts as an administrator for a small 401(k) plan in Florida. William explains why the plan changed service providers 3 times in the past 8 years, and he talks about changing the plan structure to improve spending predictability. Confero Magazine: Briefly tell us about you, your role at the company, and your role with regards to your company’s retirement plan. William Hughes: I’m the administrator of an 11-provider, 3-location OB/GYN office. We have 65 employees in a 401(k) plan that is a safe harbor, dollar-for-dollar match, on the contributions at 4% on the employees’ annual income. I am the administrator of the plan. Also, we have 2 trustees who are shareholders of the corporation that own the medical practice. CM: Please describe some of the key challenges that you find regarding your retirement plan. What were your “pain points”? Was this pain felt by participants are you on the committee? What do you think the participants most want to see changed regarding the plan?
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WH: We’ve always looked at trying to set the plan, of course, with the least expenses within the funds. It’s a mutual fund based platform, where there’s 17 to 20 mutual funds and retirement targeted age fund mixes. We’re trying to pick the ones that have the least expenses so employees can get more return without having to pay plan expenses. The other thing is getting enough employee interest to where the plan doesn’t turn out to be top-heavy: the owners are putting in so much more than the employees are, that the employers either have to return contributions or they can’t contribute as much as they would like to, per law, because there is not enough employee participation. I think the other level of challenge is having someone locally, who is able to come in and get the employees involved, explain to them the importance of the retirement plan, and what the ultimate goal is in saving for your retirement. CM: Please describe how you approached these challenges. What did you, or your team, ultimately do? WH: One of the things is in the design of the plan to look at overall fund expenses to make sure each that in each category, whether it’s a large cap fund, or a small cap fund, developing markets – whatever it may be – that we’re looking at some of the more competitive funds that have some of the lower expense constants that perform well, but don’t cost too much more on the back end of their performance. We had characteristically, or pretty traditionally the past 5 or 6 six years, had to put in an additional top heavy contribution because of the owners [contributions] in relation to the employee contributions. In this last year we moved to a safe harbor plan where we do still have a graded 6 year vesting, but we’ve gone to matching dollar-
for-dollar on all employee contributions… It basically gets us into the area where if we’re contributing dollar-fordollar, gets us in the safe harbor where we don’t have to do the discriminatory testing in contributions that we did in the past. We’re still probably contributing as much, maybe if not a little bit more than we were in the past, but we’re not having to pay to get all of the testing done and having the year-end uncertainty of- “Do we have to pay here? Do
“ I know it’s not always possible, because when turnover happens you just handle things as well as you can, but I think there’s maybe some continuity that’s not going on....” we not have to pay?” We kind of pay a little all along at that point. CM:You changed relationships 3 times in a short time frame (8 years). Is there something you wish the TPA or recordkeeper had done differently that might have made their model more attractive? Do you have any advice for the professionals when it comes to understanding your business, or the issues that made you move your business elsewhere? WH: We had a local broker with, I think the company was Legg Mason, and they got bought out by Smith Barney. They reorganized and no one was in this area handling the account locally. It was going to be 70 miles away. So, we moved to someone locally, [but] he actually got promoted and moved to another area. So then we were left without the relationship. It’s not been a service issue as much as it’s been reorganization and mobility of people in that industry. I know it’s not always possible, because when turnover happens you just handle things as well as you can, but I think there’s maybe some continuity that’s not going on: when someone knows they are not either going to be local or going to have the same service providers for clients, there’s a smooth and readily communicated succession plan. Basically, it is, we just find out somebody else has moved and three months later we may meet the new guy, we may not. I think looking at a little better customer service – there again I know these spots don’t fill in overnight. Like in a lot of things - just good customer service and communication.
wish you had done differently? Do you have any advice you’d like to share with a peer going through a similar change? WH: I wish I didn’t have to be quite so proactive to get our service providers in to meet and educate the employees, and I wish I could be more proactive in getting my employees interested in meeting with them. It’s one of those things - we should meet at least quarterly, at least every 6 months, but I don’t feel enough effort is made on the other end, or maybe by my employees to get those meetings to be meaningful and useful to both sides. CM: What was the end result? Did everything get resolved satisfactorily? Are there any other trustees or fiduciaries on that account and are they satisfied as well? WH: It is satisfactory. We do have good participation. I think it’s like so many other things in the workforce. Everybody is busy and they have things to do before work or after work. We battle here with single moms and a lot of responsibilities outside of the office. I don’t think it’s particular just to the retirement plan, but just getting people keyed into some priorities on things that really are ultimately important and really will make a difference in quality of life down the road. I think we have, without getting a soap-box maybe, we’re more tuned in to immediate gratification than we are to suffering a little now, for some gratification later.n
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CM:With the benefit of retrospect, is there anything you
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