Investing December 28, 2015

The Year in Retirement Investing Trends

Retirement plan sponsors have had to cope with a significant amount of market and regulatory evolution in 2015—especially change pertaining to DC investment menus. 

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From a fundamental rethinking of the role of ESG investing to ongoing money market fund reform, there was no shortage of major shifts for defined contribution plan investment menus in 2015.

At a high level, industry thinking about the retirement plan investment menu has seemingly converged around the “KISS” principle. KISS, of course, is short for “Keep it simple, stupid.” According to a variety of business leaders and regulatory experts, expansive and complicated defined contribution (DC) plan investment menus are falling out of favor about as fast as any other practice in the industry. 

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Important to note is that this simplicity is limited to the participants’ perspective; advisers and sponsors still face challenging fiduciary concerns and recordkeeping limitations in delivering simplified menus. 

Within the menu, participants are especially seeking new types of annuities and other approaches to retirement income planning beyond simply rolling over to an individual retirement account and applying the rather archaic-seeming 4% rule. In another top story for 2015, retirement income purchasers inside and outside DC plan menus finally got a small boost near the end of the year with the Federal Reserve’s 25-bps hike in its target interest rate.

NEXT: ESG paradigm shift and new money market rules 

While introducing new guidance in October, Labor Secretary Thomas Perez told reporters ESG-based investing no longer has “the cooties” from an ERISA perspective. The Department of Labor (DOL) issued Interpretive Bulletin 2015-01, a piece of guidance Perez says will significantly expand the use of environmental, social and governance (ESG) investing principles under the Employee Retirement Income Security Act (ERISA).

Other regulators impacted the retirement plan investment menu in 2015—notably the Securities and Exchange Commission (SEC). While it technically adopted ongoing money market reforms in 2014, the next several months will be crunch-time for advisers and sponsors seeking to comply with the new rules. The good news is that sponsors and advisers have until October 2016 to decide how they will address the nearly 900-pages of rulemaking. But the timeline is tighter than some may think, given the complexity of money market funds and the potential for a late-mover premium should too many sponsors wait until the last minute to make changes.

Also challenging this year were several rounds of serious market volatility, including several very large daily swings in equity values. These spurts of major market volatility have happened pretty regularly historically, but it hasn’t happened in a while, so it’s critical for participants to be reminded of the long-term nature of retirement investing.

NEXT: Retirement plans tested again and again

The principles underlying retirement plan investing were tested time and again in 2015. 

In one interesting example that has less to do with market moves or regulators, an attention-grabbing Business Insider video emerged that suggested investing in a 401(k) is “a complete waste of money” for Millennials. Unsurprisingly, journalists and finance experts rushed to attack the video’s producer and his line of thinking, but others agreed the video brought up some good points.

Looking ahead, experts are focused on an aging global investing population that will continue to dampen economic growth and keep interest rates low globally—rivaling the impact of cyclical market trends heading into 2016. Some advisers suggest they’ll be advocating for more active strategies and different asset classes in this environment. Still others are working to remind plan sponsor clients that conservative investment approaches still have a place on retirement plan investment menus.

Topics having to do with qualified default investment alternatives (QDIA) remained top-of-mind in 2015 and are likely to do the same next year. Sponsors by now will be familiar with the challenges of picking the right QDIA for a given plan—but this year saw building momentum for managed accounts and other approaches beyond the dominant category of target-date funds (TDFs).

Whatever happens with the investment markets and regulators in 2016, you can be sure to find the latest news and analysis at www.plansponsor.com. 

Compliance December 24, 2015

Retirement Plans Still Being Scrutinized by Plaintiffs' Attorneys

It seems nearly all types of plans and investment approaches have been challenged recently in the courts. Next year probably won’t be any different. 

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“From stable value, to proprietary funds, to company stock, to excessive fees, to a mix of all of the above, there are also more plaintiffs law firms filing suits than ever,” warns David Levine, a principal at Groom Law Group specializing in the Employee Retirement Income Security Act (ERISA).

It’s been a busy year for litigators, Levine says, and there even seems to be a developing measure of competition among plaintiffs firms to organize and file complaints first, “to come up with new theories, and to move quickly.” Where does this leave sponsors, advisers and providers?

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“In short, we are in a world where every action could be put under the microscope—before we even gauge the impact of the fiduciary regulation on these lawsuits—and where a prudent process and contemporaneous documentation is more essential than ever,” Levine predicts.

One helpful exercise for retirement plan officials is to review recent court decisions for any potentially problematic shared practices. Levine also suggests plan officials developed trusted go-to resources for sound and responsive legal advice.

NEXT: The influential lawsuits in 2015

Presented below is just a sample of the defined contribution plan litigation to emerge or progress in 2015:

Pledger, et al., v. Reliance Trust Company, et al – Despite being a professional employer organization which provides human resources and business solutions to small- and medium-sized businesses throughout the United States, the Insperity company is accused of failing to engage in a proper process for the selection and retention of a plan recordkeeper for its own 401(k).

Sulyma v. Intel Corporation – In November a participant in retirement plans sponsored by Intel Corporation filed a lawsuit claiming custom-built investment portfolios within the plan are too heavily invested in alternatives and other imprudent investments.

Dennard v. Aegon USA – Another provider-focused lawsuit claims retirement plan provider and asset manager Aegon USA caused superfluous fees to be charged to its own retirement plan.

Urakhchin and Marfice v. Allianz Asset Management of America, et al – A lawsuit filed by two participants in an Allianz retirement plan claims the company and its asset management partners, including PIMCO, misused employees’ 401(k) plan assets for their own financial benefit.

Tibble v. Edison – A decision from the Supreme Court of the United States seemed to solidify the “ongoing duty to monitor” investments as a fiduciary duty that is separate and distinct from the duty to exercise prudence in selecting investments for use on a defined contribution plan investment menu.

Windsor and Obergefell decisions – A notice from the Internal Revenue Service gives guidance to plan sponsors, applying the Supreme Court’s recent same-sex marriage cases to retirement plans, as well as other benefits.

Spano vs. Boeing – In the end it was a rather abrupt conclusion to one of the original and longest-running examples of 401(k) excessive fee litigation. Plaintiffs in this particular case alleged that Boeing violated ERISA by permitting a variety of excessive fees to be charged to 401(k) plan participants. They also claimed that Boeing engaged in self-serving conflicts of interest, and permitted imprudent funds to be included in the company retirement plan.

The full archive of 2015 compliance coverage is online here. 

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