Benefits January 11, 2017

Businesses Support Auto-IRAs

But auto-IRAs run by governments are not favored.
Reported by

Small and mid-sized employers surveyed by the Pew Charitable Trusts most often cited expense (71%), limited administrative resources (63%), and lack of employee interest (50%) as main reasons for not offering retirement plans.

Three-quarters of business owners who do not offer a plan said that under current circumstances, they would be no more likely to offer one in the next two years than they are now. Key changes that could lead employers to offer a plan include greater profitability, financial incentives, and increased demand from employees.

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

When asked about individual retirement account (IRA) plans funded entirely by employees that use automatic enrollment and pre-determined deductions from their pay, employers without plans were either somewhat or strongly supportive of the concept. Many said the main reason for this support was that the auto-IRA plan would help their employees.

State-Run Plans Not Widely Embraced 

At the same time, that support varied somewhat depending on which entity served as the program sponsor. Support for an auto-IRA initiative proved highest if the plan would be sponsored by an insurance or mutual fund company; it dropped if a state or federal government ran the program. Still, more than 40 percent supported a government-run program.

If their state implemented an auto-IRA plan, 13% of businesses that already have plans said they would drop theirs and enroll their workers in the state program. Meanwhile, half of those without plans said that they would start their own rather than go into the state program. For employers that have been contemplating whether to start a plan, the auto-IRA program might nudge them to consider plan sponsorship.

Employers expressed strong support for voluntary programs such as online marketplace exchanges or multiple employer plans. 

The Pew Charitable Trusts recently surveyed more than 1,600 small and medium-sized business owners or managers to better understand the barriers to—and motivations for—offering retirement plans and to get their views on policy initiatives. The survey included employers who sponsor plans and those who do not. The responses, in one of the few such surveys conducted in the past decade, generally show strong support for offering retirement benefits and for various policy initiatives that would boost savings.

The Pew Charitable Trust’s Issue Brief about its findings is here.
Data and Research January 11, 2017

Plan Sponsors Must Judge Fees Independently

Advisers and providers will help defend against fee challenges, but it is important to point out that the providers’ obligation is actually to make disclosures, not warrant that compensation is reasonable.

Reported by

Fiduciary Benchmarks, provider of fee-benchmarking solutions, has published the first in a series of white papers authored by Employee Retirement Income Security Act (ERISA) attorneys Fred Reish and Bruce Ashton, of Drinker Biddle and Reath.

The analyses will be published quarterly and the first is available now, asking the question, “Who has the job of determining whether an adviser’s compensation is reasonable … the plan sponsor or individual account owner or the adviser?”

Get more!  Sign up for PLANSPONSOR newsletters.

As the pair explains, ERISA and the Internal Revenue Code have always required the use of suitable products and the assessment of only rational compensation for financial advisers and investment managers regardless of their contractual fiduciary status or service offering. However, the pending implementation of the Department of Labor’s (DOL) strengthened conflict of interest standard, paired with the rash of retirement plan fee litigation filed in recent years, has added even more significance to the question: Who is responsible for determining whether an adviser’s compensation is reasonable?

Just as important, Reish and Ashton warn, is determining what type of a process can be deemed reliable for determining fee reasonableness under ERISA’s tighter standards, as well as what type of records will be satisfactory?

“The ‘reasonable compensation’ requirement is highlighted by the Department of Labor’s expanded definition of fiduciary advice and the related prohibited transaction exemptions,” the pair explains. “As a result, an adviser’s responsibility for determining and having evidence of the reasonableness of its compensation has been heightened.” 

Ashton and Reish observe that the fiduciary rule’s exemptions raise an issue that financial advisers, “by which we mean broker-dealer representatives, investment adviser representatives and insurance agents,” may not have addressed in the past: Who has the job of determining whether an adviser’s compensation is reasonable, the plan sponsor or IRA owner or the adviser? “The short answer is, it depends.”

NEXT: Process, process, process 

According to the Fiduciary Benchmark’s analysis, what has changed under the new DOL standard is the obligation of a fiduciary adviser to a plan or IRA, whose firm (referred to as a financial institution) will receive variable compensation or third party payments.

“These advisers must rely on the Best Interest Contract Exemption (BICE), which requires the financial institution to warrant that its and the adviser’s compensation is reasonable,” Reish and Ashton write. “Other exemptions contain a similar requirement … For plans, this creates a dual obligation to make sure that compensation is reasonable. The plan sponsor retains its ERISA obligation to do so, and the adviser and the financial institution have the BICE obligation.”

Pertaining to IRAs, the analysis suggests the prohibition against an adviser receiving unreasonable compensation remains as in the case above, “but the obligation to make sure (and to warrant) that the compensation is reasonable is heightened under BICE (and other exemptions).”

According to Reish and Ashton, advisers will likely have to defend fees if challenged, but it is important to point out that the adviser’s obligation is actually to make disclosures, “not warrant that his compensation is reasonable.”

“It is still up to the plan sponsor to make the determination of reasonableness,” they conclude.

The first white paper can be downloaded (after free registration) here. 

«