Data and Research October 14, 2015

Using Recordkeeper Proprietary TDFs Not a Given

Plan sponsors and participants stand to gain from advisers shopping around.
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Retirement plan recordkeepers can no longer count on selling their target-date funds (TDFs) to the plans they serve. A new study finds that almost half of the advisers who sell defined contribution (DC) plans now go shopping for clients’ TDFs, netting them the best fund for the best price—and often from a competitor.

This and other findings appear in Market Strategies International’s Cogent Report, “Retirement Plan Adviser Trends.”

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“This is the first year we’ve seen plan advisers championing proprietary and non-proprietary options equally, which underscores how competitive the target-date market has become,” says Sonia Sharigian, senior product manager at Market Strategies and the annual report’s co-author.

The likelihood an adviser will suggest an external TDF increases, too, in line with a plan’s assets under management (AUM). Nearly six in 10 (59%) DC specialists managing $50 million or more in defined contribution AUM urge plan sponsors to consider an external asset manager’s fund instead.

The trend to such funds may not be surprising. According to Linda York, vice president, Syndicated Research and Consulting at Cogent Reports, the percentage has been edging up every year. “In 2013, just 32% [of advisers] recommended external target-date fund providers. In 2014, that number was 41%. Now, in 2015, it’s up to 47%,” she notes.

As to why, she posits “a variety of factors.” These include greater scrutiny of plan fees and wider choice of target-date options. Also, “the fact that more plan providers are offering more open architecture in their fund offerings means more advisers have access to external managers,” she says.

NEXT: What lesser competitors stand to lose

Less competitive recordkeeper fund providers could potentially lose a growing amount of market share, as target-date funds now rank as advisers’ second favorite investment option, trailing only traditional, actively managed mutual funds, the paper says. Four in 10 DC advisers (41%) recommend a target-date or lifecycle fund as the plan’s default—twice as many as suggest any other type of qualified default investment alternative (QDIA).

“The move toward external target-date providers, along with [an] increasing popularity of index funds, shows that retirement plan advisers are acknowledging their clients’ concerns of managing plans more responsibly, including seeking the best overall value for the money,” says York. “Among the elite group of DC specialists[—i.e.,  those managing $50 million or more in defined contribution assets—]we find strong preference for both active and passive target-date fund providers, indicating that asset managers will not only need to compete on performance and price, but also find ways to further differentiate their target-date offerings in the marketplace.”

Generally speaking, investment managers can differentiate themselves by adhering to the tried and true: reliability, trustworthiness and consistent performance, showing the adviser they are easy to do business with, the report says.

Other findings include:

  • Nearly three-quarters (73%) of established DC advisers also recommend index funds to their clients, up from 64% in 2014.
  • The percentage of advisers selling defined contribution plans is growing. Two-thirds (65%) of advisers report managing defined contribution assets as part of their overall book of business this year, up from 60% in 2014. “Established DC advisers who manage $10 million or more in DC AUM represent 27% of all advisers, up from 23% a year ago,” York says.
  • Defined contribution advisers work with an average of 4.7 investment managers in their DC plans, down from 5.3 in 2014; however, they concentrate their business with just 2.7 plan recordkeepers—a number that has held steady for several years.

The report is based on a survey, performed in August, of 486 active advisers to defined contribution plans.

Market Strategies International is a market research consultancy that studies consumer/retail, energy, financial services, health care, technology and telecommunications topics.

More information about “Retirement Plan Adviser Trends” can be found here.

Compliance October 14, 2015

Court Finds No Fault with Top-Hat Plan Termination Payment

A federal court has ruled that a top-hat plan’s calculation and distribution of a lump sum in place of a retiree’s monthly installments after plan termination did not violate ERISA.
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A participant in NCR Corp.’s supplemental plan for executives filed a lawsuit claiming that the conversion of his monthly retirement benefit to a lump-sum payment upon the plan’s termination violated the terms of the plan document and that he was due relief under the Employee Retirement Income Security Act (ERISA).

Keith A. Taylor claimed that the distribution illegally reduced his accrued benefit by causing him to suffer great tax consequences and by including a present-value reduction rate in its calculation. However, U.S. District Judge William S. Duffey Jr. of the U.S. District Court for the Northern District of Georgia found that courts uniformly have concluded that tax losses do not fall within the relief available to redress a violation of ERISA, and the 11th U.S. Circuit Court of Appeals specifically has held that “the various types of relief available to plaintiffs in civil actions brought pursuant to ERISA’s civil enforcement scheme do not include extra-contractual … damages.”

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Duffey agreed that an adverse tax impact is not a basis for an ERISA remedy under Section 502(a)(1)(B).

While Taylor also cited NCR’s use of a 5% present-value reduction factor to calculate the lump-sum benefits as causing a decrease in his benefits, he did not allege that the present-value reduction factor was miscalculated, incorrect or improperly applied, the court noted in its opinion. Duffey found the allegation that use of the present value reduction factor was, in itself, improper because it amounted to a reduction of future monthly payments under the plan to be incorrect as a matter of law.

Citing the 11th Circuit decision in Holloman v. Mail-Well, Duffey said discounting to present value is a standard way to account for the fact that a dollar amount to be received in the future is generally worth less than the same dollar amount received in the present.

Because Taylor failed to allege any plausible basis for an ERISA remedy under Section 502(a)(1)(B), the court dismissed the claim.

NEXT: A finding about document request for top-hat plans

Taylor also asserted a claim for civil statutory penalties under ERISA Section 502(c)(1)(B), alleging that the plan administrator failed to comply with ERISA Section 104(b)(4), by not responding to his document request within 30 days. The court found that regulations allow the administrator of a top-hat plan to satisfy the reporting and disclosure provisions of Title I of ERISA by filing a statement with the Secretary of Labor and providing plan documents to the secretary upon request. Duffey noted that top-hat plan information is available on the Department of Labor (DOL)’s website. 

Since the regulations exempt top-hat plans from ERISA’s disclosure requirements, the court also dismissed Taylor’s claim for penalties. 

The Case  

Taylor retired from NCR on March 31, 2006. For the top-hat plan, Taylor elected a joint and 100% survivor annuity benefit so that he and his wife would receive an annual benefit of $29,062.80 for their lives, paid in monthly installments. On or about April 12, 2013, NCR informed Taylor that it had terminated the plan effective February 25, 2013, and that Taylor would receive a lump-sum payment “equal to the actuarial present value of [his] accrued benefit under the plan(s) on April 25, 2014.”  

NCR’s correspondence indicated that Taylor’s lump-sum payment value before taxes was $370,236.01, and Taylor would be paid an additional $70,739.87 for the joint and survivor annuity component of the benefit. The total lump sum payment was $440,975.88, and after federal and state income taxes were withheld, $254,063.00 was distributed to Taylor. 

After his appeals to the plan committee were denied, Taylor filed the lawsuit. The court’s opinion is here.

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