Creative Collaboration Can Expedite the Adoption of Lifetime Income Solutions

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Creative Collaboration Can Expedite the Adoption of Lifetime Income Solutions

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. 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!

 

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ESG: It’s a Mess!

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ESG: It’s a Mess!

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!

 

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Who Will Get It Right On Lifetime Income: Plan Consultants or Financial Services Firms?

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Who Will Get It Right On Lifetime Income: Plan Consultants or Financial Services Firms?

By: Mitch Shames

Retirement plan consultants regularly conduct client surveys. Recently, they have consistently been reporting that plan sponsors have little interest in lifetime income products. (various annuity-type options associated or imbedded within investment options) On the other hand, leading financial services firms, including household names in insurance and mutual fund products, have invested enormous resources, over the course of the last three to five years in developing sophisticated products which address the income needs of retirees.

Who is going to be correct?

Reading the tea leaves – Plan Sponsor, an informational and educational organization devoted to serving retirement plan decision-makers, will be holding its annual conference this June in Orlando and is devoting significant conference time to lifetime income products. In fact, I’ll be speaking at the conference and please track me down and introduce yourself.

While I’m not a betting man (good thing because I’m a professional fiduciary), my gut tells me that both the financial services firms and Plan Sponsor have done their market research. They don’t devote significant resources to a topic on a whim. Furthermore, financial services firms were spot on in introducing mutual funds and then eventually target date funds into the retirement savings market. History suggests that plan sponsors pay attention to these developments.  

If you would like to speak with us about how Harrison Fiduciary goes about implementing and signing off on lifetime income products for retirement plans, please feel free to reach out. We would love to hear from you!

 

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Process Can Trump ERISA Fiduciary Litigation

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Process Can Trump ERISA Fiduciary Litigation

Ask any ERISA lawyer and they will tell you that fiduciary litigation is out of control. The recent 11 cases involving BlackRock target date funds are Exhibit A for that statement. Without digging deep into the facts, it is easy to say that the BlackRock funds have solid performance, and yet, plan sponsors are being sued. One easily would have that thought that these funds were unassailable investment selections.

The litigation is costly, time consuming and a distraction from executing business strategies. A survey of recent activity also shows it’s impossible to predict paths to success.

Lawyers like to extract principles from cases and offer advise based upon these principles.  Fiduciary litigation is all over the map, there is little consistency. Given the deluge of cases, some industry experts predict that the system may implode under the unrelenting volume.

Chaos breeds opportunity. Independent fiduciaries may prove to be the bulwark against this wave of litigation.

However, the role of independent fiduciary is not a well understood concept in the industry these days. Independent fiduciaries are neither investment consultants or advisors nor are they lawyers providing legal advice. Instead, they can fulfill the role of the investment fiduciary of a plan sponsor. Armed with sophisticated investment analytic tools, a deep expertise with respect to the model of fiduciary prudence, and devoid of conflicts of interest, independent fiduciaries can lift a risky burden off the shoulders of retirement plan investment committees.   

While the recent wave of litigation has produced few consistent legal principles for guidance, there are two old chestnuts of ERISA litigation:  1) courts are loathe, in hindsight, to second guess investment decisions, and 2) fiduciaries are obligated to exercise procedural prudence –e.g. a prudent process. The core competency of investment fiduciaries — prudence — relies upon this well settled case law.  

An independent fiduciary firm with investment product expertise and steeped in best practices of procedural prudence would likely prevail against today’s throw-it-against-the-wall-and-see-what-sticks litigation environment. Plan sponsors should avail themselves of this expertise regarding their pension plans and 401(k) retirement plans.

Challenging times require new responses. The time has come for plan sponsors to leverage the core competency of independent fiduciaries: prudence.  

 

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Fiduciary NewsLetter

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Fiduciary Newsletter – Summer 2022

2022 has been a very busy year for news in the retirement world.

To recap what we have seen over the past several months, we are providing retirement plan fiduciaries and the committees they serve on with this brief summary of the issues of the day, and our thoughts on how plan fiduciaries should be approaching them.

If you have questions or concerns about how these issues will affect your plan or your role as a plan fiduciary, please don’t hesitate to give us a call!

Lifetime Income/Annuities

As the passage of the SECURE Act has paved the way for annuities in retirement plans, participants are increasingly interested in adding a lifetime income component to their 401(k) plan. And you can’t really blame them. Creating a steady income stream for their golden years provides a great deal of comfort and security.

The investment and insurance industries are responding by building and rolling out new investment strategies that incorporate annuities and lifetime income options. Firms like Blackrock, Nationwide and Annexus have already brought these strategies to the market and as retirement plan fiduciaries begin to assess this trend, we can expect to see these products playing a more prominent role in 401(k) plan line-ups in the years to come.

So what does this mean for the fiduciaries who oversee these plans? Well, on top of everything else on their plate they will now have to acquire a new skill set in understanding and analyzing insurance contracts from a fiduciary point-of-view. That’s right, annuities are not investments. They are insurance contracts that are designed to last a lifetime. Building this skill set and getting this right is imperative. And for retirement plan fiduciaries, it adds to the already heavy burden of overseeing a retirement plan.

To get our take on this issue and what we believe retirement plan fiduciaries need to be aware of, read our article that was recently published in BenefitsPRO.

If you are interested in adding lifetime income options to your retirement plan, Harrison Fiduciary can help. Please feel free to give us a call to discuss how engaging with an independent fiduciary can lead to better outcomes for plan sponsors and plan participants!

 

Cryptocurrency

Everyone is watching and wondering where crypto is heading, but it’s safe to say not everyone understands it. Nonetheless, it’s inching its way towards the retirement industry and fiduciaries should take note. Recently the nation’s largest 401(k) plan provider, Fidelity, has announced that they will soon be rolling out the option to invest retirement assets in Bitcoin. The DOL has said they have “grave concerns” and they have cautioned plan fiduciaries to exercise extreme care before they consider adding cryptocurrency options to a 401(k) plan. You can read the DOL’s Compliance Assistance Release for plan fiduciaries here.

For a multitude of reasons, we believe retirement plan fiduciaries should hold off here as crypto assets have not provided audits and other standard modes of verification. From our fiduciary perspective this disqualifies them as prudent investments. To dive deeper into the issues plan fiduciaries need to know about cryptocurrencies and specifically, Bitcoin, read our article that was recently published in Investment News.

ESG

Last fall the DOL issued a proposed rule that would amend its investment duties regulation related to the use of ESG factors in selecting appropriate investments for ERISA qualified plans. The new rule would explicitly give a green light to plan fiduciaries looking to incorporate ESG into their plans. It’s a significant change from the position of the DOL under the previous administration which limited a fiduciary’s ability to consider ESG factors. Politics is playing a big role here, with Democrats in congress praising the rule, while Republicans have asked the DOL to withdraw the rule, saying that it effectively mandates consideration of ESG factors in investment decisions. The comment period has been closed and as the final rule is still pending, retirement plan fiduciaries wait.

Irrespective of the outcome, Harrison Fiduciary has weighed in on some if the issues and pitfalls that plan fiduciaries need to be aware of when considering how to integrate ESG options into retirement plans. Read about it in our article that was recently published in Plan Sponsor.

Target Date Funds

TDF’s continue to be the fastest growing investment strategy within retirement plans. While they are a useful and beneficial tool to optimize retirement savings over an investors time horizon, plan fiduciaries should be diligent in their selection. While they are often marketed as simple “set it and forget it” options for plan participants, they are actually quite complex. And we are now seeing lifetime income options being added to them, increasing their complexity. Not every TDF fund is appropriate for every plan and fiduciaries hold a duty to perform their due diligence when selecting TDF options for their plans. For fiduciaries analyzing their TDF line-up, we have outlined a number of issues that should be considered here.

As trends in ERISA litigation continue to plague plan sponsors, the recent Supreme Court decision in Hughes v. Northwestern University leaves the door wide open for future class action lawsuits that focus on Target Date Funds. Read our article on this that was published earlier this year in BenefitsPro.

And don’t forget, last year the Government Accountability Office kicked off an investigation into TDF’s and how they are used in retirement plans. It’s anyones’s guess when we will see the results of that investigation but we can expect they will also accompany new guidance for plan fiduciaries on their use.

As an independent fiduciary, we offer a comprehensive TDF analysis and review for retirement plans. If You would like to lean more pease visit www.harrisonfiduciary.com or give us a call!

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Cryptocurrencies: Not Yet Ready for Primetime

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Cryptocurrencies: Not Yet Ready for Primetime

In March of 2022, the Department of Labor issued a Compliance Bulletin that raised significant questions about the appropriateness of investing in cryptocurrencies within ERISA qualified retirement plans. In the meantime, Fidelity Investments recently announced its intention to offer a facility that would enable investments in Bitcoin within 401(k) plans. So what should retirement plan fiduciaries be doing when it comes to cryptocurrency? Harrison Fiduciary’s Mitch Shames discusses this in his recent article in Investment News.

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Plan Sponsors Must Focus on Cybersecurity - How Broad Are Their Fiduciary Shoulders?

Cryptocurrencies: Not Yet Ready for Primetime

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