Newsdash Insight on Plan Design & Investment Strategy from PLANSPONSOR
March 10th, 2014
Industry Insights
Are ESOPs Too Risky to Be Good Retirement Plans?
Perhaps the most common criticism about employee stock ownership plans (ESOPs) is that they are too risky to be good retirement programs. ESOPs inherently increase the concentration of retirement assets in a single security—company stock— and critics contend this reduced diversification makes ESOPs too risky. Even worse, employees depend on the same company for both their paychecks and their retirement accounts. While this critique seems to make sense theoretically, the data about ESOPs indicate ESOP participants are generally far better off in terms of retirement security than employees in non-ESOP companies.
Benefit Briefs
Time to Consider a Collective Trust?
One retirement plan service provider says collective investment trusts (CITs) can be a powerful answer to demand for customized target-date vehicles and less expensive investment strategies. CITs have historically been used in defined benefit (DB) plans and in the larger defined contribution (DC) and profit sharing plans. DC plan sponsors moved away from CITs as retirement plan administration moved to daily valuation. CITs weren’t priced daily or traded daily, but that issue has disappeared. Today CITs trade on the same platform as mutual funds. Internet connectivity allows plan participants to track performance of their CITs on a daily basis.
Starting in 2016, Boeing says it will transition its 68,000 nonunion employees currently participating in the company’s defined benefit (DB) plan to a defined contribution (DC) plan. Boeing will make cash contributions each pay period to employees’ retirement savings through a new defined contribution component of the 401(k) plan beginning January 1, 2016. All benefits earned in the current traditional pension plan before the transition will be paid to employees in retirement, and the company will continue to match employee savings in an existing 401(k) plan. Notice of the impending change is the latest in a series of steps the company has taken to address the challenges created by DB pension plans.
CEFEX-Designated Advisers Offer Sponsors Fiduciary Muscle
CEFEX designations are gaining more widespread adoption, and some say that working with an adviser with the designation could benefit plan sponsors. “The organization emulates the International Organization for Standardization (ISO), which outlines business, government and society standards,” explains Carlos Panksep, managing director of the Centre for Fiduciary Excellence (CEFEX), in Toronto. “In most industries, there are published standards for quality,” he notes. The ISO provides a host of public standards, and CEFEX operates the same way, issuing certifications that are based on set standards. “We’re like a Good Housekeeping Seal of approval for financial services,” Panksep tells PLANSPONSOR. With a growing number of applicants, the designation functions as a sort of quality control for the financial services industry. He says some plan sponsors include a question regarding CEFEX certification in their requests for proposals (RFPs).
Economic Events
Total nonfarm payroll employment increased by 175,000 in February, and the unemployment rate was little changed at 6.7%, according to the Bureau of Labor Statistics. Employment increased in professional and business services and in wholesale trade but declined in information. THE ECONOMIC WEEK AHEAD: Tomorrow, the Census Bureau will report about wholesale inventories for January. Thursday, the Labor Department will issue its initial claims report, and the Census Bureau will report about retail sales for February and business inventories for January. Friday, we’ll learn the producer price index (PPI) for February from the Bureau of Labor Statistics.
Market Mirror
Friday, the Dow was up 30.83 points (0.19%) at 16,452.72, the NASDAQ fell 15.90 points (0.37%) to 4,336.22, and the S&P 500 increased by 1.01 (0.05%) to 1,878.04. The Russell 2000 decreased by 1.21 (0.10%) to 1,203.33, and the Wilshire 5000 closed 1.80 lower (0.01%) at 20,154.89. On the NYSE, 3.2 billion shares changed hands, with 1.3 declining issues for every advancing issue. On the NASDAQ, 2.7 billion shares traded, with a slight lead for decliners. The price of the 10-year Treasury note decreased 15/32, and the price of the 30-year Treasury bond fell 18/32, increasing their yields to 2.792% and 3.724%, respectively. WEEK’S WORTH: For the week ending March 7, the Dow gained 0.80%, the NASDAQ was up 0.65%, and the S&P 500 increased 1.00%. The Russell 2000 climbed 1.72%, and the Wilshire 5000 finished 1.04% higher.
Financial Sense
The latest release of the Milliman Pension Funding Index, which tracks performance at the largest U.S. private pension plans, shows February brought moderate funded status improvements despite falling discount rates. The index is published monthly by Milliman and tracks the 100 largest defined benefit (DB) pension plans sponsored by U.S. employers (i.e., the Milliman 100). In February, these plans experienced a $32 billion increase in asset values, but also saw a $21 billion increase in pension liabilities resulting from falling interest rates—driving an $11 billion overall improvement in pension funded status.
Rules & Regulators
404(c) in the Modern World
Current regulations and the current plan administration landscape make it more likely plan sponsors are complying with Employee Retirement Income Security Act (ERISA) Section 404(c). Section 404(c) follows the Section 404(a) “prudent man standard of care” requirements and offers a type of “safe harbor” for plan sponsors who allow participants to direct the investments of their accounts. However, plan sponsors must meet requirements for investment selection, plan administration, and plan and investment disclosures before they are exempt from any fiduciary liability for losses participants incur as a result of their direction of investments. “We’ve said for a long time that plan sponsors just blindly assume the requirements are satisfied,” Scott A. Webster, and attorney with Goodwin Procter LLP in Boston, tells PLANSPONSOR. He says it is still a valid question whether plan sponsors are complying with 404(c), but due to changes to the plan administrative landscape and more recent regulations, he believes most plan sponsors are complying.
A federal appellate court found a registered investment adviser for two pension plans was not a fiduciary for those plans. In the case of Tiblier v. Dlabal, the 5th U.S. Circuit Court of Appeals affirmed summary judgement in favor of Paul Dlabal by the U.S. District Court for the Western District of Texas. The district court concluded that Dlabal had not violated the Employee Retirement Income Security Act (ERISA) because he provided plaintiffs with written disclosures regarding the investment risks of a particular investment that went sour. The appellate court said it need not address that issue because it concludes Dlabal was not a fiduciary as defined by ERISA.
Church Plan Lawsuits Could Reverse 30 Years of Precedent
Recent court cases are not the first efforts to try to protect retirement assets for employees in plans that have been designated as “church” plans by the Internal Revenue Service (IRS). However, a recent decision by a federal court deciding the case of Rollins v. Dignity Health dismissed the legal and regulatory precedent. What could this mean for plan sponsors?
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Small Talk
ON THIS DATE: In 1864, President Abraham Lincoln signed a brief document officially promoting then-Major General Ulysses S. Grant to the rank of lieutenant general of the U.S. Army, tasking the future president with the job of leading all Union troops against the Confederate Army. In 1876, the first discernible speech was transmitted over a telephone system when inventor Alexander Graham Bell summoned his assistant in another room by saying, “Mr. Watson, come here; I want you.” Bell had received a comprehensive telephone patent just three days before. In 1926, Lolly Willowes, or The Loving Huntsman, the first Book-of-the-Month Club selection, was published by Viking Press. In 1969, James Earl Ray pleaded guilty to the assassination of African American civil rights leader Martin Luther King Jr. and was sentenced to 99 years in prison. In 1988, disco sensation Andy Gibb succumbed to an inflammatory heart virus at only 30 years old. In 1997, the fledgling Warner Brothers (WB) television network aired the inaugural episode of what became its first bona-fide hit show, “Buffy the Vampire Slayer.”
SURVEY SAYS: Thoughts About Tax Reform Proposals
At the end of February, U.S. House Ways and Means Committee Chairman Dave Camp introduced a sweeping tax reform bill that has many in the retirement industry alarmed about its proposals concerning retirement plans. Last week, I asked NewsDash readers if they think the retirement-plan related proposals will hurt, help or not affect Americans retirement savings. The proposal that maximum contribution limits be frozen for 10 years was the least favourite as 77.8% of responding readers indicated this would hurt Americans’ retirement savings. It was followed by a cap of 25% on the rate at which deferrals would reduce a participant’s income (75.6% said this would hurt Americans’ retirement savings) and deferrals greater than 50% of statutory limits would be taxed up front (73.3%). The proposal that employers with more than 100 employees allow Roth deferrals into their retirement plans had more responding readers saying it would help Americans’ retirement savings than hurt (28.9% vs. 22.2%, respectively). I also asked responding readers how they think the tax reform proposals will affect employer decisions to offer retirement plans to employees. The majority of respondents selected “hurt” for each of the proposals listed except the freezing of maximum contribution limits. Readers making verbatim comments spoke of administrative burdens on employers and mentioned other provisions in the tax reform proposal that could hurt or help Americans. Editor’s Choice goes to the reader who said: “Once again someone with no experience administering a retirement plan is trying to create rules to change them. We need to elect Brian Graff as president!” Thanks to everyone who participated in our survey!
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Editorial: Alison Cooke Mintzer alison.mintzer@strategic-i.com

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