Compliance November 27, 2017

Democrats Unveil Bill to Create Rehabilitation Trust Fund

The fund would be used to make loans to multiemployer defined benefit (DB) plans that are in critical or declining status or that are insolvent but not terminated.

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A bill has been introduced in Congress to create a Pension Rehabilitation Trust Fund that would be managed by a new Pension Rehabilitation Administration within the Department of the Treasury, to make loans to multiemployer defined benefit (DB) plans that are in critical or declining status or that are insolvent but not terminated. The bill is in line with a pledge by House and Senate Democrats to protect union multiemployer pensions.

The Secretary of the Treasury would have the power to transfer monies to the administration to cover the loans. A director, nominated by the president, would oversee the administration. The administration would work in collaboration with the Pension Benefit Guaranty Corporation (PBGC) and the Department of Labor (DOL).

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Plans would be able to apply to the Pension Rehabilitation Administration for loans and have 29 years to repay the loans, plus interest. Plans that receive such loans would not be able to increase benefits, thereby allowing “any employer participating in the plan to reduce its contributions, or accept any collective bargaining agreement which provides for reduced contribution rates” throughout the loan period. Terminated plans would be required to reinstate benefits.

The administration would renegotiate the terms of the loan for any plan unable to repay it “and, if the Pension Rehabilitation Administration deems necessary to avoid any suspension of the accrued benefits of participants, forgiveness of a portion of the loan principal.”

To become eligible for such a loan, the DB plan would have to demonstrate the ability to repay it, as well as participant benefits. Plans would also have to reveal how they will invest the money and whether it involves any annuity purchases. If an annuity is purchased, it would need to be “rated A or better by a nationally recognized statistical rating organization, and the purchase of such contracts shall meet all applicable fiduciary standards under the Employee Retirement Income Security Act of 1974.”

Furthermore, “any investment manager of a portfolio [in the plan] shall acknowledge in writing that such person is a fiduciary under the Employee Retirement Income Security Act of 1974 with respect to the plan.”

Once an application is made, the administration would respond within 90 days.

If a plan is also applying for financial assistance from the PBGC, it would need to file both that application and the loan application to the administration jointly. Plans that are already receiving financial assistance from the PBGC would be given a simplified loan application from the administration.

The full text of the bill can be viewed here.

Investing November 27, 2017

Several Factors Push Investing Into ETFs

EY says the move from active to passive investing is one of them.

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In the past 12 years, exchange-traded fund (ETF) assets have experienced a cumulative average growth rate (CAGR) of 21%, exploding from $417 billion of assets in 2005 to $4.4 trillion at the end of this past September, according to EY research.

Several factors have driven this impressive growth, EY says: self-directed retirement saving, low yields, regulations centered around low fees and suitable investments, digital distribution and the movement to passive from active management.


Over the next three years, EY projects ETF assets to grow by a CAGR of 18% to $7.6 trillion by 2020. “If anything,” EY says, “we think this understates the industry’s growth potential.”

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However, EY says, individual ETF providers will find it increasingly harder to stand out in the marketplace. “It is no longer sufficient for an ETF to be cheaper, more liquid or more innovative than a competing mutual fund,” EY says.

Thus, ETF providers need to find ways to innovate around investors’ needs, “refine journeys for new and existing investors,” reduce costs even further, enhance transparency and “respond to evolving regulation in a way that helps investors,” EY says.

EY projects that passive investments’ market share will have grown from 14% in 2011 to 31% by 2020, while active investments’ market share will have shrunk from 86% to 69% in that timeframe—and EY expects that continued shift will help ETFs. In fact, by 2027, EY expects passive investments’ assets to exceed that of active investments.

To innovate, EY expects some investment managers will offer ETF share classes of mutual funds, and that mainstream investment managers will enter the ETF space, stressing the similarities between mutual funds and ETFs. Other mutual fund managers, EY says, will fight back against the intraday trading capabilities of ETFs by offering alternative investments in illiquid assets.

However, EY believes that within five years, nearly all assets managers will offer ETFs, be they active or passive. That said, EY believes the industry will continue to focus on fixed income ETFs in the near term, but that fixed income ETFs’ assets will never exceed equity ETFs’ assets.

“Smart beta products are seen as having particular potential, as providers apply factors such as duration or leverage to bond indices instead of traditional debt-weighting,” EY says. EY also believes smart beta is a possibility for equity ETFs. Socially responsible ETFs or ETFs built around themes such as mobile payments are another option, the consulting firm says.

EY adds that ETF providers need to seek new investors, because as much as 25% of inflows over the next three years will come from new investors. New investors could include pension funds, insurers, private banks, wealth managers, robo advisers and such investment funds as hedge funds, in search of liquidity management or exposure to select areas of the market, EY says.

In line with this, EY says ETF providers should tailor the investing experience for each type of investor by addressing their unique goals and tax situation.

EY’s full report on ETFs, “Reshaping Around the Investor,” can be downloaded here.

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