By: Mitch Shames

Back in May, 2022, when Fidelity launched a facility enabling plan participants to purchase cryptocurrencies within their qualified plans, I wrote a piece in Investment News which raised prudence concerns regarding this new facility. Earlier in January, the SEC approved ETFs investing in Bitcoin and my concerns remain the same.

To be clear, the SEC’s approval relates solely to the fact that the ETFs under review met the SEC’s various requirements under the securities laws. The SEC did not, and it never does, sign off on the prudence of the investment or the vehicle. Prudence, for purposes of ERISA, is a judgment that must be made by plan fiduciaries.

As I outlined in the Investment News piece, in my judgment, cryptocurrencies are still too new of an innovation to be included as an investment option in a qualified plan. Just look to the collapse of FTX and the conviction of Sam Bankman-Fried for proof that cyrptocurrencies are not yet ready for prime time.

Don’t get me wrong, I’m not at all suggesting that cryptocurrencies will never be appropriate for qualified plans…nor that all crypto entrepreneurs are felons. Not at all. Instead, it is simply a timing issue, both the investment case and the platforms/exchanges related to crypto have not matured sufficiently for the retirement plan marketplace. An enormous amount of analytics and due diligence needs to be accomplished. However, my prediction is that the introduction of ETF’s are an important step along the path ultimately towards a prudence determination.

If you are interested please reach out to us. We love to brainstorm around these issues and we’d be happy to connect with you!

By: Mitch Shames

When your pipes back up, you call a plumber. When you are experiencing stomach distress you call a doctor. When you are planning for retirement you call an investment professional. When you want to manage fiduciary risk, who you gonna call? A fiduciary expert!

Polling data consistently suggests that 82% of plan participants desire lifetime income options to be included in their 401(k) savings plans. But, the data also reflects that concerns related to fiduciary risks are one of the most significant obstacles preventing wider implementation of lifetime income solutions by plan sponsors.  

The term fiduciary is widely misunderstood. It sounds old fashioned, but nonetheless important. When I’m asked about my firm and I reply that we provide fiduciary services for retirement plans, more often than not, people’s eyes glaze over, instantly. Try that at a cocktail party. It’s not a great conversation starter.

Admittedly, it is a legal term, and it has a very specific meaning – at least for lawyers and people in the business. Still, in my experience, non-experts use the term in a loose fashion. So too, the term fiduciary risk. My hunch is that the term is used to cover a wide variety of concerns and uncertainties that can’t necessarily be articulated or quantified.

When it comes to lifetime income solutions, I suspect that fiduciary risk can be a cover for a deep discomfort and lack of experience surrounding annuity investments. Understandably, annuity products have NOT traditionally been part of the expertise developed by plan sponsors over the past decades. I too would be very uncomfortable.

For us, however, fiduciary risk has a very precise meaning. It is the risk that Department of Labor or a court would determine that an investment authorized by a plan fiduciary was NOT considered prudent. A fiduciary can be held liable for imprudent investment decisions.

As with any attempt at managing risk, the first step is to identify the nature of the risk, the next step is to establish the tools which mitigate the risk, and lastly to implement the tools along with a process for monitoring the success of the risk management. Importantly, the monitoring of risk also includes a constant process of evaluating and updating the understanding and assessment of the risk metrics. For us, that means staying on top of product innovations, insurance risk events, regulatory pronouncements and, of course, litigation developments. Any changes in these arenas could likely necessitate a revision of our risk parameters. Risk mitigation is not a static process.

Taking this knowledge and experience into account, we have developed a propriety model which can substantially mitigate fiduciary risk. Just as out the outset, I noted that it is customary to hire experts to handle to various challenges (plumbing, medical and investment) our combined 60 years of legal and investment experience provide the foundation for our fiduciary expertise. Risk mitigation processes are core to our business model, and frankly, are baked into our professional DNA.

In many types of endeavors, it is rare that risk can be eliminated. Instead, we all take actions to manage and minimize risk.

Simply put, fiduciary risk can be managed successfully by fiduciary experts.

If you are interested please reach out to us. We love to brainstorm around these issues and we’d be happy to talk more about our proprietary risk mitigation methodology.

By: Mitch Shames

The Employee Retirement Income Security Act was passed in 1974 to safeguard retirement income. But, for the past 30 years financial services firms have been focused largely on 401(k) Savings Plans (remember, traditional pension plans are going the way of dinosaurs). Savings vs. Retirement Income; which is it? Obviously, it needs to be both. They go hand in hand; before retirees can generate retirement income, they need to have a solid base of savings.

Given the deluge of retiring baby boomers, the entire industry (from plan sponsors to advisors, to managers and insurance providers) needs to make a quick pivot from focusing on savings alone to focusing on savings and generating retirement income. Recent surveys tell us that retirees are overwhelming calling for these new features in their retirement plans. 

While interest in lifetime income is high among plan sponsors and their advisors, there seems to be a hesitancy that is casting a shadow and a general pause over decision making and widespread adoption of these solutions. We suspect this hesitancy is related to:

1. 1. the number of new products being offered
   2. the “untested” nature of the products
   3. the insurance/guaranty element of the products

Of the three, I suspect that the third, the insurance element, is the greatest factor. For the past 40 years, plan sponsors and their advisors have largely been focused on developing analytical expertise among products that are “securities”. (i.e., equities and fixed income, mutual funds and alternative investments) For the most part, insurance products have not been part of the mix. For many reasons, insurance products were left to “roll overs” outside of the plan and therefore were left to traditional insurance advisors and outside the ambit of the retirement planning arena. 

Getting up to speed in this new domain can be daunting. Furthermore, we continue to hear that there is great uncertainty with respect to the perceived fiduciary risk in shifting to lifetime income solutions. The lack of familiarity (expertise) can generate the perception of higher risk, which can lead to inertia.

Insurance expertise, however, can’t be cultivated in a quick pivot!

I know from experience. We have done a deep dive over the past couple of years into the lifetime income products that have come to market and have developed a dynamic database, identifying over 30 products and upwards of 50 factors or features of products which need to be evaluated. Note too, each week we seem to hear about new products and expand the database. The sheer breadth of product offerings precludes the quick pivot.

Given the needs of the market, we believe that both plan sponsors and their advisors would benefit from creative thinking around structuring relationships that would help facilitate the adoption of these new products. Of course, plans and advisors can build the product competency internally. However, given the complexities and the particularity around guarantees and annuity contracts, this could take a long time; a time longer than the market might allow.

Instead, we’d suggest that advisers might partner with fiduciary experts that can demonstrate competency around the wide range of lifetime income options and the details on executing a fiduciary decision to adopt them. This model is analogous to the relationship employed between investment managers and sub-advisors.

In this model, the plan advisors would maintain the primary relationships with their clients while product experts would focus on the evaluation, selection (in a fiduciary capacity) and monitoring of retirement income options. On an ongoing basis, the plan advisors would continue to maintain their relationships with their clients while leveraging the support of the expert for providing necessary reports and responding to specific client questions. The plan sponsor ultimately could rely on the combined fiduciary processes of the advisor and the sub-advisor.

The creative use of an advisor/sub-advisor model could supplement the plan advisor’s existing skill sets and brands, while enabling them to offer a new area of expertise to their clients in a manner that enhances their on-going client relationships. This new model could provide an efficient response to plan participants pressing needs and a new dizzying array of products hitting the market.

This is one alternative. There easily could be other creative options that could arise out of collaborative brainstorming between retirement plan advisors and lifetime income product specialists. The market energy and the immediacy of meeting plan participant’s needs, provides opportunities for creative problem solving.

We welcome these opportunities.

If you would like to speak with us about lifetime income options for retirement plans, please feel free to reach out. We would love to hear from you!

By: Mitch Shames

With $39 trillion captured in U.S. retirement plans, it is not surprising that some people ask the question; “why can’t we do some ‘good’ with all that money?” In fact, that question has been asked for decades. Back in the 1960’s, driven by political protests, the Vietnam war, and the apartheid regime in South Africa, socially responsible investing gained currency. Eventually, in 2004, socially responsible investing morphed into Environment Social and Governance (ESG) when Koffi Annan introduced a set of principles to the CEO’s of 50 major financial institutions.

Today, ESG has been reduced to a political hot potato. Starting with the Obama presidency, the Department of Labor has introduced proposed regulations either supporting or prohibiting plan fiduciaries from taking ESG considerations into account when investing plan assets. True to form, the Biden administration filed supportive regulations which were eventually challenged and overturned by a court.  

Given that litigation around these regulations continues to play out, fiduciaries would be well advised that any reliance on these regulations might be risky at best.

However, all is not lost. Commentary and research is showing that many of the issues highlighted by ESG are not merely a matter of “social do-goodism” but rather can go to the issue of evaluating the quality and reliability of a corporation’s current and projected earnings.  In other words, focusing on various ESG issues are tantamount to focusing on real business issues and their impact on earnings. Certainly, even the most skeptical about ESG would likely admit that the evaluation of earnings is a critical component of any active investment management strategy and worthy of evaluation by a plan fiduciary.  

As an example, just recently the Wall Street Journal reported that the Federal Reserve Bank has launched a Pilot Program evaluating whether the largest banks face risks related to climate change. In other words, charged with monitoring the resilience of the banking system, the Federal Reserve, has determined that climate change may raise specific systemic risks and that it is worthwhile to assess these potential risks.  

The approach by the Fed seems not to be an extreme position. In fact, it appears prudent and reasonable. As any knowledgeable fiduciary knows, prudence and reasonableness, are the watchwords of the fiduciary decision-making process.

Therefore, it would seem that the best possible approach for fiduciaries would be to avoid the extremes of the political positions and instead focus on a middle of the road reasonable approach. Remember, plan fiduciaries are charged with the responsibility of investing plan assets “solely in the interest of plan participants”. When it comes to ESG, explore with asset managers and advisors how they might evaluate the risks and earnings impact associated with various ESG issues as business matters (impact on earnings), not as matters of social activism. Seems there is little fiduciary risk attributable to focusing on the potential risks and returns related to plan investments.

If you would like to speak with us about your ESG concerns, please feel free to reach out. We would love to hear from you!