Ask the Experts July 25, 2017

(b)lines Ask the Experts – Effect of the Supreme Court Ruling on Church Plans

“I heard that the recent Supreme Court ruling was favorable to church plans sponsored by organizations such as faith-based universities and church hospitals.
Reported by

“Does the ruling mean that it may be possible for such organizations to continue to maintain church plans that are not subject to the Employee Retirement Income Security Act (ERISA) as they have in the past, or is there more to come on this subject?”  

Stacey Bradford, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer: 

For more stories like this, sign up for the PLANSPONSOR NEWSDash daily newsletter.

For now, yes, organizations such as faith-based universities or church-affiliated hospitals may continue to establish and maintain church plans following the Supreme Court’s ruling in Advocate Health Care Network et al. v. Stapleton et al. The ruling means that plans maintained by certain tax-exempt organizations that are controlled by or associated with a church (like a faith-based university or a hospital) may qualify as a church plan exempt from ERISA. 

Specifically, as long as the plan is maintained by an organization whose principal purpose is the administration or funding of a retirement plan or welfare plan, or both, and that organization is controlled by or associated with a church, the plan is a church plan.  For example, a non-profit, church-affiliated health care system may establish a church plan. 

But litigation over church plans is likely to continue in the lower courts because the Supreme Court left several issues unresolved, including:

  • What qualifies as a “principal purpose organization” that may maintain a church plan?
  • What does it mean to be “controlled by” or “associated with” a church?
  • What is the definition of a “church”?
  • Is the church plan exemption from ERISA an unconstitutional accommodation under the First Amendment’s Establishment Clause.

Of course, Congress could in the meantime amend Section 3(33) to tighten the definition of “church plan,” but that seems unlikely in the near future given its current make-up.

If you have any question whether your organization may establish or maintain a church plan, you should consult an attorney.

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.  

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Rebecca.Moore@strategic-i.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future Ask the Experts column.
Tags
Reported by
Reprints
To place your order, please e-mail Reprints.
Investing July 24, 2017

Management Change Has No Impact on Fund Performance

Even though several funds see major outflows following highly-publicized management changes, Morningstar argues this tweak rarely effects fund performance.

Reported by

Management changes have no effect on fund performance, according to research by Morningstar. The firm says the outflow typically associated with management change is an investor flaw rather than a reflection of the fund’s management style and underlining principles.

Morningstar points out that management changes rarely result in changes to the fundamentals of the fund and how it is actually run. The firm embarked on its latest research in following the “catastrophic outflows” associated with “highly publicized management changes—most notably, Bill Gross of PIMCO or Greg Serrurier of Dodge & Cox.”

For more stories like this, sign up for the PLANSPONSOR NEWSDash daily newsletter.

Morningstar urges investors to ask themselves a series of questions following major management changes. These include asking whether the fund is truly an outlier in the sense where the fund is truly run by an individual whose strategies and insight can’t be replicated. Morningstar finds this is rarely the case and notes that today more than ever before, fund management is essentially a team-oriented science.

In addition, investors should ask themselves about the tax implications of the fund and determine whether selling would leave them responsible for an unnecessary tax bill. The fund’s expenses also need to be put under a microscope. If they increase as a result of management change, Morningstar suggests pulling out of the fund may be justified.

In most cases, however, management change leads to business as usual. Morningstar finds “there is zero relationship between a management change and future returns over the next month up to the next three years. Furthermore, this holds true for all different types of management changes. Gross excess performance does not depend on the fund’s alpha, size, or industry experience at the time of management change.”

Moreover, management change isn’t necessarily a major shift as some investors may surmise.

The firm notes that “Since January 2003, in the U.S. actively managed equity and fixed-income space, an average of 244 funds each month undergo some form of a manager change, whether new managers are added or tenured managers are removed. While this accounts for less than 1% of fund offerings, they represent on average $220 billion in assets under management. Despite the magnitude of this turmoil, these facts go underreported relative to other, singular, high-profile management changes.”

Taking this into consideration, Morningstar asks whether the management changes at name-brand funds warrant the attention they get. The firm suggests investors avoid knee-jerk reactions and take a closer look at what, if anything, is changing in the fundamentals of the fund.

Morningstar concluded, “No matter which way we sliced the data, we found statistically no relationship between future performance and adding or removing a single manager or an entire team. This is shown in two ways. First, the models r-squared is effectively 0% … Second, even if variables are statistically significant, the economic significance is negligible. For example, a management change happening in the past seven to 12 months at a fund with alpha above the category median increases the fund’s gross excess return by 0.1 basis points over the next 12 months. A 0.1 basis point increase is hardly an impact.” 

«