Apropos of this Independence Day, the Heinz Family Philanthropies and the Women’s Institute for a Secure Retirement (WISER) have made a new eBook is available, “What Women Need to Understand About Retirement.” The publishers recognize the fact that because women live longer and because they are the majority of the nation’s caregivers, it was especially important for them to know how to take control of their own retirement futures. Here is a link to the eBook.
You can’t protect what you don’t control
In a recent email, American Express pointed me to some good stuff about protecting against identity theft. What plan sponsors can’t protect against, however, is employee personal and financial information stolen from 401(k) providers. I’ve written about this in the past. Take for instance the 401(k) provider that had personal data on 160,000 current and former employees of Neiman Marcus stolen, or the accounting firm that had personal data on 40,000 current and former Chicago Public School Teachers stolen. Or my nomination for the Chutzpah of the Year Award: the thieves that robbed Scotland Yard of the names and personal data on 15,000 Met police officers.
What do all of these situations have in common? The service provider in question was carrying around confidential employee data on a lap top. Not exactly state-of-the-art computer security. I’m now convinced that one of the questions that plan sponsors should ask their provider is "exactly how do you protect our data?" The answer may surprise – and concern – you!
No ERISA violation for not disclosing revenue sharing to 401(k) participants says court
In a June 20 memorandum dismissing a lawsuit against John Deere, Inc. and two subsidiaries of Fidelity Investments, the U.S. District Court for the Western District of Wisconsin ruled that ERISA does not require plan sponsors or service providers to disclose revenue sharing information to 401(k) plan participants. For those of you that don’t know what revenue sharing is, it’s the common practice of mutual funds and their investment managers to make payments to other service providers.
It’s been included in most of the class action litigation, and I’ll leave it to the lawyers like Thelen Reid Brown Raysman & Steiner to comment on the legal aspects of this decision.
But don’t count on non-disclosure of revenue sharing being an acceptable practice for much longer. The Department of Labor’s proposed changes to the 2009 Form 5500 calls for reporting the dollar amount of revenue sharing and who receives it. A copy of the Form 5500 must be provided, of course, to a participant upon request, and is also available on several on-line Form 5500 data bases.
Are 401(k) plans transforming into defined benefit plans?
401(k) plan focus is shifting from the accumulation phase to the distribution phase. The why is obvious. The first wave of Baby Boomers are reaching age 60 who have significant concerns about running out of money. The how is being provided by 401(k) providers – insurance companies and mutual funds – who are beginning to address the need by adding lifetime annuities as 401(k) distribution options. That it’s now an industry is evidenced by the activities of the Retirement Income Industry Association, a trade group formed to deal with retirement income challenges.
The regulators are not unaware of the potential for abuse. The NASD and a group of state insurance commissioners are calling for uniform regulation of annuities by having the states add a suitability requirement for all annuity products. Not unlike, the suitability requirement that the NASD imposes on broker/dealers.
To make it work, retirement plan sponsors will have to decide whether to allow advisors into the workplace. The Pension Protection Act provides fiduciary relief to plan sponsors in this regard, but it remains to be seen if that will actually happen.
No phone, no email, no fax, no worries. Priceless
Gone scrambling. Back in two weeks.
New non-spouse beneficiary IRA rollover not a “gimme”
Individual retirement accounts, as I’ve written about before, are an increasingly valuable planning tool. One of the tax benefits that comes out of the Pension Protection Act of 2006 is the ability of a non-spouse beneficiary to rollover a lump sum distribution from the deceased participant’s retirement plan account tax free to an “inherited IRA”. The big advantage? It allows the beneficiary to take a deferred payout of the benefits over his or her lifetime.
I’ll skip the fine-print, but it’s important for you to know that it’s not a gimme. The IRS earlier this year said that retirement plans are not obligated to offer the non-spouse beneficiary option. My guess is that many plans will not bother to offer this distribution option because it complicates plan administration. But is “simple” plan administration, the real objective of the plan sponsor?
More green on green
It’s not just the environmental groups that are actively participating in the debate – and politics – of climate change. Now the institutional investors that are entering the arena. This past Earth Day I wrote about institutional investors in the U.S. becoming vocal.
Now as leaders of G8 most industrialized nations are to meet in Germany, a U.K. based organization, the Institutional Investors Group on Climate Change in an open letter called for greater clarity from key industrialized nations on policies addressing climate change. The organization is a forum for collaboration between pension funds and other institutional investors on issues related to climate change. Primarily comprised of U.K. institutional investors, the 17 signatories hold 3 trillion euros in assets (approximately $3.95 U.S.). The investor group said it wanted the G8 event to decide upon major aspects for a new Kyoto agreement, in advance of a UN meeting in Indonesia in December.
What does this have to do with participants in retirement plans? Simple. The institutions that manage the investments in these plans need to be able to rely on an effective long-term climate change policy for investment decision-making. Now getting the G8 to agree on a common policy is a little more complicated.
12b-1 fees added to the 401(k) fee brew
The 401(k) fee issue continues to percolate. This time it’s 12b-1 fees, those fees charged by mutual funds to compensate underwriters and brokers for sales. And last year, it was $11 billion according to Securities and Exchange Commission estimates. It’s time for review said the SEC, and it announced last week that it will hold a roundtable on June 19 to discuss so-called 12b-1 fees, which are also used to cover advertising and promotion and for mailing fund prospectuses.
This would be the first look by the SEC at 12b-1 fees since their inception in 1980. At that time, the mutual fund industry was still limping along from bear markets of the mid-1970s. The SEC provided a boost in the form of the 12b-1 fee to help mutual funds pay for marketing and distribution expenses justified on the basis that the fund operating expenses would be less if more investors could be attracted.SEC Chairman Christopher Cox said,
Today’s uses of 12b-1 fees have strayed from the original purposes underlying the rule, and it is time for a thorough re-evaluation.
The SEC could take one of a number of approaches ranging from better disclosure to outright repeal. And 401(k) plans will be part of the mix with over 40 million investors owning mutual fund shares through 401(k) plans.
“You mean I can get 100% return on my money using your investment system?”
If you are still not convinced that 401(k) participants need investment advice, then check out the results of a recent survey as reported by Investment News, 43% of investors are suckers. The survey was conducted by Money-Track, a public-television series, and Investor Protection Trust. Most of the survey results I would have expected. I’m not surprised that:
- Only 1% of the people surveyed understood eight basic investing principles, e.g., diversification.
- 66% of the respondents would meet with a financial professional without first doing a background check.
- 40% of those surveyed said that they expected Social Security to make up a major part of their retirement income.
- 50% said they had not created a financial plan.
But here’s the surprise: 43% of the respondents said that they would invest in an "opportunity" that would provide them with guaranteed returns of at least 100%, e.g., an option-trading system.
Or maybe just call me be naive and maybe "there’s a sucker born every minute".
The phrase, "There’s a sucker born every minute", often credited to P.T. Barnum, the famous showman, may actually have been said by someone else. Here’s the history of it.
Presidential politics, Darfur, and 401(k) plans
There was a lot of media coverage recently that the financial holdings of Presidential candidates Rudy Giuliani (R) and John Edwards (D) who have spoken out about genocide in Darfur, included investments in companies that do business in Sudan. But let’s cut these guys some slack. These investments were in companies that were part of mutual fund holdings about which they were unaware. Information on what securities mutual funds hold are difficult to obtain, let alone information on the companies themselves.
But not for large institutional investors who can have their nvestments in individual securities screened – sometimes for an additional management fee, e.g., .25%. So what can the average 401(k) investor do. One option is to check out the screening tool offered by the Sudan Divestment Task Force. But note the caveat that this screening tool uses historical mutual fund data which is at a minimum 3 months in arrears.
