Our President and Founder, Brian Allen, talks about Pension Consultants in this video produced for the Strube Small Business Award.

In Tussey v ABB, Inc., the Western District of Missouri Central Division Court found that ABB violated their fiduciary duties to the Plan in several areas including failing to monitor the retirement plan vendor fees and revenue sharing, and allowing the Plan to subsidize other corporate services received by ABB from their vendor, Fidelity.

Failure to monitor the retirement plan vendor costs
Fidelity began providing services to ABB in 1995; however, beginning in 2001, ABB did not monitor the vendor’s fees and did not calculate the amount of compensation that was received by Fidelity through revenue sharing.  The bottom line from this case is the arrangement ABB had with Fidelity was not reasonable. 

One recurring theme in the case was the importance of implementing and following a prudent process.  An example the Court gave was if a fiduciary opts to use revenue sharing, “It must also have gone through a deliberative process for determining why such a choice is in the Plan’s and participants’ best interest.”

If the plan sponsor pays for all Plan expenses, then the fiduciaries do not have the fiduciary responsibility to monitor plan expenses.  However, this rarely happens, and the duty to act prudently is a central responsibility of the plan fiduciary as they are spending money that ultimately would have been in participants’ accounts. This is true when the Plan pays for expenses through a direct charge to participant accounts or through the use of indirect compensation like revenue sharing. 

The Plan subsidized non-plan related services
ABB also violated their fiduciary duties to the Plan when paying Fidelity an amount that exceeded market costs and received other non-plan related services from Fidelity—basically, the Plan subsidized other services.  The court cited services such as payroll services and recordkeeping for the health and welfare plan and a defined benefit plan.

I wonder if other plan sponsors receive “free” or reduced rates for other goods or services based on the profitability of the plan.  Has a nonqualified plan with executives ever received discounted pricing based upon the pricing of the plan with non-executives?  Has a bank ever provided better loan terms when the retirement plan was involved?  How many steak dinners, golf games, ball game tickets and trips to “conferences” are furnished because the retirement plan is ultimately subsidizing them?

This may be a little harder to prove than what happened in the ABB case, but at the heart of ERISA, it is important to understand that you cannot use participant’s money for personal or corporate gain.

“Do Over”
When we were kids, we used to call for a “Do Over” and we would have the opportunity to redo something we just did.

The decision in Tussey v ABB, Inc. is based upon the defendant’s liability due to the lack of oversight related to vendor fees and revenue sharing.  Fidelity provided information to ABB regarding fees and revenue sharing.  However, a plan fiduciary cannot rely on a conflicted retirement plan service provider who is not a fiduciary to be responsible for decisions.  ABB needed to conduct their own evaluation and make a determination based upon prevailing market conditions.

Talk about a “wish I had this to do over again” situation.  Every company has a limitation when it comes to time and money.  However, after reading Tussey v ABB, any plan fiduciary could easily assess that a prudent due diligence process to monitor and evaluate would have saved a tremendous amount of time and money on ABB’s part and would have greatly benefited the participants for which the Plan ultimately exists.

• 2 billion inches is 31,566 miles
• 2 billion dollars in pennies would cover approximately 28 square miles
• 2 billion is the record number of views on a YouTube channel
• 2 billion seconds is approximately 63.4 years

On a more serious note, Brian Allen, President and Founder of Pension Consultants, commented that, “This milestone was accomplished through hard work, with the help of loyal clients, and by maintaining the mentality that honesty and fairness go hand-in-hand with good business.” Brian noted that from the start, he was not concerned with what the competition was doing—but, instead, set out to provide products and services that truly benefited employer-sponsored retirement plans.

“We’ve been blessed to experience steady growth throughout the years, which I believe can be attributed to our transparency, hard work and contrarian nature. We’ve been looking forward to reaching this milestone for a while, and now that we’ve reached $2 billion in assets under advisement, I think it’s important to pause and reflect and to appreciate what an accomplishment it is,” said Brian. To mark the occasion our leadership team created a video that reflected on their proudest accomplishments and favorite memories throughout the years. Our firm also celebrated together with friends and family at a dinner party where the video chronicling our company’s history was shown and live music was enjoyed.

Question: At the end of the presentation, when you were describing common types of plan mistakes, you distinguished between mistakes that affect participant’s benefits from those that do not.  Are there harsher consequences for mistakes that affect participant’s benefits?

Chase: Not technically, but mistakes that affect participant’s benefits are more likely to be determined “significant” and significance is a key factor in determining whether or not a VCP filing will be necessary.  Also, the remedial steps for this type of failure, even if no filing is needed, may involve the Employer making participants whole, which could involve actually cutting a check out of corporate funds.

Question: If we suspect our plan is experiencing a failure that could result in disqualification, should we notify participants?

Chase: Not necessarily—it is best to notify your consultant and ERISA counsel when you suspect a plan defect has occurred, and they will prescribe the best course of remedial action which at some point may involve notifying affected participants.  Simply put, do not do anything without first consulting an expert, ideally your ERISA counsel.

Question: If a VCP filing is needed, how much does this process cost, excluding the cost of whatever the ultimate correction might require?

Chase: That varies depending on both the size of the plan (on an asset basis) and the type of failure involved.  Revenue Procedure 2008-50 provides a detailed fee schedule.  The cost may range from several hundred dollars to many thousands of dollars.  Note also that most agree that the cost of a VCP filing should be categorized as a settlor expense, not a plan expense, and should not be paid for out of plan assets.

First, let’s review some of the choices you are likely to have inside your retirement plan.  Every retirement plan should at least have three investment types: cash, bonds and stocks.  Within each of these types you will probably have several more choices.  The majority of your investment return will come from how you divide your money among these categories, referred to as asset classes.

Cash. We all know what cash is.  You invest in a cash investment because you don’t want it to lose value, and your cash will pay you a small interest rate while it sits there.

Bonds. Investing in bonds is in essence loaning your money to some government or company and having them pay you interest.  The bonds that you buy should pay higher interest than a cash investment. There is a risk that the entity that borrowed the money won’t be able to pay it back.

Stocks. When you buy stocks, instead of loaning money to a company, you are actually buying a piece of the company.  As part-owner of the company, your investment will go up or down in value based on how the company’s business is performing.

So how do you know how much to put in each area?  There are a couple of factors to consider.  The first factor is your time horizon, or how long you have until you need the money.  Are you five years from retirement?  Twenty years? Thirty-five years?  The more time you have until retirement, the more you can devote to stocks at the expense of cash and bonds.  The second factor to consider is your own personal tolerance for risk.  In other words, how do you feel about seeing your account value fluctuate? 

Both of these factors vary for each individual.  There is not a set investment mix for each situation.  You may not even know your time horizon or risk tolerance.  If you are in this situation, you can start by completing a risk/time horizon questionnaire to help you determine your needs.  You might find a questionnaire on your retirement plan’s website.  Another alternative would be to meet with a Certified Financial Planner™ who could discuss your options with you.

After you have identified what type of investor you are you can build your retirement portfolio.  Remember, every account mix can be different, as no two investors are exactly the same.  If you still need help determining what to buy, your plan may have some model portfolios already built for you.  Just plug in your results from the questionnaire and you will be directed towards an asset mix that will typically be appropriate for your situation.  Your plan may also be able to connect you with a financial adviser that can give you some pointers.

No matter what your situation, here are a couple rules of thumb:
 
• The less time you have left until retirement, the more you will want to allocate to cash and bonds.
• The more time you have left until retirement, the more you can allocate to stocks.
• The less you like to see volatility in your account value, the more you should have in cash and bonds.
• If you don’t mind seeing some fluctuation over the years, you might be able to have more exposure to stocks. 

Once you’ve determined your portfolio mix, you should monitor your account.  Just because you pick an investment mix that makes sense today, does not mean that it is appropriate for the next several decades.  It is wise to review your retirement account to ensure it is still performing as you intended at least annually.

The S&P 500^® Index returned 12.59% in Q1 2012, closing just above 1,408, which was the best Q1 performance for the broad-based index since 1998. The S&P 500^® has now more than doubled since its lowest performance in March 2009, albeit still well off its all-time high of 1,561 in late 2007.  The tech heavy NASDAQ faired even better returning 18.67% in Q1. 

Nearly all equities participated in the rally; in fact, 80% of the companies that comprise the S&P 500^® Index appreciated in value during the quarter. Although the rally in equities was broad, the risk trade was definitely beneficial during the first quarter of 2012. Growth equities outperformed their value counterparts. The Utilities sector, traditionally defensive, was the worst performing sector during the quarter posting a -1.51% return. More aggressive sectors like financials and technology posted strong returns (22.29% and 21.69% respectively) over the same period.

In general, foreign equities had a strong Q1 as well. The MSCI EAFE Index returned 10.86% and its emerging market counterpart, the MSCI Emerging Market Index, returned 13.65% during the quarter. The German DAX was one of the strongest foreign markets, returning 17.78%, while the Chinese Shanghai Composite was one of the weakest posting just 2.88% during the quarter.

Although riskier assets also performed best in the fixed income market, the bull market was not nearly as broad or robust. The BarCap US Aggregate Bond Index, a broad based fixed income index, scratched out a meager gain of 0.30% during the first quarter of 2012. During the quarter, risk and riskless fixed income assets provided significantly different returns.

Interest rates on high yield fixed income assets dropped from 7.71% to 6.93% on average. The drop in interest rates helped propel the BofAML US HY Master II Tr Index to a gain of 5.15% during the quarter. Conversely, yields on the 10 Yr US Treasuries rose from 1.87% to 2.22%. This rise in interest rates led to the BarCap US Government Index posting a -1.12% return during Q1 2012.

Indices are unmanaged and cannot be invested into directly. Past performance is no indication of future results.

The information must be used to evaluate the reasonableness of the retirement plan service provider’s arrangement. But how do we evaluate something that is not clearly defined? Obviously, fees need to be reasonable, but you have to know what you are evaluating before you can make that decision. Specifically you need to know what services are actually being provided. The tricky part is knowing how to evaluate your vendor’s services as compared to another vendor’s services.

First, start with evaluating the term “vendor.” Vendor could be used to describe any organization or person providing services to a retirement plan; however, I use the term vendor specifically to define the organization providing the retirement plan “product.” Within the product, there are different “functions” such as recordkeeping, testing, reporting, trustee and custody. Within each function there are several potential services offered. You might be wondering about providers such as money managers, but they are in a category all to themselves that need to be evaluated separately.

We have been so focused on the new fee disclosures that we have ignored how we will actually conduct a reasonable evaluation of the plan’s vendor. Unfortunately, there will be a plethora of fee information being pushed to plan sponsors without a clear method in which to make an evaluation.

What I know is the complexity of comparing services begins as basic as the words we use to define the vendor and its product. I shared mine. You may have your own. And, vendors, no doubt, have their own terms and definitions. Fees can be confusing, but more difficult are the variations in vendor business models. Because each vendor develops a slightly different product, it is more difficult to correctly define and evaluate a product and its services than it is to decipher the actual fee information. Challenging the process is not impossible; in fact, it is imperative in conducting an evaluation of reasonableness.

Prior to any 408(b)(2) or 404(a)(5) fee regulations, there has always been a fiduciary responsibility to evaluate and monitor vendors. But, in addition to fulfilling our responsibilities, we should look for opportunities of meaningful improvement that become evident as a result of the evaluation. To accomplish this, plan sponsors and fiduciaries need to skillfully conduct an evaluation rather than allowing vendors to define how the game will be played.

For more insight into this topic, hear Chris Thixton present, “Are you monitoring your record keeper? Critical success elements you need to know.” at Pension Focus Conference 2012 to be held May 17-18 in Branson, Missouri.

Leap years occur because the mathematics of our calendar don’t result in whole numbers.  Our years are measured by how long it takes for the earth to rotate fully around the sun.  Our days, however, are measured by how long the earth rotates fully around its axis.  Since the time it takes to rotate around the earth’s axis one time doesn’t divide equally into how long it takes for the earth to rotate around the sun one time, our calendar has to make regular adjustments; hence, the leap year.

You might recognize that retirement plans are not too dissimilar from the leap year; many aspects of the process are predictable, but regular adjustments will have to be made.  Many elements of administering a retirement plan are predictable and systems can be developed that address them.

That is a big part of what our various consultants do.  We develop systems that direct the administration of the plan through its known, predictable administration.  Each plan is different to be sure, but we have extensive experience on how to calculate the precise method for administering retirement plans.

These calculations do not fully solve the problem, however.  All retirement plans require on-going attention and regular adjustments will have to be made.  Plan provisions and  personnel will change over time and laws and regulations will certainly change as will the size and demographics of a work force.  Administration and fiduciary oversight of retirement plans will never be one-time exercises for these reasons.

So, enjoy the extra day.  We can all use it to make the predictable, but regular, adjustments to our retirement plans.

But there is much more to the process of planning for retirement than just dreaming about how you will fill your time.  You must build a plan for how to get to your retirement goals.  When you develop your retirement plan, it helps to work backwards, which is why we start with visualizing what your retirement lifestyle looks like to you.

The first calculation that must be done is to determine how much the lifestyle you just pictured will cost in the future.  If you have been to the grocery store or the gas station lately, then you know that prices seem to go up over time.  How much?  Well, it is impossible to say for sure, but historically the price we pay for the goods and services we buy every day, doubles every 20 to 25 years.  If you think you could be happy living on $50,000 per year; think again, because that same lifestyle might cost $100,000 by the time you retire.

The next part of the process of building your retirement calculation is to decide how long you will need to maintain that retirement lifestyle you are visualizing.  Life expectancies have increased dramatically over the past several generations.  Did you know that if a husband and wife both reach age 65, then there is a 50/50 chance that one of them will live to age 90?  That is another 25 years of living expenses that must be planned for.  Some people will actually spend more years in retirement than they spent in their entire working careers.  As you can see, the money that you will need to set aside adds up quickly.

So where will the money come from to meet your retirement income need?  One source will likely be Social Security.  The amount you can expect from Social Security is different for everyone, because it is based on your personal earnings history.  You may have an idea how much you will get based on the estimate you get in the mail every year approximately three months before your birthday.  What we do know is that it would be difficult and far from ideal to live solely off of Social Security throughout retirement.  For most workers, Social Security will likely replace 30% to 40% of their pre-retirement income.  Fortunately, Social Security benefits will already be adjusted for inflation, but you will still need to replace the remaining 60-70% of your income.

That 60-70% will need to be replaced through personal savings.  How much personal savings needs to be set aside for retirement is a question that each individual must answer for themselves.  Financial professionals will normally recommend that you only withdraw 4- 5% of your retirement savings each year, if you want it to last for the rest of your life.  That means that you will need a nest egg of 20 to 25 times the size of the annual retirement income you visualized earlier. 

Frequently, the best place to start saving is in your employer’s sponsored retirement plan.  There may be tax advantages to using this vehicle and you may also receive some “free money” from an employer’s profit sharing or matching contribution to your account.  If you have already begun to save for retirement, you can also subtract your current retirement account balance from the amount you need to save.  Furthermore, your current savings should continue to grow between now and your eventual retirement.  This growth helps to get you closer to your goal.

Are you there yet?  If the amount you expect from Social Security and the amount of income you can withdraw from your retirement account are not enough to meet that retirement lifestyle we talked about earlier, you have some more work to do.  The extent of the shortfall will determine your personal calculation.  How many more years until you retire? What is a reasonable growth rate for your account based on how it is invested?  With these two pieces of data you can once again work backwards to determine how much must be withheld from each paycheck from now until retirement to cover the shortfall.

Remember: being short of your retirement goal is not an excuse to give up planning and saving for retirement; the key is to know how short you are, so you can make a plan to meet your ultimate goal.  Another key is to monitor your progress along the way.  If you make a calculation based on retiring twenty years in the future, about the only thing you know for sure is that it will not happen exactly as you calculate today.  Because of all of the moving variables like the rate of inflation, your asset allocation, stock market rates of return and how long you plan to work, your calculations will most likely be either too high or too low, but the closer you get to your magic date, the more accurate these estimates will become.

If it looks like you are already saving enough out of each paycheck to get to your retirement goal-congratulations!  Keep doing what you are doing until you get there.  Some of you may not like the numbers you are seeing, but there are things you can do.  Although not always easy, we all have choices:  you may have to adjust your expected income in retirement; perhaps, you will need to work an extra year or two.  Maybe you could reduce your lifestyle today, so that you can defer more money to savings.  Keep in mind that the sooner you make some changes, the longer those changes will have to work for you, and the rosier your retirement picture could become.