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Are Your Plan Investments Independent of Your Provider?

Posted by Erik Daley, CFA

August 16, 2018

Once upon a time, asset custodians and recordkeepers were selected based on the quality of the investment products they managed and made available to consumers. For retirement plans, that dynamic has been gradually changing for years. Even to the point where virtually any retirement plan of any size should be selecting retirement plan custodians and recordkeepers based on their ability to meet the needs of participants and with full knowledge that the plan can use the best investment options in the marketplace in nearly any custodial environment.

Back on June 19, I published a piece outlining the five areas recordkeeping vendors have tried to monetize their relationship with retirement plan sponsors and participants:

  • Proprietary investment management
  • Managed accounts
  • IRA rollovers
  • Cross-selling retail financial products
  • Annuitization

In this piece, the first in a five-part series where we discuss each of these provider revenue opportunities, I’ll highlight proprietary investment management.

Unlike providing recordkeeping services to retirement plan sponsors, investment management is a highly profitable and scalable revenue opportunity. While financial service firms may receive asset based or per capita fees scaled by the complexity of the work they provide, investment managers collect asset based fees that grow along with the performance of the market. As recordkeeping firms grow, they are pressed for significant investments in technology and to add staff to service plan sponsors and participants alike.

Investment managers have virtually no marginal costs as their investment mandates grow. Funds become more “profitable” as the fixed legal, accounting, and research costs are spread across a larger and larger asset base. 

Annually, Multnomah Group benchmarks fees for recordkeeping services to our clients and details investment management costs at the same time. For larger plan sponsors, investment management costs may be as much as four-times the cost of recordkeeping services. Given the scale of revenue available in investment management and the profitability of that revenue, it should be no surprise the degree to which recordkeepers may have interest in seeing their investment products in the investment menus of their retirement plan clients.

In addition to using captive recordkeeping clients to promote the marquee investment products from the recordkeeper, financial service firms regularly steer plan sponsors to use proprietary investments in three core areas:

  1. Cash alternatives – Whether it’s insurance companies selling annuity and stable value accounts, or mutual fund companies with money market funds, these mandates which are largely commoditized are promoted heavily by retirement plan providers

  2. Indexes – Index funds continue to take significant cash flows in retirement plans. As mutual fund companies compete for the lowest-cost index, retirement plan providers are encouraging sponsors to use proprietary indexes in their menus

  3. Target dates – Whether active or passive, retirement plan providers are using their trusted role with committees to communicate the merits of their proprietary target date investment products

The success of those initiatives is clear. According to a study conducted jointly by AllianceBernstein and BrightScope in 2017[1], 43% of sponsors were using proprietary target date funds in their plan. While this is down from 59% back in 2009, it’s clear that the link between retirement plan providers and target date funds utilized remains strong. According to the same study, 31.7% of billion-dollar and greater plans used proprietary target date funds.

Even if the correlation between proprietary investment mandates and recordkeepers is mild the opportunity is huge. As of June 30, 2018, 62% or our clients’ retirement plan assets were in target date funds, cash, or index products.

Erik_blog_8162018

The Department of Labor has been aware of these correlations for some time.  In 2013, the DOL published tips for plan fiduciaries that included the tip, “Inquire about whether a custom or non-proprietary target date fund would be a better fit for your plan.”

Many plan recordkeepers have excellent investment products, and sponsors should use those products when they meet the needs of the plan, its participants, and adhere to your investment policy statement. However, any plan using proprietary funds should be cognizant of their requirements to evaluate those products with the same care and rigor they would any other investment product. Using proprietary funds may make sense, but fiduciaries should take extraordinary care in ensuring the independence of the plan provider and investment product decisions.

Notes:

[1] https://www.alliancebernstein.com/sites/investments/us/resources/pdf/final_dci-7572-0717.pdf


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

A Legislative Update on Health Savings Accounts

Posted by Hailey McLaughlin & Bonnie Treichel, J.D.

August 13, 2018

shutterstock_461780311_blogAs you map out your benefits strategy for the coming year, what’s on the menu?  Do you have a high deductible health plan (HDHP) with a health savings account (HSA) option?  If not, have you considered one?  As discussed before on the blog (here and here) and in our webcast about the basics of HSAs (available here), there can be substantial benefits to the employer and the employee as you look at a comprehensive benefits strategy; for example, the tax benefits.  There may also be other benefits that aren’t so apparent; for example, if you’re a plan sponsor who fails testing on a recurring basis and as a result struggles with corrective distributions for highly compensated employees each year, the HSA may be the plan design fix you are seeking (and you didn’t even know it)!

Aside from the reasons we have discussed before as to why HSAs may be an attractive option for some employers to supplement the benefits strategy, Congress just took steps that may make this option even more attractive.  The U.S. House of Representatives recently passed two bills (H.R. 6311 and H.R. 6199)  that would make some substantial changes to HSAs.

Arguably one of the most impactful to workers enrolled in an HSA, is an increase in the limits on annual contributions to the HSA. Back in May, we discussed the 2019 limits of $3,500 for an individual or $7,000 for a family plan (with a $1,000 catch-up contribution for those 55+). Under this legislation, there would be an increase in the contribution limits to match the limits on out-of-pocket expenses, which in 2019 will be $6,750 for an individual and $13,500 for a family plan.  In other words, an employee would be able to contribute nearly double to an HSA, which for some is a powerful retirement savings tool.   

The legislation makes changes to who is eligible for an HSA. The bill allows for workers who are covered by an HDHP, but also covered under Medicare Part A, to be eligible for an HSA.[1] Under the current laws, this is often a surprise for the aging workforce as they approach Medicare enrollment.  Additionally, with this bill, if one spouse has a general health Flexible Spending Account (FSA)[2], the other spouse is still eligible to open an HSA, a change from the current rules.

Finally, one other exciting change is expanding the qualified medical expenses that are allowed. The bill would add certain over-the-counter medical products to be treated as qualified medical expenses (meaning they can be paid for by the HSA). Further, certain fitness-related expenses, such as gym memberships would also qualify; the limit would be $500 for an individual or $1,000 for a family plan.

The changes described in this post are not exhaustive, but rather, provide a highlight of a few key provisions.  For a more comprehensive overview of the legislation and how it could impact your employees and overall health and wealth strategy, contact Multnomah Group

And, be sure to keep in mind that for now, these two bills have only passed in the House.  We’ll have to wait and see how the Senate feels about these changes as they review later this year. Stay tuned.

Notes:

[1] It is important to note that workers are automatically enrolled in Medicare Part A when they start receiving Social Security benefits.

[2] Don’t forget there are different types of FSAs:  general purposes versus limited purpose versus dependent care.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Focus on Fixed Income Performance Since the Federal Reserve Began Raising Short-term Interest Rates

Posted by David Williams, CFA

August 9, 2018

The Federal Reserve (Fed) began raising the Fed Funds Rate, which is the benchmark interest rate banks charge one another for overnight borrowing, in late 2015.  Prior to this action, the interest rate had been left near 0% since the early days of the financial crisis in 2008 to encourage economic activity.  Beginning in late 2015, the Fed has raised this key rate seven times to its current range of 1.75% to 2.0% (see chart below).  Actions by the Fed receive great attention in the press, but they are only part of the story for retirement plan fixed income investors.  This blog post will explore how fixed income funds have performed in light of the headline news that ‘interest rates are rising.’

DW blog_892018

The prior chart provided a narrow view of interest rates – just the very shortest-end of the yield curve, but this serves as a starting point for the full curve.  The chart below shows interest rates over the full maturity spectrum of available U.S. Treasury bonds at two points in time – November 2015 (prior to the Fed’s first increase in this current series) and July 2018 (most recent available data).  In general, the yield curve has flattened over the last 32 months.  This is to say that the increase in bond yields at the short-end of the curve (less than 5 years) is greater than increase at the long-end of the curve (10-30 years).  Other common shifts in the yield curve include ‘parallel’ and ‘twists’.  

DW blog_892018_2

 

Fixed income investors returns are comprised of two components – coupon payments and bond prices.  Rising interest rates have an inverse relationship to bond prices.  In other words, as interest rates rise bond prices will generally decline, reducing investment returns.  A commonly used measure of a bond fund’s sensitivity to changes in interest rates is duration.  Duration, stated in years, indicates how much an investor should expect their portfolio value to change in value if a 1% change in the level of interest rates occurred across the yield curve.  For example, if the yield curve shifted up 1%, then a bond fund with a duration of 6[1], then the portfolio would decline in value by approximately 6%.  Additional factors (credit quality, inflation, issuer specific factors, etc.) will influence fixed income fund performance but are not covered in this post.

In spite of this rising interest rate environment the past 2+ years, fixed income fund performance hasn’t been awful. 

  • Money market investors have benefited greatly, as returns for BoA ML 3-month T-bill index has returned 0.75% on an annualized basis. This return is still low but about 15 times greater than the same index returned one-year period ending Dec. 31, 2015.  Given the short maturity of money market instruments, money market funds are highly responsive to changes in interest rates. 

  • Intermediate term bond funds, typically benchmarked against the Bloomberg Barclays Aggregate Bond Index, have experienced positive returns, but the level of returns is low. The index has returned approximately 1.6% annualized over this period.  Interest rates in this segment of the curve have risen but given the longer average maturity compared to money markets; fund managers haven’t been able to reinvest as large a percentage of the portfolio at the prevailing higher yields.

  • Long-term bond funds, not typically offered in defined contribution retirement plans due to the educational complications and general low utilization of fixed income strategies, have outperformed short- and intermediate-term counterpart. The Barclays Bloomberg U.S. Gov’t./Credit Long index has returned 4.2% annually during the same period.  After looking at the changing shape of the yield curve, one could observe that this segment of the fixed income market has not experienced an increase in interest rates as seen in other segments.

It should be noted that rising interest rates do allow for reinvestment of coupon payments and maturing bonds at higher interest rates.  So, there may yet be a silver lining to this story.

One thing is for sure, the interest rate market will continue to move.  The Fed’s benchmark interest rate is an important signal of the overall direction of interest rates, but don’t let the headlines trick you.  It doesn’t tell the full story of interest rates and is just one factor influencing fixed income investments. 

Notes:

[1] The Bloomberg Barclays Aggregate Bond Index, a commonly used index for passive bond investors in retirement plans, is approximately 6 currently.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Participant FAQ Series: Cryptocurrency

Posted by Stephanie Gowan

August 7, 2018

shutterstock_323781848_blogParticipant question: Can we have cryptocurrency in our plan?

Answer: The short answer is no. While cryptocurrencies, such as the infamous Bitcoin, meet the definition of currency in that it can be used in exchange for the purpose of acquiring goods and services, this type of currency is associated with additional complexities beyond traditional assets typically offered in a retirement plan such as mutual fund stocks and bonds.

I want to quickly explore some of the unique nuances of cryptocurrency and how it relates to offering such an investment in a qualified plan.

Access. In order to offer cryptocurrency in a retirement plan, you would need to have access to it through your recordkeeper’s investment platform. Today, there are no mutual funds, collectives, or ETFs that invest exclusively in cryptocurrency. The exchange of this currency is typically peer to peer or through a cryptocurrency exchange.

Liquidity. Long-term liquidity of this currency is not well understood by most. In order to derive value from your currency, you need to find a buyer willing to accept your currency of choice as payment, or a buyer willing to exchange traditional currency. Without a buyer, you do not have liquidity. This is not unlike an investor wanting to sell a stock or a bond; however, traditional investments have broad platforms for investors to sell and trade on.

Volatility. Given the fiduciary responsibilities of plan sponsors, the notable volatility in the value of these currencies makes cryptocurrency a less than ideal addition to the investment menu for a long-term retirement savings account. I will use BitCoin as an example, according to CoinDesk, an information services company for crypto assets[1], July 2017 to July 2018 BitCoin has seen price swings from as low as $2,550.18 to as high as $19,343.04, which is an 86% price swing. I think that would give most plan participants heart burn and considering how plan sponsors are ultimately liable for the investments they offer; it seems this may be just too risky or inappropriate for the time being.

These complexities continue to limit the applicability of cryptocurrency in qualified retirement plans. However, this could change. Cryptocurrency exchanges have already penetrated the much smaller IRA market and are advertising their availability broadly.

If an employee is still interested in investing retirement funds into cryptocurrency they need to look toward the new IRA products available. In addition, there are some mutual fund managers investing in cryptocurrency companies; however, adding these funds to meet the needs of a select few could expose your plan to additional risk. Instead, offering a brokerage window where a participant can access these funds is a more viable option.

Notes:

[1] https://www.coindesk.com/price/


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

NYU Case: A Victory for the Plan Sponsor Team

Posted by Bonnie Treichel, J.D.

August 1, 2018

shutterstock_572127751_blogWhen it comes to retirement plan class action cases under ERISA, there is one word you don’t hear a lot: trial. Most cases settle long before making it to trial, which made the series of cases filed against colleges and universities (starting in August 2016) somewhat different. With a few exceptions, the defendants in these cases – several Ivy League schools – weren’t afraid to proceed toward trial and the first case to go to trial was NYU.

Background. The original complaint was brought by employees of NYU against the Retirement Plan Committee (the “Committee”), alleging $358 million in damages. Brought in August 2016, the complaint originally included seven counts. By the following year, the court dismissed most of the counts – leaving only two that went to trial:

  • The Committee was imprudent in managing two recordkeeping vendors, which resulted in excessively high fees. Included in this count, the plaintiffs argued that the Committee failed to prudently manage a Request for Proposal (RFP) process. 
  • The Committee was imprudent by not removing TIAA Real Estate and CREF Stock as investment options. For example, the plaintiffs argued that confusing and inappropriate benchmarks were used, which lead the Committee to keep underperforming funds.[1]

Findings. The court found that on both counts, the plaintiffs failed to show that the Committee acted imprudently, and the plaintiffs failed to show that there were resulting damages. 

Next Steps in the NYU Case. This case went to trial in the district court. The plaintiffs can appeal to the Appellate Court, which Jerry Schlichter (managing partner at the firm representing the plaintiffs) already raised the possibility of in a statement just after the district court issued the Order.[2] 

Impact on Plan Sponsors. For other 403(b) and 401(k) plan sponsors alike, there may be important lessons in the Opinion. For example, this case reminds us of the importance of having a process and being able to show the process through documentation. It was clear that NYU reviewed quarterly investment reports from their investment advisor, asked questions about the reports, and came to well-reasoned decisions. This information was presented at trial and assisted the court in their determination.   

The case also shows the importance of fiduciary training for Committee members. The court noted, “several members displayed a concerning lack of knowledge relevant to the Committee’s mandate.” While this court was forgiving about some committee members' lack of knowledge, other judges may not extend the same courtesy. Committee members should understand the process and materials reviewed at meetings. 

In addition to lessons learned, could it be possible that ERISA class action litigation is changing directions?  While the number of cases filed continues to increase, the cases that result in a successful outcome for the plan sponsors also seems to be increasing.

Multnomah Group will continue to monitor this case for an appeal as well as the other pending 403(b) cases.  To learn more about the lessons learned from this case and other class action litigation, contact your Multnomah Group consultant.      

Notes:

[1] Bloomberg Law, Sacerdote v. N.Y. Univ., S.D.N.Y., No. 1:16-cv-06284-KBF, Opinion and Order available at: https://www.bloomberglaw.com/public/desktop/document/Sacerdote_et_al_v_New_York_University_Docket_No_116cv06284_SDNY_A/24?1533075430.

[2] Reported by InvestmentNews, NYU beats back Jerry Schlichter and 403(b) lawsuit, available at: http://www.investmentnews.com/article/20180731/FREE/180739976/nyu-beats-back-jerry-schlichter-and-403-b-lawsuit


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Automatic Enrollment: Thoughts on Plan Designs

Posted by Brian Montanez, CPC, TGPC, AIF®, CPFA

July 31, 2018

Comparison_Blog_imageIn my third blog focused on automatic enrollment, I want to discuss the different types of automatic enrollment designs and provide you some thoughts on each type. To read my previous blogs in this series, click here for the participant perspective and click here for the employer perspective.

For this blog, let’s review the three types of automatic enrollment and some thoughts on each.

According to the IRS,[1] the first type is:

 “(1) Basic automatic enrollment (Automatic Contribution Arrangement or ACA):

  • Employees are automatically enrolled in the plan unless they elect otherwise
  • Plan document specifies the percentage of wages that will be automatically deducted
  • Employees can elect not to contribute or to contribute a different percentage of pay”

With this feature, participants are automatically enrolled at a pre-determined rate until they change or eliminate their contribution. Participants can change their deferral election before the first payroll or at any time after. However, under this ACA design, once the participant’s money is withheld, the money must stay in the plan until the participant has a distributable event. This can cause some challenges and increased administrative effort as the plan will have an increased number of accounts that will require the distribution of all notices and disclosures regardless of account balance size. And of course, notice must be supplied at least 30 days before the employee is eligible and annually thereafter. With immediate eligibility, notice must be provided prior to the first payroll for which the employee becomes eligible. Your recordkeeper should be able to draft and distribute this notice on your behalf, but it is worth checking as not all recordkeepers will do so.

It is worth pointing out that an ACA design may be implemented at any time during a plan year.

The second type is:

“(2) Eligible automatic contribution arrangement (EACA)[2]:

  • Uniformly applies the plan’s default deferral percentage to all employees after giving them the required notice
  • May allow employees to withdraw automatic contributions, including earnings, within 90 days of the date of the first automatic contribution”

With this feature, participants are automatically enrolled until they change their contribution and, if they elect not to participate they can get a full, penalty-free return of their contributions within 90 days of their first contribution. This return of contribution feature can ameliorate participants who were defaulted and provide comfort to the administrators knowing that participants can get their money back. Of course, you will need to provide the above mentioned initial and annual notices at least 30 days, but not more than 90 days, prior to enrollment and prior to the beginning of each plan year.[3]

Please note, an EACA plan design may only be implemented on the first day of a plan year.

 The third type is:

“(3) Qualified automatic contribution arrangement (QACA)[4]:

  • Uniformly applies the plan’s default deferral percentage to all employees after giving them the required notice
  • Meets additional “safe harbor” provisions that exempt the plan from annual actual deferral percentage and actual contribution percentage nondiscrimination testing requirements
  • Default deferral percentage starts at 3% and gradually increases to 6% with each year that an employee participates. The default percentage cannot exceed 10%.
  • Required employer contributions. Pick either:
    • matching contribution: 100% match for elective deferrals that do not exceed 1% of compensation, plus 50% match for elective deferrals between 1% and 6% of compensation; or
    • nonelective contribution: 3% of compensation for all participants, including those who choose not to make any elective deferrals.
  • Employees must be 100% vested in the employer’s matching or nonelective contributions after no more than 2 years of service
  • Plan may not distribute any of the required employer contributions due to an employee’s financial hardship”

With this design, the employer must determine in advance if the QACA will be an EACA or just an ACA. That decision will determine if participants can get a return of their contributions within 90 days of their first contribution. And similar to the EACA, the QACA may only be implemented on the first day of the plan year and requires both the initial and annual notices.  

It is worth noting that the automatic deferral rate must begin at a minimum of 3% and increase for those automatically enrolled by at least one percentage point each year, to at least 6%, but not to exceed 10%. Further, the QACA design exempts plans from annual actual deferral percentage (ADP) and actual contribution percentage (ACP) nondiscrimination testing requirements.

Automatic enrollment may not be for everyone, including governmental entities in states with anti-garnishment laws that prevent non-ERISA plans from using automatic enrollment. But where you can, I prefer the EACA design because of the 90-day refund window for participants who truly do not want to or can’t afford to participate. If after 90 days they have not taken any steps, well….

For further information on the content of the notices, see the IRS website describing the notice requirements. 

 

Notes:

[1] https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-automatic-enrollment

[2]  https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-automatic-enrollment

[3] https://www.irs.gov/retirement-plans/faqs-auto-enrollment-when-must-an-employer-provide-notice-of-the-retirement-plans-automatic-contribution-arrangement-to-an-employee

[4] https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-automatic-enrollment


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Automatic Enrollment: Employer Perspective

Posted by Brian Montanez, CPC, TGPC, AIF®, CPFA

July 26, 2018

shutterstock_261014018_blogOn July 17, I wrote the blog, Automatic Enrollment: Participant Perspective. In this post, I want to walk you through the employer’s perspective. Let’s first define what automatic enrollment means.

According to the Internal Revenue Service, (IRS), “Automatic enrollment allows an employer to automatically deduct elective deferrals from an employee’s wages unless the employee makes an election not to contribute or to contribute a different amount.”[1]  I’ve italicized and bolded employee’s wages because I’ve heard numerous people mistake enrolling a participant for their annual employer contribution, rather for salary deferrals. Automatic enrollment specifically refers to a participant’s salary deferrals.

Automatic enrollment and automatic deferral escalation continue to get a lot of attention in the press. The main reason many of my clients consider automatic enrollment is to help more employees accumulate greater retirement savings by removing the inertia that employees succumb to, rather than taking the proactive step of enrolling.

On the other hand, it can become expensive and problematic for some plan sponsors. Why? More people enrolled may mean an increase in employer funding costs. Then there are the increased administrative efforts, and the reporting required to have the auto feature(s) work properly. With automatic enrollment implementation, coordination between all service providers is critical.

Pros of auto-enrollment:

  • More financially secure employees. Automatic enrollment in an employer-sponsored retirement plan enables a cost-effective and functional saving plan that may not otherwise be available for employees. This helps participants save for retirement which creates a healthier and happier relationship with the employees as well as enable older participants to retire timely, which could offer cost savings benefits.

  • Nondiscrimination testing help. Automatically enrolling non-highly compensated employees will help with the nondiscrimination testing, potentially allowing highly compensated employees to save more of their own money or receive and keep more of the employer contribution while reducing any refunds or corrective contributions.

Cons of auto-enrollment:

  • Increased cost to the employer. Given the improvements in participation resulting from automatic enrollment, employers who offer a matching contribution may increase the cost to the employer due to the increased employee participation.

  • Increased administrative efforts. Having more participants enrolled increases the number of participants that must receive their annual notices and disclosures such as eligibility notice and the Qualified Default Investment Alternatives notice. This may not be an issue if your recordkeeper handles fulfillment, but if your staff is responsible for fulfillment, this can increase their burden. Further, if you have a force-out provision (also known as a small sum distribution provision) in your plan, you’ll face the burden of trying to track down participants with small sums that were automatically enrolled to properly distribute the proceeds of their account when they leave employment.

  • Payroll pains. Before you implement automatic enrollment, check to see that your payroll vendor can send the necessary data to your recordkeeper to administer the enrollment of participants and ensure your recordkeeper can fulfill the notice requirements. If either party cannot automate the data transfer and notice delivery, this burdon will fall back on you, the employer.

  • Administrative errors. If a participant is not enrolled properly, or timely, the employer may have to make a qualified non-elective contribution for the employee that compensates for the missed deferral opportunity. Employers need to ensure that payroll is properly tracking new hires, their eligibility, and then enrolling in a timely manner. A secondary concern is rehires. You need to make sure you have a way to track newly rehired employees’ eligibility. This rehire issues seems to be more of a challenge than originally considered and can create recurring administrative failures.

  • Low savings rates. Participants may stay enrolled at the default enrollment rate and not save enough for their retirement. In my experience and corroborated by Vanguard’s Automatic Enrollment[2]: The Power of The Default, participants will stay enrolled at the default enrollment rate. According to this study, only 6% of participants lowered their default savings rate within the first year, while 34% of automatically enrolled participants increased their savings rate. Further, according to Wells Fargo Institutional Trust & Retirement, opt-out rates for a 3% deferral rate (11.3%) are almost identical to those rates at 6%(11.4%).[3] So, be thoughtful about what default deferral rate you choose and consider automatic increases to assist your participants in saving enough for and retiring at a reasonable age.

  • Plan pricing. Increasing the number of small account balances will lower the average account balance which could hurt plan-level pricing. Given that the retirement industry prices services on an average account balance, this is something worthy of consideration.

Automatic programs create inertia for savings without the intimidation or decisions required to get started. In this respect, auto-enrollment can be a tremendous success. Starting late or investing too little can lead to significant shortfalls and challenged employees. According to PricewaterhouseCoopers LLP, nearly one in three employees report that issues with personal finances have been a distraction at work.[4] Net of the potential challenges with administering automatic enrollment, the positive attributes of automatic enrollment do seem to make automatic enrollment an appealing plan design.

For a discussion of the types of automatic enrollment, click here to be directed to the IRS website.

Notes:

[1]   https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-automatic-enrollment

[2] Automatic Enrollment: The Power of The Default, February 2018

[3] Pensions & Investments: Default deferral rates for DC plans get a nudge up

[4] “Employee Financial Wellness Survey: 2017 Results,” PwC, April 2017


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Focus on Style Factors: Smaller Companies

Posted by Rex Kim

July 24, 2018

In this, our second in the series on factor investing (you can find the first blog here), we dissect the return premium inherent in small cap stocks. 

The hypothesis that small cap stocks provide excess return premium is hotly debated.  Below is a chart showing the growth of a dollar invested in a strategy that is long small cap stocks and short large cap stocks.  This data is courtesy of Professor Kenneth French’s website.  Prof. French is the co-founder of the Fama-French Three Factor Model.

rex blog_7242018

 

 

 

 

 

 

 

 

 

 

As the above graph shows, being long small cap stocks while being short large cap stocks has provided a tremendous amount of capital growth over the time period (1926 to present).  Clearly, the picture shows that the equity of smaller companies outperforms large, right?  Some critics point to the period of the mid-80’s to the present during which small caps have not outperformed large caps, exclaiming that the premium is dead.  Others further argue the small cap effect is so sporadic, leaving the efficacy of this hypothesis in limbo.  However, recent work conducted by AQR (an investment management firm based in Connecticut) shows that the small cap premium is quite strong and robust when controlled for certain factors… well, mainly quality[1].  AQR believes companies that exhibit “profitability, profit growth, low risk in terms of return-based measures and stability of earnings, and high payout and/or conservative investment policy” tend to outperform “junky” companies that do not exhibit the aforementioned characteristics.  In other words, investing in small cap stocks may not provide a return premium; however, investing in small cap stocks that exhibit strong quality profile does indeed provide a return premium.

Here at Multnomah Group, we tend to favor utilizing small cap funds within the active or extended array.  We believe that small cap investing does provide an excess return; however, we believe that small cap investing is best in the hands of active managers.  Our selection of active managers broadly and specifically within the small cap space tend to lean heavily towards funds which exhibit a strong focus on buying good businesses.  Regardless of value or growth tilt, our recommended managers rely on fundamental analysis to discern good businesses from bad, often focusing on the very qualities of profitability, profit growth, and strong management.

Notes:

[1] “Size Matters, if You Control Your Junk”, Asness, Frazzini, Israel, Moskowitz, Pedersen, 2015


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Russell Index Reconstitutions: How Does It Impact Retirement Plan Investors?

Posted by David Williams, CFA

July 19, 2018

shutterstock_245477752_blogFTSE Russell provides a series of U.S. equity indexes that are commonly used benchmarks for both active and passive investors. These indexes are intended to provide a proxy for the investible U.S. public equity market. Russell provides U.S. as well as non-U.S. indexes, but they're primarily known for the U.S. index suite. As of Dec. 31, 2017, Russell reported that approximately $9 trillion of assets or 67% of actively managed U.S. equity institutional assets are benchmarked to one of their U.S. indexes. Russell indexes are commonly used by our clients for benchmarking their retirement plan’s active U.S. equity managers (e.g., large cap value, large cap growth, small cap value, etc.).

To provide an overall view of the U.S. equity market performance an investor can use the Russell 3000 Index.  This index covers the investible U.S. public equity. From there, Russell will divide the U.S, equity market by capitalization (e.g., large, mid, small) and style (e.g., value and growth). The first factor, market capitalization, is fairly straightforward. Stocks are segmented by their market capitalization (total value of a company’s stock traded in the market) and style. Russell uses a relative valuation approach (book-to-price ratios, forecasted earnings growth rates, and historical sales-per-share ratios) to segment stocks into the appropriate growth or value style index.

Russell’s construction methodology relies on relative measures (size and style). Given that these measures change daily with price movements, a key feature of Russell’s process is its annual reconstitution. Each year, during May and June, Russell conducts the index reconstitution exercise.  This is a notable event for investors, whether they are an active or a passive investor. Moving a stock into or out of an index has implications for a stock’s demand due to investor mandates. For example, a passive manager will need to purchase stocks that are moving into their designated index and sell stocks that are moving out of the index. This movement creates shifts in supply and demand for different investor groups that may impact a stock’s price.  In order to minimize the impact on investors, Russell follows a clearly defined process for announcing index constituent changes with preliminary and updates lists during the month of June. This year, the index reconstitution day was on June 22.  Active managers will also note the changes in index composition as this will impact their ‘active positioning’ (amount of over- or underweight relative to index).  At a high level, these active positions will ultimately determine the amount of value the manager is able to add relative to the index, assuming their positions are correct.

So how does this activity impact our retirement plan clients and their participants?  The reconstitution activity is an important annual event that effectively rebalances indexes to reflect current valuations. This provides active managers with appropriate style benchmarks for U.S. equity mandates reflecting the current market and allows passive investors to hold stock portfolios that are rebalanced to reflect their selected equity style.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Automatic Enrollment Participant Perspective

Posted by Brian Montanez, CPC, TGPC, AIF®, CPFA

July 17, 2018

shutterstock_261014018_blogAfter concluding my second quarter client meetings, I was surprised by the number of clients who wanted to discuss how their employees would feel about being enrolled in their plan automatically. Many of these conversations emanate from the concern that participants will react negatively to being automatically enrolled; that perhaps this plan design is to paternal. But before I express my thoughts on the “pros” and “cons” of automatic enrollment for participants, let’s first define what automatic enrollment means.

According to the Internal Revenue Service (IRS), “Automatic enrollment allows an employer to automatically deduct elective deferrals from an employee’s wages unless the employee makes an election not to contribute or to contribute a different amount.”[1]  I’ve italicized and bolded employee’s wages because I’ve heard numerous people mistake enrolling a participant for their annual employer contribution, rather for salary deferrals. Automatic enrollment specifically refers to a participant’s salary deferrals.

Pros of auto-enrollment:

  • Employees are more likely to participate. Unquestionably, inertia is the greatest obstacle to getting people to start saving for retirement. According to Vanguard, nationwide, plans that have participants voluntarily enroll have a participation rate of 57%, but plans with automatic enrollment have a 92% participation rate.[2]
  • Participants will stay enrolled. While this is both a pro and a con, I’ll list it here as a pro. In my experience and corroborated by Vanguard’s Automatic Enrollment: The Power of The Default,[3] participants will stay enrolled at the default enrollment rate. According to this study, only 6% of participants lowered their default savings rate within the first year, while 34% of automatically enrolled participants increased their savings rate. Further, according to Wells Fargo Institutional Trust & Retirement, opt-out rates for a 3% deferral rate (11.3%) are almost identical to those rates at 6% (11.4%).[4]
  • Participants will save. If participants are enrolled at a rate that combined with the employer contributions is near an appropriate savings rate, this may be a virtuous plan design.  According to American Century Investments, 5th Annual National Survey of Defined Contribution Plan Participants, 75% of employees surveyed would say yes to being automatically enrolled at 6%.[5]
  • Participant don’t mind auto increases. A participant’s default deferral rate can be auto-escalated each year. If you do start at a low rate, consider auto-escalating them by 1% each year. Participants tend to not miss a 1% increase in savings rate and before the know it, they are saving at a reasonable rate. According to American Century, 80% would say yes to annual automatic increases in their savings rate. [6]
  • The bite of savings is minimized because employees will not be taxed on their traditional contributions.
  • Participants enrolled in a Qualified Default Investment (QDIA) such as a target-date fund, are invested in what is considered to be an appropriately diversified investment vehicle, rather than left to their own investment decision.
  • Participants with adequate savings rates are less distracted at work and can retire at a reasonable age. According to the Center for Financial Services Innovation, “Nearly one in three employees report that issues with personal finances have been a distraction at work.”[7] Given the auto-pilot nature of automatic enrollment and the use of a QDIA, your participants could leave more worries at the door.
  • And aside from the above, auto-enrollment may help the annual nondiscrimination testing results.

Cons of auto-enrollment:

  • Participants can get locked in, due to inertia, at a lower savings rate than is prudent. As mentioned above, we see participants keep their deferral rate that was set at enrollment. Therefore, if you enroll them at a low deferral rate, they are likely to stay enrolled at that lower rate and may not save enough for retirement.
  • Employees can be disengaged and wrongly believe their needed retirement savings will be taken care of with auto-enrollment. Sans auto-increases, employers may want to consider providing retirement planning or education programs to their employees to address this misconception.
  • Once considered a “con” because participants felt the employer was forcing them to do something, auto-enrollment is now over a decade old and participants are more comfortable with the idea because they have heard about it from other sources. And, as noted above, 75% of employees surveyed, would say yes to being automatically enrolled at 6%.[8]
  • Participants who do choose to cancel their automatic enrollment will, depending on the type of automatic enrollment and how long they have been enrolled and the availability of loans and hardship distributions, not have ready access to their money until they have a distributive event.

Given that we know participants don’t truly start saving for retirement until later in life and that automatic enrollment is gaining wider and wider adoption and acceptance, perhaps implementing automatic enrollment would truly be appreciated by your employees and be in their best interest.

For a discussion of the types of automatic enrollment, click here to be directed to the IRS website.

Notes:

[1] https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-automatic-enrollment

[2] How America Saves 2018, Vanguard 2017 Defined Contribution Plan Data

[3] Automatic Enrollment: The Power of The Default, February 2018

[4] Pensions & Investments: Default deferral rates for DC plans get a nudge up

[5] American Century Investments, 5th Annual National Survey of Defined Contribution Plan Participants

[6] American Century Investments, 5th Annual National Survey of Defined Contribution Plan Participants

[7] Center for Financial Services Innovation Employee Financial Health: How Companies Can Invest in Workplace Wellness

[8] American Century Investments, 5th Annual National Survey of Defined Contribution Plan Participants


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

2nd Quarter 2018 Market Update

Posted by Tina Beltrone, CFA

July 12, 2018

Multnomah Group_2Q2018 Quarterly Market Commentary_blogA strong U.S. economy gave the Federal Reserve confidence to raise interest rates again in June to a new target range for the fed funds rate of 1.75% to 2.00%. This is the seventh rate hike since December 2015. The U.S. economic expansion is in its ninth year, the second longest on record. Real GDP grew at an annual rate of 2.0% in the first quarter of 2018 (the most recent data available). GDP was weighed down by weak performance in consumer spending for the first two months of the year. Consumer spending, which makes up over two-thirds of the economy, has reported mixed results thus far in 2018. Inflation remains low. Core CPI, which strips out food and energy prices, rose marginally in May (most recent), up 2.2% versus a year ago. After falling to 3.8% in May, the U.S. unemployment rate rose to 4% in June as potential workers came off the sidelines. The U.S. is now experiencing a labor shortage and economists expect wage pressures to continue to build. U.S. manufacturing activity jumped in May and June in part because manufacturers were scrambling to move goods ahead of threatened tariffs.

The yield curve continued to flatten during the quarter. The spread between the 2-year and 10-year Treasury narrowed further to 33 basis points at the end of the quarter. This spread is the tightest since the period of 2005 to 2007 prior to the Great Financial Crisis. Most points along the U.S. Treasury yield curve increased during the quarter, with the 2-year rising by 25 basis points to 2.52%, the 10-year increasing by 11 basis points to 2.85%, and the 30-year increasing by 1 basis point to 2.98%.

Fixed income was broadly lower throughout the quarter. The top fixed income performers were high yield bonds and TIPs, increasing 1.1% and 0.8% respectively. Developed international bonds and emerging markets bonds were the worst fixed income performers declining 5.0% and 3.5%, respectively.

U.S. equity markets bounced back in the quarter with the S&P 500 gaining 3.4%. Of the 11 sectors, seven ended higher. Energy, consumer discretionary, and technology sectors showed the largest gains during the period. Energy had its best quarter since 2011. Financials and industrials recorded the largest declines. The forward P/E for the S&P 500 dropped to 16.1x, now matching the 25-year average. Small cap stocks continued to outperform their large cap counterparts. Small value stocks beat small growth while large growth beat large value. The CBOE Volatility Index moderated in the second quarter after a huge spike upward earlier in the year, but the index remained at an elevated level with large gyrations.

International equities struggled with emerging markets being hit the hardest. The dollar rallied against most currencies during the quarter, particularly impacting international equity returns. The recent weakness in the euro this quarter (down 5.1% versus the U.S. dollar) has not benefitted European equities. Emerging markets reported the worst quarterly equity returns versus other asset classes declining nearly 8% in U.S. dollar terms versus a decline of 3.4% in local currencies. Additionally, Developed Europe (ex-UK) and Developed Asia had modestly negative equity returns in U.S. dollars. The UK market improved 3.0% in U.S. dollars versus being up 9.4% in local currencies given the weak British pound.

Oil prices were the bright spot of commodities in the second quarter despite the Bloomberg Commodity Index being basically flat for the period. U.S. crude oil prices jumped 14% to $74 per barrel. Gold prices declined 5.2% for the 3-month period finishing the quarter at $1,255 per troy ounce. REITs rebounded strongly (by 8.5%) during the period recovering all of first quarter’s losses.

To view Multnomah Group's full Capital Markets Review, please click here


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Have You Looked At Your Plan Document Recently?

Posted by Bonnie Treichel, J.D.

July 10, 2018

shutterstock_77773051_blogI recently hosted an audiocast with Summer Conley, a partner at Drinker Biddle, in which we discussed tips for maintaining a compliant retirement plan document (to listen to the recording, click here).  One of the biggest themes from the audiocast was simply to look at your plan document.  Sounds simple, right?  Just look at your plan document.

The next tip, of course, is to understand all the components that comprise your plan document.  For example, if you are working with a provider’s document, then make sure you are reviewing both the basic plan document along with the adoption agreement and any additional attachments and amendments that have been added over time.  As Summer discussed during the audiocast, she often has plan sponsors send her their “plan document,” but it only contains the adoption agreement.  Don’t forget that the adoption agreement only includes the plan’s elections, but all the terms and definitions are found in the basic plan document (also known as the specimen document or the volume submitter document). 

In addition, don’t forget about amendments!  If the plan is amended over time, be sure to keep the amendments in the same place with the plan document so that the plan may continue to administer to the current terms of the plan. 

Once you have all the pieces in front of you, what’s next?  Consider a self-audit to ensure the plan operates in line with its provisions.  The IRS makes recommendations for the types of questions you might consider asking (check out a section of their website titled: Policies, Procedures, and Internal Controls Self-Audit).  In addition, you may consider the following areas that were discussed on the audiocast, which are prevalent areas plan sponsors run afoul of the plan’s provisions:

  • Definition of compensation. The compensation definition is used to determine the amount of contributions allocated to participant accounts.[1]  The most common definition of compensation found in plan documents is W-2 compensation, but sometimes compensation that is included on the W-2 is not included in the retirement plan calculation (as it should be to align with the plan document).  This may be a common area for plan sponsors to check right now given the recent tax law changes, which impacted areas such as certain moving expenses and bicycle commuting expenses.
  • Eligibility. Determining eligibility – or rather, who is included and who is excluded from the plan – requires plan sponsors to look at multiple factors and sections of the document including both the eligibility section and the exclusions section.  Issues typically arise where the plan has different eligibility provisions for different plan features such as eligibility for salary deferral versus employer contributions.  Companies that are engaged in merger and acquisition activity may find this area to be of heightened concern.
  • Loans and Hardships. While not necessarily complicated, loans and hardships require a lot of coordination with the third-party provider(s) (ie:, the recordkeeper and/or TPA) to understand roles and responsibilities and to ensure proper administration in line with the plan document.  For example, when working with 403(b) plans, the plan document may refer to eligibility at the plan level, which would include legacy vendors; use caution with respect to what the plan says and how many vendors hold participant assets.

While there are several other areas plans may run into plan document compliance issues, I will save that for future blog posts.  Until then, be sure to reach into the depths of your hard drive (or dusty binder or file folders), and find your plan document and give it a review.  If you have any questions, please do not hesitate to reach out to a Multnomah Group consultant.  

Notes:

[1] A compensation definition can be used for other issues in the plan document as well, but this is the most common area.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

How America Saves 2018

Posted by Tina Beltrone, CFA

July 3, 2018

Socially_Responsible_InvestmentVanguard’s 17th edition of How America Saves 2018 was recently released.  Everything you ever wanted to know about 2017 defined contribution plan data but were afraid to ask can be found within this 100+ page fact-filled publication. The study is especially relevant since Vanguard analyzes the retirement savings behavior of 4.6 million participants in about 2,000 plans for which Vanguard provides recordkeeping services. The detailed report explores participant behavior regarding accumulating and managing retirement savings, professionally managed accounts, and the growth in usage of target date funds (TDFs) just to name a few topics. While the data may be skewed by coming from a single recordkeeper’s data set, it highlights a few key industry trends.

Target Date Strategies: The use of target date strategies continues to grow.  Nine out of 10 plan sponsors offered TDFs at year-end 2017, up more than 50% from 10 years ago.  97% of all Vanguard participants are offered TDFs, while 75% of all participants use these funds.  51% of participants have their entire account invested in a single target date fund.  The qualified default investment alternative (QDIA) regulation continues to influence adoption of TDFs.  However, voluntary choice remains important since half of single target date investors choose TDFs on their own.  

Automatic Saving Features: There is an increased use of automatic savings features.  At year-end 2017, 46% of Vanguard plans had adopted automatic enrollment.  Two-thirds of auto enrollment plans have implemented auto deferral rate increases.  Adoption of automatic enrollment has grown by 300% since 2003.

Savings Rates: Participant savings rates have remained fairly stable for the past 15 years.  The average Vanguard participant is saving 10.3%[1] which includes both employee and employer contributions.  The median estimate is lower at 9.6%.  The average participant deferred 6.8% of his/her paycheck into savings.  Most Vanguard plans make employer contributions – there is a wide variation in employer contributions.  Roth 401(k) adoption increased in 2017 as the feature was adopted by 68% of Vanguard plans and 12% of participants within these plans elected the option.  Only 13% of participants save the maximum allowed. 

Plan Participation Rate: In 2017, Vanguard’s plan participation rate was estimated at 81%, rising modestly in the last decade.  Participation rates vary considerably by employee income and gender, plan size, and industry group.  The rising adoption of automatic enrollment is impacting the number of people saving. 

Professionally Managed Allocations: Professionally managed allocations, defined as diversified portfolio solutions that offer regular rebalancing, continued to increase in 2017 as 58% of Vanguard participants had their entire account balance invested in either a single target date fund (51%), a single target risk or traditional balanced fund (4%), or a managed account advisory service (3%). 

Index Core: In 2017, 61% of Vanguard plans offered a set of options providing an index core.  Over the past decade, the number of plans offering an index core has grown by 75%.

Participant Use of Equities: Equities remain the dominant asset class for many plan participants.  73% of plan assets were invested in equities in 2017, unchanged from the prior year.  Participant contributions to equities were unchanged for the year at 75%. 

Average Account Balance: At year-end 2017, the average account balance for participants was $103,866 while the median balance was $23,331.  The large divergence is due to a small number of very large accounts that dramatically raised the average above the median.  The average and median account balances in 2017 rose by 8% and 7%, respectively, versus the prior year. 

Loan Activity: Loan activity was generally flat for the year with 15% of participants having a loan outstanding equating to about 1% of aggregate plan assets.  The percent of participants that had an outstanding loan is down from 18% in 2013.

Participant Trading: During 2017, only 8% of participants traded within their accounts, while 92% did not initiate any exchanges.  Vanguard has seen a decline in participant trading over the last decade, partly due to the growth in target date fund adoption by plan participants. 

Click here if you would like to learn more about this study.

Notes:

[1] Vanguard’s estimate for 2017


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice. 

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Location, Location, Location!

Posted by Multnomah Group

July 2, 2018

We’re excited to share with you that we have moved to a new office location in the U.S. Bancorp Tower in downtown Portland! As our company continues to grow, this new space will accommodate our expanding team.

Our new address is:

111 SW 5th Avenue
Suite 4000
Portland, Oregon 97204

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Click here for a map of our new location.

Our office phone numbers, fax, and individual team phone numbers are remaining the same.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

DOL Fiduciary Rule Vacated: Now What?

Posted by Bonnie Treichel, J.D.

June 27, 2018

US_Dept_of_Labor_-_Image_-_05_27_16Some of you may be fatigued by the term “fiduciary rule” and rightfully so because the saga of the Department of Labor (DOL) fiduciary rule has been going on for several years. The DOL proposed its first iteration of the rule in 2010 and re-proposed the rule in 2015.  After much controversy, media attention, and for some firms, millions of dollars spent to comply, the 5th Circuit vacated the fiduciary rule in its entirety in the case of Chamber of Commerce v. U.S. Department of Labor.[1]

Without the fiduciary rule, what does that mean for plan sponsors?  And, what does that mean for plan participants?  What about participants that roll over their assets from the retirement plan into an individual retirement account? 

To answers these questions and others, read the latest Guide from Multnomah Group.

Read the Guide

 

 

As a plan sponsor, it is your responsibility to prudently select and monitor your service providers, which at a minimum means that you must understand the duty owed to your plan by such service providers.  This Guide will assist you in understanding the current – and ever shifting – regulatory landscape and the impact of the DOL’s fiduciary rule being vacated as well as the introduction of the SEC’s Regulation Best Interest.  The Guide will conclude with a set of action items for plan sponsors as they continue to navigate through a time of uncertainty in the financial services industry – trying to discern what standards of care apply to the financial services professionals serving the plan and its participants.

After you have had a chance to review the Guide, don’t hesitate to reach out to your Multnomah Group consultant with any questions.

Notes:

[1] Chamber of Commerce et al. v. United States Department of Labor, et al., No. 17-10238, available at: https://financialmarketslaw.files.wordpress.com/2018/03/document-3.pdf.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Tips for Evaluating Share Classes Within Your Plan

Posted by Scott Cameron, CFA

June 26, 2018

shutterstock_613216670_blogMy colleague, Erik Daley, recently wrote a blog on the trends we are seeing in recordkeeping fees. Every year during the second quarter, we benchmark our clients’ retirement plans to evaluate the reasonableness of the fees they are paying for recordkeeping services. During the same quarter, we help clients evaluate their choice for share classes. Does this seem odd? Why look at investment products when we are discussing recordkeeping fees? The reason we paired these two projects is that historically many plans used revenue sharing to subsidize recordkeeping fees. We could not evaluate the feasibility of re-negotiating recordkeeping fees without understanding what investment products were in the menu, the revenue sharing they paid to the recordkeeper, and the options to switch share classes to lower recordkeeping subsidies.

Over the past few years, we have seen many of our clients move to de-couple the investment products in their plan from the recordkeeping services offered by their vendor. They are eliminating the subsidies that have occurred historically and negotiating explicit recordkeeping fees from their vendor. Initially, this was done in the form of a revenue requirement and more frequently is now being done as an explicit per participant fee from the recordkeeper. With this change, they are crediting revenue sharing back to participants in the plan or using fee equalization techniques to level the revenue sharing across all investments within the menu.

The need to review share classes to understand recordkeeping fees is diminishing, but there are still good reasons to evaluate the share classes within your plan to see if there are ways to lower participants’ costs. With that in mind, here are a few tips for you.

Evaluate Share Classes At Least Annually

Plan fiduciaries should have a formal process to evaluate the share classes they have selected for the investment products in their menu at least annually. Share class selection is not a “set it and forget it” decision. It can change over time based on the fee model used by the plan’s recordkeeper, the growth of plan assets, or the launch of new products from investment managers. Decisions made a few years ago may be out of date based on any number of changes, prompted either by decisions of the fiduciaries or external factors.

With share class changes occurring all the time, it can be hard not to get into a habit of chasing your tail, creating frequent fund changes and dominating the time and attention of the fiduciaries. In our experience, creating a formalized annual process strikes the right balance between proactively managing share class decisions while not getting bogged down in a constant rotation of investment products.

Evaluate Share Classes Any Time Investment Changes Are Made

While we recommend a formalized, annual share class review process, we also know that fund changes occur for other reasons throughout the year. The fiduciaries may choose to add, replace, or remove a fund to the investment menu for any number of reasons. With the participant fee disclosure rules, any time a fund change occurs plan sponsors have to communicate the change to participants and provide an updated fee disclosure document. Because of the increased administrative burdens for making fund changes, we find that clients like to group fund changes into fewer, less frequent batches.

As a result, if the plan fiduciaries are electing to make a change in the investment menu, they should also look to see whether any share class changes can be bundled with the fund change. Batching of multiple fund changes into a single process simplifies the participant communications and can save the plan money if the recordkeeping vendor charges for fund changes or the delivery of participant disclosures.

Don’t Look Just at Share Classes

While you should consider whether the current funds’ offer any different, lower share class options, you should not limit your review to just alternate share classes. Specifically, you should also consider three other alternatives that may be available.

Alternative Index Provider – Most clients have passively-managed index funds in their investment menu. These funds are designed to track a benchmark index at a low cost. Their value is not based on the expertise or skill of an active manager, and they are therefore more commoditized than actively managed mutual funds. As a result, index funds have experienced significant downward pricing pressure over the past decade. You may be able to find a similar index fund option from another provider for less than what your participants are paying today.

Institutional Version of Strategy – Some investment managers have responded to the interest in zero revenue sharing, institutionally-priced investment options by launching new institutional funds of the same strategy. These products use the same portfolio management and research team and follow the same investment process but are not structured as an alternate share class to the existing fund you may use. As a result, these products may not show up in your “share class” evaluation, but they may be a viable option for your plan, offering a less expensive version of the same strategy for your participants.

Collective Investment Trust (CIT) – The investment managers utilized within your investment menu may also offer their strategies in a CIT investment vehicle. These are not registered mutual fund products; instead, they are pooled investment accounts generally available only to institutional investors and are maintained by a bank or trust company. There is less public data available on CIT investments, so a cursory review of alternative share classes may not make you aware of CIT alternatives available. Additionally, not all plan types can invest in these vehicles. 403(b) plans are prohibited from investing in CITs so are not an option for consideration.

Include Your Recordkeeper in the Evaluation

If you are working with an experienced investment consultant, they should be leading this process for your committee. If you are doing it yourself, you should create an internal process. Either way, you should include your recordkeeping vendor in the evaluation process. Your recordkeeper can help you understand what options are available on their investment platform and which share class provides the “best deal” based on the fund’s expense ratio and the revenue sharing agreement that the recordkeeper has negotiated with the investment management firm. Some investment management firms pay standardized revenue sharing to all recordkeepers, but other firms have revenue sharing agreements that vary by recordkeeper for the same fund and share class. Most recordkeepers do not want to publicize their revenue sharing agreements with the investment managers, so the data is not widely available. Recordkeepers will work with clients and their consultants to evaluate specific options but generally do not publish a full list of all the investment products on their menu and the revenue sharing for each product.

Ultimately, if you elect to make any changes to the investment menu, your recordkeeper will need to be involved in the process. Including them early on in your evaluation will enable you to get better information and save you time in trying to implement the change.

If you would need help reviewing your plan’s investment share classes, please feel free to contact a Multnomah Group consultant.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Continued Focus on Clarifying EBSA Guidance for Using Economically Targeted Investments

Posted by Scott Cameron, CFA

June 21, 2018

shutterstock_551444962_blogLast month I wrote a blog about new guidance the Department of Labor (DOL) issued regarding economically targeted investments (ETIs), otherwise known as environmental, social, and governance (ESG) investments or socially responsible investments (SRI). Field Assistance Bulletin No. 2018-01 was perceived by many, including myself, to be more skeptical of the role of ETI investments in ERISA plans. This seems to run counter to prior guidance from the DOL under the Obama Administration in 2015 and 2016 that seemed to encourage the use of ETIs by plan sponsors.

For example, FAB 2018-01 states:

“Fiduciaries must not too readily treat ESG factors as economically relevant to the particular investment choices at issue when making a decision.”

As I discuss the new guidance with clients, it has created confusion for plan sponsors about the use of these investments within their investment menu. Should we consider these options for our plan if we don’t have them already? If we already include these types of products, do we need to re-think their inclusion in the menu?

While not exactly helpful, it is comforting to know we aren’t alone in our confusion. About a month after the DOL issued their guidance, the U.S. Government Accountability Office (GAO) issued a report (GAO-18-398) titled “Retirement Plan Investing: Clear Information on Consideration of Environmental, Social, and Governance Factors Would Be Helpful.” In their report, the GAO interviewed asset managers and reviewed retirement plans from other countries to evaluate the status of ESG factors in retirement plans. Based on their research, the GAO issued two recommendations:

  1. The Assistant Secretary of Labor for the Employee Benefits Security Administration (EBSA) should clarify whether an Employee Retirement Income Security Act of 1974 plan may incorporate material ESG factors into the investment management for a qualified default investment alternative (QDIA).

  2. The Assistant Secretary of Labor for EBSA should provide further information to assist fiduciaries in investment management involving ESG factors, including how to evaluate available options, such as questions to ask or items to consider.

So far, the DOL has not responded to either recommendation. Without further guidance from the DOL, we continue to believe:

  • It is appropriate to use prudently-managed, well-run ESG/SRI investment options within your plan’s menu
  • Do not use ESG/SRI criteria in selecting your plan’s QDIA
  • Document the inclusion of ESG/SRI criteria within your plan’s Investment Policy Statement
  • ESG/SRI options should be included because you reasonably believe that they have a positive economic impact on the expected return and/or expected risk of an investment. (For example, a belief that companies following certain best practices from a governance perspective are going to have better returns or greater future growth.)
  • ESG/SRI options should not be included just to appease participants or make a subset of your plan population feel good

If you would like more information on the topic of socially responsible investments, feel free to contact a Multnomah Group consultant.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Why Do Fees Continue to Compress?

Posted by Erik Daley, CFA

June 19, 2018

shutterstock_402879268_blogFirmwide we completed our annual review of retirement plan costs, benchmarking them against our peer ranges. Yet again, prices declined, and participants benefited from the compression. For clients, we now routinely see their fees at $100 per participant or less for more attractive engagements.

That means for recordkeeping, custody, call center, web trading, employee education, and frequently legal and technical support, large financial service organizations are getting $100 a year for each account holder they serve. By way of comparison, I pay my high school aged babysitter $12 an hour to watch my 10-year-old read a book when my wife and I have a date night.

While some of the compression can be attributed to vendor consolidation and scale, why would billion-dollar financial services organizations continue to invest in recordkeeping capabilities where profits have traditionally been so thin? The answer is: they believe there is an opportunity to generate additional revenue beyond the recordkeeping fees for servicing retirement plans. Generally, we believe there are five areas where recordkeeping vendors have tried to monetize their relationship with retirement plans:

  • Proprietary investment management
  • Managed accounts
  • IRA rollovers
  • Cross-selling retail financial products
  • Annuitization

All five of the above solutions carry the possibility for the recordkeeper to earn additional high-margin revenue not part of a standard recordkeeping engagement.

Proprietary Investment Management – Many recordkeeping firms also manufacture their own investment products. The products carry asset-based fees and generate highly-leveraged profitability. For many, recordkeeping provides an advantaged position in communicating the benefits of their investment products. While the market has moved away from proprietary investment management, it is still common among target date fund series and general account fixed annuity options.

Managed Accounts – Participants in defined contribution plans continue to be confused with more investment choices than they wish to manage. Many firms are selling managed account solutions, where participants delegate investment management to the recordkeeper. In exchange, the recordkeeper gets an asset-based fee. Managed accounts are highly profitable as the allocation, and investment rebalancing aspects are entirely automated.

IRA Rollovers – For many financial service companies, IRA rollovers are the lifeblood of their sales efforts.  Watch any golf match on TV and see endless ads offering to assist you in rolling over your employer retirement benefit. Recordkeeping firms have become very good at communicating the benefits of rolling over to participants before they arrive at a distributable event and are in the first position to be notified when a participant becomes eligible for a rollover. Once in an IRA account, frequently, the cost for investment products and investment management increase and become more attractive to the financial service company.

Cross-selling Retail Financial Products – For financial service sales people, few things are more valuable than a room full of employed consumers looking to them for help. Some organizations have successfully used employee education, financial wellness, and personal financial counseling as an avenue to discuss other products and financial needs outside the plan, from 529 accounts to life insurance. These solutions carry tremendous margins and the opportunity to capitalize on the value of the participant.

Annuitization – One of the challenges of the defined contribution solution so prevalent in the country today is the lack of certainty related to lifetime income. Insurance firms in the recordkeeping marketplace are continuing to develop insurance solutions for use in defined contribution plans. Whether pure annuitization or guaranteed lifetime income solutions, these insurance driven solutions also carry the possibility of much higher asset-based and general account revenues.

None of the five areas are definitively evil, and each may have a place in the right type of plan. Good investment products should always be used regardless of recordkeeper, and quality managed accounts may improve savings or returns for participants. Assisting participants with assets after termination in an IRA may help them avoid early taxation or penalties. Talking to financial educators about mortgages and college expenses may provide a complete picture of financial health. Annuitizing a portion of a benefit may improve financial security.

The challenge for sponsors is identifying these ancillary areas of revenue, understanding them, and ensuring that they are not done in such a way to victimize already overwhelmed participants.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Just When You Thought It Was Safe to Go Outside

Posted by Erik Daley, CFA

June 14, 2018

shutterstock_572127751_blogBack on May 31, I wrote a blog post relating to the 19 class action cases brought against higher education institutions.  That was a mere six days after a judge dismissed the case brought against Northwestern University, Divane v. Northwestern University.  While in no way instructive towards the other 18 cases scattered across the country, it appeared to provide some optimism for other similarly situated defendants. 

Not surprisingly, plaintiffs do not seem deterred.  In Cassell v. Vanderbilt, the plaintiffs recently amended their complaint, alleging that the fiduciaries provided TIAA access to confidential information, which in turn, TIAA used to market other products and services. The amended complaint was granted by the court.[1] 

The amended claim is unique in that it argues that sharing the participants’ data and allowing participants to be solicited was not in the best interest of participants. It also references that the marketing value of the information provided to TIAA was never quantified. The plaintiffs are simultaneously claiming that providing the information was not in their best interest, but even if it were, that the fiduciary should have achieved better cost structures in exchange for providing the data. The amended complaint appears to also seize upon negative press TIAA has recently received in the NY Times related to the sale of products outside of the retirement plans they serve.

Participant demographic data is necessary to meet compliance testing requirements. Wage is needed for compliance testing; termination date for notifying the Social Security Administration of benefits accrued; age for tracking minimum required distributions. 

However, the claim does highlight one of the difficult decisions that plan sponsors, participants, and providers may have to wrestle in the years to come. As the cost of providing retirement plan services continues to compress, providers are looking for alternative ways to generate income from their retirement plan business.  At the same time, plan sponsors are asking service providers to provide more comprehensive financial wellness education to their participants. Given the trends of fee compression, cross-selling, and sponsor desire for more services, the potential for conflicts continue.

Every fiduciary needs to be aware of how their providers are compensated for the work they do for their organization, both inside the plan and out. And when possible, those relationships should be quantified. 

With each case, the plaintiffs’ firms pursuing these cases learns more and develops new approaches. It is far too early to know whether the latest claim against Vanderbilt has merit, but the issue of data use is one to watch closely in 2018.

Notes:

[1] Cassell v. Vanderbilt, Order in Response to Plaintiffs’ Motion for Leave to File Second Amendment Compliant, available here: https://www.napa-net.org/wp-content/uploads/vanderbilt-approval.pdf.  The U.S. District Court granted the plaintiffs’ Motion in part and denied in part.  The court allowed the new claims, but did not allow the plaintiff to re-bring any of the claims which were previously dismissed by the court.  


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Participant FAQ Series: Mega Backdoor Roth Conversion

Posted by Stephanie Gowan

June 12, 2018

shutterstock_323781848_blogAs baby boomers continue to near retirement and are looking for more tax advantages, we find ourselves being asked this question more frequently.

Participant Question: I heard somewhere I can do a Mega Backdoor Roth Conversion. Is that true?

Answer: You might be thinking… “You heard what?”

Well, you’re not alone. Yes, there is something called a Mega Backdoor Roth Conversion, and no, it is not the home improvement equivalent of turning your back-patio door into French doors. It is a financial strategy utilized by those seeking additional tax benefits through tax-free accumulation.

A Mega Backdoor Roth Conversion occurs when an employee converts their after-tax contribution money sourced within their 401(k) into a Roth 401(k) or Roth IRA. The trick is an employee can put more money into this after-tax bucket in their 401(k) than they would be able to in a Roth IRA account. The 2018 contribution limit for a 401(k) (from all sources, both personal and employer contribution) is $55,000, this means an employee could effectively put as much $36,500 annually (in addition to their $18,500 person 401(k) contribution limit) into the after-tax contribution source in their 401(k) depending on how much the plan sponsor contributes as this amount would be reduced by employer contributions.

For an employee to participate in this activity, their retirement plan would need to have an employee contribution window for after-tax dollars that is separate from their traditional and Roth contribution sources. This feature is not available in most defined contribution plans.  This is the least-known type of contribution and thus most recordkeepers do not offer this option. After-tax contributions are subject to discrimination testing, which makes their inclusion cumbersome.

Second, while few plans allow for after-tax contributions into their plan, retirement plan service providers may also have limitations to their recordkeeping systems that prohibit Roth conversions.  Converted accounts have unique tax tracking requirements that make their inclusion difficult. For now, while theoretically possible, we rarely see in practice.  The customization that is required of the plan and providers is challenging to provide a solution that will be utilized by so few.

If your plan provides for after-tax contributions, Backdoor Roth Conversions may be possible. However, it is probably best to direct participants to competent financial planning resources for further advice on how to properly fund and eventually convert the account.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Custom Portfolios in Defined Contribution Plans

Posted by David Williams, CFA

June 7, 2018

shutterstock_266541431_blogOccasionally, we are asked about the use of custom portfolios, whether target date or target risk portfolios, for use in defined contribution plans.  This blog post discusses both the reasons for and considerations that committees need to explore before deciding to offer custom funds to their participants.

Creating custom funds for a defined contribution plan can be appealing for several reasons, including:

  • There are monitoring efficiencies generated by use of custom funds since the funds offered in the custom funds are also offered as stand-alone options. For example, a committee only needs to select and monitor one large-cap growth fund that can be used in both investment tiers.

  • Custom portfolio construction has the potential to reduce investment fund fees. As described above, a plan will use single fund per asset class for both custom portfolios and stand-alone options.  The use of a single fund per asset class allows for increased inflows to that fund and for the plan to reach investment fee breakpoints sooner.  This can lower investment fees for participants utilizing either the custom portfolios or the stand-alone options.  

  • In 2013, the Department of Labor (DOL) provided plan sponsors a series of ‘tips’ for the selection and monitoring of target date funds. The DOL promoted the idea that committees should understand how their participant demographics align to the assumptions used to develop the comparable ‘off-the-shelf’ target date fund options.  This idea is used to justify the creation of custom target date portfolios if a plan’s participants have a sufficiently unique set of circumstances such as an active defined benefit plan, unique retirement dates, salary levels, etc.

The items listed above offer compelling reasons for the use of custom portfolios.  Before deciding to implement custom portfolios, we work with our clients to review the potential drawbacks of these investment structures.

  • Committees should consider the amount of time and resources they dedicate annually to committee meetings. I refer to this as their ‘governance budget.’  Committees should anticipate an expansion of their governance budget due to additional activities required for custom funds (e.g., creation, implementation, and monitoring).  In some cases, but not all cases, new vendors (such as a custodian/trustee or communications consultant) will be utilized by the plan.

  • Creation of custom communications will be required to support participant education. This can include fund fact sheets, general plan education material updates, and plan website updates.

  • Custom portfolios are more operationally complex than offering ‘off-the-shelf’ mutual funds or commingled funds. Depending on the plan’s recordkeeping vendor, the committee may need the services of a custodian/trustee to strike a daily net asset value and asset safekeeping services.

  • Access to non-core fund lineup asset classes. Many plan sponsors limit the investment options that are available to participants to a distinct set of assets classes (e.g., intermediate fixed income, U.S. large-cap equity, etc.).  However, there is a strong argument to offer asset classes within a multi-asset class fund, like a target date or target risk portfolio, that a committee might not be willing to offer on a standalone basis for a variety of reasons (e.g., high volatility, economic sensitivity, concentrated portfolios, etc.).  By not offering these funds as both stand-alone and components for the custom portfolios, the Committee loses some of the fee and monitoring benefits discussed earlier.

In the end, committees considering custom portfolios need to weigh the benefits and drawbacks of the custom solution.  Committees should engage in a process to demonstrate that the expected benefits are sufficient to overcome the development and ongoing ‘costs’ of offering custom portfolios to their defined contribution plan participants.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Higher Education Class Action Litigation Reaches a Boiling Point

Posted by Erik Daley, CFA

May 31, 2018

shutterstock_572127751_blogThe past month has been a busy one for the 19 class action cases making their way through federal courts across the country.

First, the trial in Sacerdote v. NYU has concluded with a ruling expected from the judge on the case in July.

Second, in the trial of Daugherty v. University of Chicago, the University of Chicago has agreed to a preliminary settlement with its participants. The university agreed to pay $6.5 million to address allegations that it failed to monitor two investment products and paid excessive recordkeeping fees in the two plans administered by the university.  The $6.5 million settlement amounts to about 0.2% of assets controlled by the university based on the university’s 2016 5500 filings.

Last, on Friday, May 25, Judge Jorge L. Alonso dismissed the plaintiffs’ claims in Divane v. Northwestern University.  The decision was most notable because the judge denied the request of the plaintiffs to amend their lawsuit to include additional claims.  This differs from the dismissal in the University of Pennsylvania case where plaintiffs were permitted to amend their claims and refile.

So, for those of you keeping score at home, a similar claim brought against 19 universities has recently yielded:

  • 1 trial – decision pending
  • 1 settlement – $6.5 million
  • 1 dismissal (which is now on appeal)
  • 1 dismissal with prejudice (but which could be appealed by plaintiffs)

The text of the dismissal in the Northwestern case is promising. Ultimately, the judgement in the NYU case may be more interesting so stay tuned this summer as we await this decision and watch as additional lawsuits keep coming (see: Mulligan v. Long Island University and D’Amore v. University of Rochester filed within the last month). 


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Focus on Style Factors: Value Investing

Posted by Rex Kim

May 30, 2018

shutterstock_396852841_blogMultnomah Group’s investment philosophy rests heavily on the belief that “beating the market” is exceptionally difficult. Our proposed investment menus tend to emphasize passive investments with a keen eye on fees.  However, we are also strong believers in the body of academic research that has, through empirical data, shown that it is possible to generate returns in excess of the broad market return with the use of style factors. Some of you may have heard us use the phrase, “We like to have tailwinds supporting our active managers.” Style factors serve as the tailwind. 

This is the first in a series of blog posts in which we hope to provide the thinking behind these style factors.  We will not be attending to all factors, but rather focusing on the factors receiving the most press. We would like to start this journey with a look at value investing.

Investment managers’ method towards value investing vary in the specifics but are similar in that they are seeking to invest in companies whose intrinsic value is higher than the current market value. In other words, value investors focus on valuation metrics that help to gauge how much a company is worth. For example, the most common forms of deciphering the value of a company is with metrics such as price-to-earnings ratio and price-to-sales ratio. A more thorough analysis likely includes conducting a multi-year cashflow projection, either with the use of dividends, buybacks, or free cashflow, then discounting the value of that projected cashflow back to its worth today. Again, the idea is to purchase shares of a company that is trading today at a price that does not fully reflect the cash generating ability of that business. Below is a snapshot of the relative fundamentals of the Russell 3000 Value Index against the broad based Russell 3000 Index.

Fundamentals *

Dividend Yield (%)

Price/Earnings

Price/Book

Russell 3000 Value

2.46

16.55

2.00

Russell 3000

1.86

20.51

3.09

 *Data courtesy of FTSE Russell Fact Sheets as of 4/30/2018.

The above table clearly shows that value stocks provide higher dividend yields and lower valuations. This is not to suggest that value stocks WILL outperform in the near future as we, and others, are not capable of timing such a shift. The reality is that trends may persist for extended periods of time.  For example, value stocks have underperformed the market over the past five years.

Especially in light of recent relative underperformance of value investing, why should investors still care? Again, empirical data going back decades shows that value stocks tend to outperform the market; however, they also tend to go through cycles when they underperform as well. In the long run, value stocks outperform the market. Ok, it’s fine to say that this strategy has worked in the past, but what makes us believe that it will in the future? For us to believe in this factor going forward, we must see a sound economic intuition to explain the reason behind why it works. As Ilmanen, Israel, and Moskowitz of AQR write, the value factor may work due to “investor behavioral biases, such as excessive extrapolation of growth trends, as well as risk-based explanations like value assets having greater default risk.” [1] In other words, the value factor seems to work because investors overlook the attractiveness of these companies, finding more appeal in sexy new product launches by other companies or not being able to see that fundamentals have changed. Also, these same companies may be riskier, and the market rewards investors for taking this extra level of risk.

Notes:

[1]“Investing with Style: The Case for Style Investing,” AQR. https://www.aqr.com/~/media/files/papers/investing-with-style-the-case-for-style-investing.pdf


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

IRS Announces HSA Limits for 2019

Posted by Bonnie Treichel, J.D.

May 24, 2018

Are you offering a high deductible health plan (HDHP) to your employees? If so, is the HDHP accompanied by a health savings account (HSA)? If yes, you may want to keep reading, as the Internal Revenue Service recently announced the limits for 2019[1], which will be important for your employees. 

HSA-Contributions (2)

Keep in mind that these “limits” are the maximum amounts that your employees (or you as the employer together with the employee) may contribute to the HSA each year. Unlike an FSA (or flex spending account), the money doesn’t have to be spent in 2019. The money may be spent on qualified medical expenses in 2019, but the employee may choose to use the HSA as a vehicle to save for future years. Essentially, an HSA is a powerful retirement savings tool with a lot of flexibility, which is great given that the cost of health care in retirement is estimated to be $280,000 to cover health care and medical costs for the average couple retiring today at age 65 (according to Fidelity).[2]

To learn more about the basics of HSAs, check out our recent webinar available here or consult with a Multnomah Group consultant

Notes:

[1] Revenue Procedure 2018-30, available here: https://www.irs.gov/pub/irs-drop/rp-18-30.pdf.

[2] Time, Retirement: Here's How Much the Average Couple Will Spend on Health Care Costs in Retirement, available at: http://time.com/money/5246882/heres-how-much-the-average-couple-will-spend-on-health-care-costs-in-retirement/.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Systematic Withdrawals & Consolidating Recordkeepers

Posted by Brian Montanez, CPC, TGPC, AIF®, CPFA

May 22, 2018

shutterstock_600492404_blogI work with a lot of 403(b) plans. This means my daily work life can be very complicated, especially when it comes to consolidating recordkeepers for my clients. More often than not, 403(b) plans have more than one vendor with which a participant may actively invest. They also may have additional active, or inactive vendor(s) with whom the participant retains an account. This may seem a bit odd, but there may be a good reason for this structure, such as a guaranteed interest rate or minimum crediting rate from before the Great Recession, or a painful surrender charge preventing the participant from removing his/her money. But as plan fiduciaries have discovered in the recent case law having multiple recordkeeping vendors can be detrimental to the participant (and plan fiduciaries) as they tend to result in higher fees for each vendor due to the lack of economies of scale, which can be a fiduciary issue. This has resulted in a wave of recordkeeper consolidation over the last 10 years, of which I have seen several plans not properly prepare for how to address systematic withdrawals (SW).

When I reference SWs, I’m specifically talking about the plan sponsor, rather than the participant, initiating the movement a participant’s money from one recordkeeper to another recordkeeper. While there are a variety of valid and beneficial reasons to do so, each consolidation or vendor change must address one specific issue: how to continue participants’ systematic withdrawals.

SWs occur when a participant establishes a regular and recurring distribution from the plan. This may be a withdrawal to a person’s bank account to pay for a participant’s retirement income needs, or a withdrawal to meet the Internal Revenue Service’s Required Minimum Distribution (RMDs) requirements, or even a third party as per a Qualified Domestic Relations Order (QDRO). Not matter how they become established, SWs can be vital to a participant’s short-term income security as well as compliance with regulatory mandates or court-ordered directives.

While most recordkeepers will receive the SW information from the prior vendor as part of the data transfer, because SWs are not a common occurrence they are easily overlooked, which is why I am writing this blog. In the past few years, I have seen several cases where the vendor losing the plan does not transfer the SW information to the new recordkeeper, thereby resulting in a participant not receiving their SW, RMD, or worse, their QDRO. I have also seen where there is a partial transfer of plan assets and because the legacy recordkeeper is not losing the whole plan but is being instructed to send a portion of the plan's money to a new vendor, sends only the assets and not the SW information. Please keep in mind that most recordkeepers have the appropriate controls in place to ensure SWs are appropriately addressed. However, in my experience, some plans may choose to leave their current vendor because there have been problems, or the recordkeeper is exiting the business. This is a prime opportunity for errors that you need to account for.

As you are imagining, this can be very painful to participants and will complicate the lives of the human resources team. It is with the knowledge of hindsight that I strongly recommend you make the documentation of SWs a part of your conversion process regardless of your perception of the terminating vendor. Your participants and legal counsel will be grateful.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Trends in Target Date Funds

Posted by Caryn Sanchez

May 16, 2018

shutterstock_266541431_blogMorningstar recently published their review of the target date product marketplace through 2017. Since 2008, target date mutual fund assets have grown from approximately $158 million to over $1.1 trillion as of Dec. 31, 2017. In 2017, net inflows to target date funds topped $70 billion, with over 95% of flows directed to passive mutual fund series. While passive options are receiving the larger share of inflows, largely due to their lower expenses, active target date series still have the most assets.

As of Dec. 31, the top three target date mutual fund managers by assets were Vanguard ($381.5 billion), Fidelity ($227.5 billion), and T. Rowe Price ($165.5 billion); American Funds and JPMorgan round out the top five. The difference in target date assets under management is stark – Vanguard, Fidelity, and T. Rowe Price dominate the market with a combined market share of 69.8%. By way of contrast, American Funds and JPMorgan’s combined market share is less than T. Rowe Price alone. Most of Morningstar’s data is focused on mutual funds, but several managers offer their target date series in collective investment trusts (CITs) in addition to mutual funds. When you consider the CIT assets reported to Morningstar, Vanguard’s target date assets jump to over $622 billion. Fidelity & T. Rowe Price maintain their second and third positions with more modest increases in total assets and BlackRock jumps from ninth to fourth place with $139.7 billion.

The trend to lower target date fund expenses continued in 2017. Of 58 target date mutual fund series tracked by Morningstar, 37 had reductions in their weighted average fund expenses.

Another continuing trend in target date funds has been the move by some managers to offer multiple target date products. Fidelity, TIAA-CREF, JPMorgan, and Principal are among a select group of active managers who have expanded their offerings in recent years by adding hybrid (active-passive) and passive target date strategies. A smaller group of managers including T. Rowe Price, Wells Fargo, and Great-West have added target date strategies that utilize a different glidepath as compared to their flagship series.

As plan sponsors face increasing pressures to monitor investment costs, it is not surprising that passive target date series are seeing such strong asset growth. However, active managers are not unaware of expenses, and many are continuing to cut fund expenses. As always, plan sponsors should consider multiple factors in selecting and monitoring target date products including glidepath, asset allocation, expenses, and performance.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

How to Train Your Fiduciaries

Posted by Erik Daley, CFA

May 8, 2018

shutterstock_349797617_blogIn 2004, the Department of Labor (DOL) launched the “Getting it Right – Know Your Fiduciary Responsibilities” campaign. The campaign was designed to improve workers’ health and retirement security by educating employers and service providers about their fiduciary responsibilities under the Employee Retirement Income Security Act (ERISA). 

Shortly after that, the DOL began asking sponsors for information related to fiduciary training and education as part of their examination program. While the number of examiners and examinations seem to be on the decline, their focus on educating sponsors has remained consistent.

To support the initiative, the DOL has delivered in-person seminars in 53 cities across the country and delivered dozens of webcasts on “Getting it Right.” Unfortunately, the DOL has only scratched the surface of the need for this education, and the content of the talks has been too broad and rarely touches on the unique needs of the attendees.

Most committee members spend less than 40 hours annually directly engaged in their duties as fiduciaries.  Smaller plans may have committee members who work directly on retirement far less than that. Educating those members to a point where they can be effective and confident in their role is one of our most important obligations to our clients. 

To that end, this year we launched our comprehensive suite of integrated fiduciary education to support our clients. This suite of resources allows us to pair our curriculum with where they are in the education cycle.

For newer committees, we focus on the basics of fiduciary duty and responsibilities. From there, we move to addressing the finer points of fiduciary education, including governance, service provider monitoring, employee engagement, plan operations, and investment monitoring.

We are honored to have served some of our clients (and their committees and members) for well over a decade. For those committees, we have focused fiduciary education on topics ranging from the preparation of meeting minutes to how you select asset classes for inclusion in a defined contribution plan menu.

These presentations have been developed as short-form training that can be done as part of a typical retirement plan committee meeting. The full catalog of content represents hours of intellectual capital we believe can continue to increase the effectiveness of our clients and by extension the plans they manage on behalf of their participants.

As new committee members are added to existing committees, we also assist clients with fiduciary training and orientation materials to help bring those members “up the curve.” Fresh ideas can improve the effectiveness of a committee, but to take advantage of those ideas new members must possess the basic framework of responsibilities, history, and committee objectives.

Here is what we have been working on at Multnomah Group. From the earliest days of the firm, one of our organizing principals has been to simplify what makes retirement plans intimidating for committees and participants. By empowering our clients with training, knowledge, and confidence, they are equipped to act as successful fiduciaries to their plan.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Trends in Participant Services

Posted by David Williams, CFA

May 3, 2018

shutterstock_353531531_blogOver the past couple of years, defined contribution plan recordkeepers have modified their set of services to account for implementation of the Department of Labor’s fiduciary rule. While the fate of the fiduciary rule now hangs in the U.S. court system, plan sponsors retain a duty to understand and monitor their recordkeepers revised service offering. These services include but are not limited to: investment education, advice, managed accounts, general plan education, enrollment, and plan distributions. We are calling this service array – ‘Participant Services.’

Multnomah Group created a new report designed to summarize the recordkeepers definition and delivery of these services. The results of this exercise showed that while there are significant commonalities, differences in key areas exist. The table below provides a summary of the key areas.

Subject Area

Similarities

Differences

Fiduciary services

  • Investment advice
  • Managed accounts
  • Participant distributions
  • Financial wellness
  • Savings rates
  • Investment advice/Managed accounts either delivered through a proprietary or non-proprietary solution

Non-fiduciary services

  • General plan education, announcements, enrollment, webinars, on-line tools, etc.
  • No substantive differences

Delivery method

  • Online, in-person, phone or print
  • No substantive differences

Education topics

  • Segmentation/targeted groups (e.g., young, mid-career, nearing retirement)
  • Financial wellness (e.g., budgeting, saving, investing, borrowing, etc.)
  • No substantive differences

Plan sponsor monitoring

  • Quarterly and/or annual reporting
  • Reports from independent auditors covering advice tools
  • Comparison of populations (advice versus non-advice participants)

Measuring success

  • Does participant services (advice and/or education) impact participant behavior
  • No substantive differences

Managing conflicts of interests

  • Employees providing advice must use ‘advice tools’ to facilitate discussions
  • No substantive differences


We note common threads of education topics, delivery methods, and monitoring through regular reporting are noted across the vendors, but we also observe differentiation in the categories of fiduciary services and plan sponsor monitoring.  

  • For example, one of the vendors offers financial wellness tools under ‘fiduciary services.’ Financial wellness, a topic deserving of its own blog post, is the common industry term for a much broader set of educational tools/materials seeking to help plan participants with their entire financial situation (e.g., budgeting, saving, investing, borrowing, debt repayment, etc.). A credible argument can be made that participants with a broad view of their financial picture are better equipped to develop a long-term plan that includes retirement savings. It will be interesting to watch the vendor community over the coming years to see if financial wellness is more broadly viewed as a ‘fiduciary service.’

  • Another area of both similarity and differentiation observed is how vendors seek to demonstrate the value of their advice programs. A common thread is that vendors will measure the programs’ success through the resulting participant behavior changes (e.g., savings rates, diversification, outstanding loans, etc.). In fact, one vendor went a step further by noting the ability later this year to provide comparison reporting of participants receiving advice versus those not utilizing the advice tools. Over time, this type of reporting should allow plan sponsors to monitor retirement readiness progress of the two groups and potentially gain a quantitative validation of the advice programs.

While the fate of the fiduciary rule is in doubt, the implementation work undertaken by the recordkeepers has been significant to modify delivery of participant services in anticipation of the rule. We will continue to work with clients and vendors to understand this evolving landscape. 


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Confused About ETIs and ESG Investments? You’re Not Alone.

Posted by Scott Cameron, CFA

May 1, 2018

shutterstock_551444962_blogOn April 23, 2018, the Employee Benefits Security Administration (EBSA) of the Department of Labor (DOL) issued the Field Assistance Bulletin No. 2018-01 to provide guidance to plan fiduciaries with respect to their responsibilities in considering “economically targeted investments” (ETIs). ETIs is the DOL’s terminology for socially responsible investments (SRI) or environmental, social, governance (ESG) investments. While the new “guidance” is designed to provide clarity for plan fiduciaries, in reality, it is likely to create additional confusion.

To understand why, it is helpful to understand a little bit of the backstory. The purpose of the Field Assistance Bulletin was to provide guidance to plan fiduciaries regarding two prior Interpretive Bulletins (IB 2015-01 and IB 2016-01). IB 2015-01, “Interpretive Bulletin Relating to the Fiduciary Standard Under ERISA in Considering Economically Targeted Investments,” was widely interpreted to provide a basis for plan fiduciaries to incorporate SRI or ESG criteria into their investment selection process. It was interpreted that way because it replaced prior guidance (in the form of Interpretive Bulletin 2008-01) that was considered to restrict the use of these criteria. In fact, IB 2015-01 states:

The Department believes that in the seven years since its publication, IB 2008-01 has unduly discouraged fiduciaries from considering ETIs and ESG factors. In particular, the Department is concerned that the 2008 guidance may be dissuading fiduciaries from (1) pursuing investment strategies that consider environmental, social, and governance factors, even where they are used solely to evaluate the economic benefits of investments and identify economically superior investments, and (2) investing in ETIs even where economically equivalent. Some fiduciaries believe the 2008 guidance sets a higher but unclear standard of compliance for fiduciaries when they are considering ESG factors or ETI investments.

ERISA clearly articulates a fiduciary has a responsibility to act in the best interests of plan participants and their beneficiaries. As it relates to investment decision-making, it means that plan fiduciaries must put the economic interests of participants above any other, ancillary objectives. While that has been consistent since the advent of ERISA, in IB 2015-01, the DOL states that plan fiduciaries can consider ESG criteria as they “…may have a direct relationship to the economic value of the plan’s investment.”

So, what we have now is a game of regulatory ping pong. The DOL issued initial guidance in 1994 which provided an opportunity for SRI funds, in 2008 the DOL restricted the use of those options, then encouraged their use in 2015 and further encouraged that in 2016, and now in 2018 is seeking to “clarify” its position once again; this time in a way that is viewed as restricting of those investments. FAB 2018-01 says:

Fiduciaries must not too readily treat ESG factors as economically relevant to the particular investment choices at issue when making a decision. It does not ineluctably follow from the fact that an investment promotes ESG factors, or that it arguably promotes positive general market trends or industry growth, that the investment is a prudent choice for retirement or other investors.

So where does the current guidance leave us? Can we use socially responsible investments in our plans? Should we use them? The good news for plan sponsors using, or considering using SRI or ESG investments, is that FAB 2018-01 does not preclude the selection of these products within an investment menu and in fact, provides some clarity on the ability to include them within a fund menu that offers participants a wide range of investment options. FAB 2018-01 states:

In the case of an investment platform that allows participants and beneficiaries an opportunity to choose from a broad range of investment alternatives, adding one or more funds to a platform in response to participant requests for an investment alternative that reflects their personal values does not necessarily result in the plan forgoing the placement of one or more other non-ESG themed investment alternatives on the platform. Rather, in such a case, a prudently selected, well managed, and properly diversified ESG-themed investment alternative could be added to the available investment options on a 401(k) plan platform without requiring the plan to remove or forgo adding other non-ESG-themed investment options to the platform.

In plain English, the DOL says it may be reasonable for a plan fiduciary to include an SRI or ESG fund on its platform assuming it is prudently managed because it does not crowd out other non-ESG options. The DOL continues on to make an exception with respect to a plan’s qualified default investment alternative (QDIA). The DOL draws a distinction between offering an SRI/ESG fund as one of many options and actively using it as the default option which is used by the plan fiduciary when a participant otherwise doesn’t make an election. In that circumstance, the burden is higher, and the plan fiduciary would need to demonstrate that the SRI/ESG criteria impact the economic considerations of an investment.

In reviewing FAB 2018-01, my takeaways are as follows:

  • It is okay to use prudently managed, well-run ESG/SRI investment options within your plan’s menu
  • Do not use ESG/SRI criteria in selecting your plan’s QDIA
  • Document the inclusion of ESG/SRI criteria within your plan’s investment policy statement
  • ESG/SRI options should be included because you reasonably believe that they have a positive economic impact on the expected return and/or expected risk of an investment. (For example, a belief that companies following certain best practices from a governance perspective are going to have better returns or greater future growth.)
  • ESG/SRI options should not be included just to appease participants or make a subset of your plan population feel good

If you would like more information on the topic of socially responsible investments or would like to discuss the FAB 2018-01 in greater detail, feel free to contact your Multnomah Group consultant.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Selecting Financial Professionals: Tips from the SEC

Posted by Bonnie Treichel, J.D.

April 26, 2018

shutterstock_178143140“Choosing a financial professional is an important decision,” says the Securities and Exchange Commission (SEC), in its recently updated Investor Bulletin “Top Tips for Selecting a Financial Professional.”[1] ERISA and the Department of Labor echo this sentiment, requiring that plan sponsors act with prudence when selecting and monitoring financial professionals for the retirement plan. Specifically, ERISA requires the selection of service providers to the plan be made in the best interest of the plan’s participants. 

At Multnomah Group, we frequently speak with clients and prospects about how to monitor vendors[2] (we have written about it here and here). But, what about how to select an advisor?  What questions did the plan fiduciaries use to document your initial selection or ongoing monitoring of your advisor?  Recently, the SEC provided guidance in the form of “tips” and associated questions to consider when choosing your advisor.[3] 

The SEC suggests that you consider the following questions:

  • Is the financial professional licensed? At Multnomah Group, for example, all consultants are licensed.  To review the licensing of any of our consultants or that of another financial professional, click here.  
  • What products and services are offered? The SEC draws an analogy: “Just as a grocery store offers more products than a convenience store, some financial professionals offer a wide range of products or services, while others offer a more limited selection.”  Specific to retirement plans, think about the needs of your participants and the level of expertise and proficiency within your internal resources.

For example, do you have a high level of proficiency with respect to investments and desire more autonomy as a retirement plan committee?  If so, you may prefer an advisor that serves the retirement plan as a 3(21).  If you (or your retirement plan committee) have a lower level of proficiency with respect to investments and you prefer to shift liability as much as possible away from your institution, then an advisor willing to be a 3(38) fiduciary to the plan may be a better service model.  Accordingly, you would need a financial advisor willing to serve the plan in the appropriate capacity.       

  • In what way(s) is the financial professional compensated? As the SEC describes it, there are two parts to understand: (1) how you pay and (2) how is the advisor paid. At Multnomah Group, for example, we are entirely fee-for-service.  We are not compensated by any commissions or other revenue generated by the plan, and our fees are all disclosed in the agreement with the plan.  Given the rules under ERISA, it is critical to understand these questions as a retirement plan sponsor! 
  • What are the background, experience, and credentials of the financial professional? In addition to being licensed, financial professionals have a host of different educational backgrounds as well as credentials.  Recently, one of my colleagues posted about why you should understand the differences between various credentials (available here) and the SEC encourages the same – that you should understand the credentials and designations of your financial advisor.  The SEC suggests learning more about these credentials using a website available here.
  • Does the financial professional have any notable disciplinary history? Finally, make sure your financial professional isn’t a jail bird.  Those are my words, not the words of the SEC.  However, in demonstrating your prudent selection and monitoring of a financial professional, it is important to document that you have asked and/or reviewed documentation to demonstrate that your financial professional doesn’t have a criminal background.  For example, many RFP questions ask whether the firm and any of its licensed persons are or have been subject to any criminal investigations, offenses, etc., which helps demonstrate a proper vetting process. 

Keep in mind, there are many ways to obtain the information described in the SEC’s Alert and this post has only covered the high-level points raised by the SEC Investor Alert.  One great way to obtain most of this information – as a starting point – is the Form ADV, Part 2.  For those readers that are clients of Multnomah Group[4], this disclosure document was sent out recently to our clients' primary contacts and it contains the information described above.  Be sure to review our Form ADV, Part 2 and document your review of the same. 

For additional information about how to prudently select an advisor or for questions about how to demonstrate prudent monitoring of your existing advisor, please contact your Multnomah Group consultant

Notes:

[1] SEC Investor Alerts and Bulletins, Updated Investor Bulletin: Top Tips for Selecting a Financial Professional, available at: https://www.sec.gov/oiea/investor-alerts-bulletins/ib_selectpro.html (April 3, 2018).

[2] Also known as recordkeepers or third party service providers.

[3] SEC Investor Alerts and Bulletins, Updated Investor Bulletin: Top Tips for Selecting a Financial Professional, available at: https://www.sec.gov/oiea/investor-alerts-bulletins/ib_selectpro.html (April 3, 2018).

[4] Multnomah Group’s Form ADV, Part 2 is also available online via the SEC’s website, available at https://www.adviserinfo.sec.gov/.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Fidelity Bond vs. Fiduciary Insurance

Posted by Brian Montanez, CPC, TGPC, AIF®, CPFA

April 24, 2018

Comparison_Blog_imageYep, it’s that time again; time to ensure your plan participants’ money and plan fiduciaries are protected. Over the next quarter, Multnomah Group will have the fidelity bond and fiduciary insurance conversation with our clients. Let me start here by saying a fidelity bond is not the same as fiduciary insurance. Fidelity bonds are required by the Employee Retirement Income Security Act (ERISA) to protect the plan and its participants against fraud or dishonesty of individuals who handle plan assets. Fiduciary liability insurance, although not required under ERISA, protects the plan fiduciaries against the liability of breaches of their fiduciary responsibilities. Not having one of these is a red flag for the Department of Labor (DOL) and could encourage one of their representatives to reach out to you.

Fidelity Bond

At a basic level, ERISA fidelity bonds are insurance products centered around protecting participants against fraud. One of ERISA’s requirements is any person who handles plan funds must be covered by a fidelity bond to protect the participants from losses due to fraud or dishonesty. Given that the requirement to obtain a bond is found in ERISA and the related regulations, only plans that are covered by those rules must have a fidelity bond.

Fraud or dishonesty includes, but is not limited to, larceny, theft, embezzlement, forgery, and/or misappropriation of plan assets. It is important to understand and make sure the plan, rather than the plan fiduciary or administrator, is named as the insured party on the bond so the plan can recover any losses covered by the bond.

Every person who handles the money of an employee benefit plan is required to be bonded unless covered by an exemption under ERISA. ERISA makes it an unlawful act for any person to “receive, handle, disburse, or otherwise exercise custody or control of plan funds or property” without being properly bonded. Bonding is usually necessary for the plan administrator and those officers and employees of the plan or plan sponsor who handle plan funds by virtue of their duties relating to the receipt, safekeeping, and disbursement of funds. In short, the bonding requirement is there to protect plan participants’ money.

Generally, each person must be bonded in an amount equal to at least 10% of the amount of funds s/he handled in the preceding year. The bond amount cannot, however, be less than $1,000, and the DOL cannot require a plan official to be bonded for more than $500,000, or $1,000,000 for plans that hold stock or other securities of the company sponsoring the plan. These amounts apply for each plan named on a bond. For plans that invest in so-called non-qualifying assets (such as direct real estate, limited partnerships, private stock, or certain other non-publicly-traded securities), the minimum bond amount is the greater of 10% of plan assets or 100% of the value of the non-qualifying assets. Given that the purpose of ERISA’s bonding requirements is to protect the plan and its participants, having a bond does relieve fiduciaries of their fiduciary obligations.

Although maintaining a standalone fidelity bond is one option, there are alternative options such as an addition to your company’s commercial crime policy. The employee theft coverage provided by a commercial crime policy can be used to satisfy ERISA if the plan is specifically a named insurer. ERISA also has some other requirements included in the commercial crime policy that relate to the employees of the plan vs. employees of the plan sponsor that are beyond the scope this blog. If your organization is insured by a crime policy, you will need to review it with your insurance broker to see if a separate ERISA compliance endorsement is needed to satisfy these insurance requirements.

Fiduciary Liability Insurance

As mentioned earlier, fiduciary liability insurance is not required by law but is important to have because it protects the individuals responsible for the plan in case of a fiduciary mistake, negligence, or a lawsuit. Keeping in mind fiduciary liability is personal, organizations often purchase fiduciary insurance to protect the plan fiduciaries, which include the board members, plan administrator, and other plan fiduciaries. If you maintain Errors and Omissions Insurance, check the provisions carefully; it likely will not provide fiduciary coverage.

Fiduciary liability insurance may cover the legal expenses of defending against claims, as well as the financial losses a plan may incur when breaches of fiduciary duty occur. In such cases, an employee acting in good faith may misinterpret regulations overseeing the retirement plan, which may result in penalties or fees being assessed to the plan. Because these acts were taken in good faith and are not acts of dishonesty or fraud, they are not covered under an ERISA fidelity bond but may be covered by a fiduciary insurance policy.

Understanding the benefits and limitations of the fiduciary insurance your organization elects to purchase is an important aspect of risk management.  Policies may or may not cover examinations by the DOL, litigation preparation, etc.  While the goal of most plan fiduciaries is not to utilize the coverage, once a claim or action has commenced, changing the nature of your coverage is not possible.

If you purchase fiduciary liability insurance for your organization and employees engaged in fiduciary roles, it is important to note that the policy does not extend to any outside advisors, consultants, or administrators of your benefits plans. As part of a good procurement process, you should review the coverage carried by your providers to ensure its adequate.

Fiduciary liability insurance should never be viewed as a substitute for good fiduciary practices, but it is good to know you have a backup if claims do arise.

The primary difference between fiduciary liability insurance and a fidelity bond is who is protected.  In the case of fiduciary liability insurance, the coverage is granted to the covered fiduciaries to the plan.  The fidelity bond protects the plan from theft but does not convey any protection to the fiduciaries for their oversight process.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Participant FAQ Series: Student Loan Repayment

Posted by Stephanie Gowan

April 19, 2018

shutterstock_323781848_blogYour participants want it all!  As consultants, we are in regular attendance at retirement plan committee meetings, and we hear the questions and concerns of your plan participants. These questions are smart, creative, and sometimes entertaining. In light of this ingenuity, I have decided to make the best participant questions an ongoing series. We will discuss participant questions and share with you the answers we provide committee members.

Participant question: Can you repay my student loans instead of matching my retirement plan contributions?

Answer: Student loans are a looming concern for much of the workforce as student debt has reached record highs.  Employees are highly interested in receiving loan repayment assistance from their employer, and plan sponsors are being asked if they can assist in loan repayment in lieu of receiving an employer match. 

In some sectors such as healthcare, it is common to use student loan repayments as a recruiting tool for recent grads.  However, we see this primarily in niche areas where the cost of education is high to enter that occupation. While helping an employee pay back loan debt is a tremendous benefit; it won’t solve their retirement income shortage when this employee is ready to leave the workforce. While loan assistance is important, we find it is not a substitute for an employer match. In addition, most recordkeepers could not accommodate this creative provision in a plan document as the goal of these programs is that the employer match should not be discriminatory, even if it is at the employee’s request.  

There are creative ways for the plan sponsor to allow participants to select the areas where their benefit dollars should be applied. Some employees may choose loan repayment as their benefit, while others enhanced their medical coverage instead of receiving a larger employer contribution to the plan. The plan document could be written with a discretionary match provision which would allow the employer to apply different levels of contribution to each employee based on their unique benefits preferences. However, retirement plan testing cannot include benefits not paid into the plan. As a result, the employer contributions made would need to be tested to ensure the plan passed its employer contribution testing. While providing greater flexibility to participants is intriguing in the abstract, adopting this approach increases the potential for operational error and testing failures. We would also suggest consulting with your benefits attorney before traveling down this path.

Until next time…keep the good questions coming!


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

2018 – The Year of Cybersecurity

Posted by Erik Daley, CFA

April 17, 2018

shutterstock_569172169_blogI had a chance to watch some of Mark Zuckerberg’s testimony to Congress. The past 24 months have helped inform the entire country on the risks of stolen data as well as the risks when data lawfully obtained is used for purposes other than its intended use.

Data and Access Security
Retirement plans have exposure in these two key areas. Retirement plan recordkeepers have spent much of the last two decades reducing the number of “clicks” a participant may need to review information and process a transaction. While intended to simplify the participant experience, some of these pass-through processing systems have been subject to breach as bad actors use them to process retirement plan distributions or request loans on behalf of an unknowing participant, thereby breaching the plan.

Use of Personal Information
In the past, we have written and spoke about the changing nature of retirement plan recordkeeping. As fees continue to compress, recordkeepers proceed with utilizing retirement plan recordkeeping as an avenue to distribute additional products and services. This creates the second challenge for retirement plan sponsors. What controls are in place to ensure the demographic data necessary to operate the plan (wage, savings, email address, etc.) is not being used to aid in selling additional unrelated products?

Providers and plan sponsors are moving to address these risks in different ways. 

The increased volume of thefts from retirement plans has caused the industry to move quickly to reduce exposure.  Smaller recordkeeping firms have suspended wire transfer payments from the plan to slow the distribution process and better track outgoing cash payments for loans and distributions.  Larger providers have moved to dual authentication for the movement of cash to ensure a stolen password does not result in a blank checkbook for the thief.  The largest of the national providers have augmented dual authentication with more sophisticated voice authentication capabilities.

To address concerns about personal information, larger plan sponsors are debating the merits of non-solicitation agreements with their recordkeepers to eliminate the cross-sell incentive to misuse data.  Purchasing groups and request for proposals (RFPs) have become very explicit in limiting the use of data obtained through the recordkeeping process.

In sitting through an education presentation on cybersecurity recently, the moderator shared that no cybersecurity procedure can be perfect given the sophistication of the bad actors.  However, the key is to be more sophisticated than the person next to you.  Ultimately, bad actors aren’t looking for challenges; they’re looking for money and the more difficult you make the system, the more likely they will move on to an easier target.  In the jungle, you don’t need to be faster than the tiger; you need to be quicker than the person next to you.

There are steps plan sponsors should take to address their plan and the safety of their participants.

Data and Access Security

  1. Who is liable in the event of a security breach where participant assets are stolen?
  2. What authentication (participant and sponsor) is required before a distribution is made?
  3. How would the plan be notified if data is breached?
  4. How does the provider monitor the system against cyber threats?
  5. Does the provider possess cyber threat insurance?

Use of Personal Information

  1. Who outside the retirement services organization has access to personal information?
  2. How might a participant find themselves in a situation where their personal information is utilized to facilitate the purchase of additional services (rollovers, managed accounts, brokerage account, etc.)
  3. Will the provider agree to a non-solicitation provision?

Cybersecurity and the protection of participant data is a rapidly changing area and the rules pertaining specifically to retirement plans are nearly non-existent.  Knowing how well your retirement plan providers are addressing this evolving field is an excellent start.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

1st Quarter 2018 Market Update

Posted by Tina Beltrone, CFA

April 13, 2018

Multnomah Group_Q12018 Market Commentary_Page_01The current U.S. economic expansion is in its ninth year, the third longest on record. Real GDP grew at an annualized rate of 2.9% in the fourth quarter of 2017 (the most recent available) as growth momentum continued.

Employment data remained strong as the unemployment rate held steady at 4.1% in March, its lowest level since 2000. Inflation continued to creep back into the economy as core CPI, which strips out food and energy prices, rose 0.2% in March, matching February’s increase.

Factory goods orders increased 1.2% in February after declining in January. Orders were supported by strong domestic and global demand, but sentiment could change due to growing trade conflicts with China. Consumer spending, which makes up more than two-thirds of the economy, rose only 0.2% in February as banks have been more cautious with lending policies. New Federal Reserve Chairman Jerome Powell continued with monetary policy normalization as it unwinds its balance sheet and raised interest rates in March by a quarter point (the sixth increase since 2015). The Fed is in the early phase of selling off $4.5 trillion of bonds that it accrued as it tried to jump-start the economy after the financial crisis. The unwinding will take several years. The yield curve continued to flatten. The 10- and 30-year Treasury bond yields increased to 2.7% and 3.0% during the first quarter. Only two fixed income segments had positive returns for the quarter as interest rates continued to rise. Developed international bonds and three-month Treasury bills returned 4.5% and 0.4%, respectively. Investment grade corporates and emerging markets bonds were the worst performers for the period.

First quarter was a bumpy one for U.S. equity markets as market volatility awakened after an unusually quiet 2017. After a nine-quarter win streak, the U.S. stock market dipped into negative territory for the quarter as the S&P 500 declined 0.76% due to concerns about interest rates, increased deficit spending, trade tariffs, tech stock worries, and rising inflation.

Technology and consumer discretionary sectors were the only two sectors to show gains for the S&P 500 during the quarter, with both sectors up over 3%. Interestingly, tech stocks had an especially difficult month highlighted by Facebook’s data breach. All other sectors were in negative territory for the quarter with telecom and consumer staples reporting the largest declines. The forward P/E for the S&P 500 dropped for the quarter to 16.4x, only slightly above the 25-year average of 16.1x. Small cap stocks outperformed large caps, a reversal from the prior quarter while growth comfortably outperformed value for the quarter.

On the international equity front, emerging markets reported the strongest quarterly returns versus other asset classes - but only gained 1.4%. Results were helped by Latin America which jumped 8.1% due to strong returns in Brazil. Developed Europe (ex-UK) and Developed Asia had modestly negative returns. The UK market was down nearly 4%. China moved modestly higher after a very strong 2017 with returns increasing 54.1%. Commodities were basically flat for the quarter with the Bloomberg Commodity Index declining -0.8%. U.S. crude oil prices jumped 8.5% last quarter, finishing at $64.94 per barrel. REITs fell 6.7% - giving back much of their gains from 2017. The pullback is mainly from a heightened short-term sensitivity to interest rates.

To view Multnomah Group's full Capital Markets Review, please click here


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

EBSA Continues to Get Smaller

Posted by Erik Daley, CFA

April 5, 2018

shutterstock_390178585_blogLater in the month, my colleague will be hosting a webinar on the significant uptick in participant litigation against retirement plan fiduciaries and the corresponding impact on how plan sponsors should elect to manage risk.

This increased risk seems to be occurring simultaneously to a significant reduction to staff and enforcement activity at the Department of Labor’s (DOL) Employee Benefit Security Agency (EBSA)

Staffing at the EBSA is down 17% from its peak in 2012. The rate of decline has significantly increased since the close of 2016. While a reduction in enforcement action may benefit plan sponsors, those that are caught in normal department examinations may anticipate longer periods before examinations can be closed, thereby increasing the cost to the sponsor.

The risk trade-offs for plan sponsors from a fiduciary perspective are tricky. While DOL audits are more prevalent, resolving any findings with the DOL are generally amicable and straightforward. The rare litigation against fiduciaries by participants is infinitely more expensive to resolve, and the de facto examiner, (the plaintiffs’ attorney) is typically motivated to inflict the most pain upon the plan sponsor on behalf of their clients.

For those either under examination, or who find themselves subject to an examination, the course of action remains the same but becomes even more impactful. Creating an organized response to any DOL inquiry that demonstrates the prudence of process and compliance allows the examiner to quickly identify potential areas to probe and can swiftly move auditors to close an examination where no material findings are presented.

For a review of some of the typical information requested by the Department of Labor, please see our white paper, Get your Ducks in a Row: 58 Questions from the Department of Labor.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Investing 101: Don’t Chase Returns

Posted by Tina Beltrone, CFA

April 4, 2018

shutterstock_252511228_blogWe all intuitively know that picking actively-managed mutual funds solely based on past performance is a bad idea. In fact, mutual funds are legally required to disclose that past performance is not an indicator of future performance. However, emotions can get in the way as our brains are wired to believe that mutual funds that have done well in the past will continue to do well.

Multnomah Group has a few suggestions to help investors avoid this trap.

  • Investors should set goals based on their age and risk tolerance. This process includes devising a diversification strategy that utilizes the appropriate asset classes to achieve an investor’s long-term goal. Things to consider include: domestic international allocations, equity vs. fixed income investments, and growth vs. value style of investing.
  • Investors should identify and purchase funds with strong philosophies, processes, and management teams that fit their investment strategy. These funds should also be attractively-priced as the more expensive a fund is, the more difficult it is to beat its benchmark. Above-benchmark performance typically follows funds that embody these characteristics.
  • It is critical for investors to stick to their plan despite periods of underperformance as asset classes can go out of style. But over the longer term, asset classes that have had several years of strong returns generally revert to the mean. Thus, re-balancing one’s portfolio is critical to keep investors from selling asset classes that have underperformed and buying asset classes that have performed well. This can be done using a time-based or percentage-based method.
  • Investors should revisit their funds to make sure the philosophy and process remain sound. Check to make sure the management team remains intact and dedicated to the fund’s strategy.

Hence, investors should set investment goals, identify competent fund managers that offer attractively-priced funds, and stick to their long-term plan to help ensure they are not letting emotions get in the way of investing. Thus, following a buy and hold strategy of the ‘right’ line-up of funds is a better plan than jumping ship to find the next hot fund.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

The Use of Human Capital in the Asset Allocation Process

Posted by David Williams, CFA

March 29, 2018

shutterstock_402879268_blogAs a retirement plan advisory firm, we devote a significant amount of time to assisting plan sponsors in the selection and evaluation of tools participants use to develop long-term savings and investment strategies. While not a new tool, the concept of human capital as an asset class has come up in recent conversations. This asset class is not always explicitly addressed by providers in developing a participant’s strategy, but human capital plays an important role in the overall wealth planning process for each participant.  Human capital, in this context, is defined as the present value of a participant’s future wages and it is a non-tradable asset.  For early career participants, it's likely to be the most valuable asset they own.  As time progresses, a participant’s human capital will diminish as it is converted into wages and, hopefully, invested into financial assets such as stocks, bonds, real estate, cash, etc.  As an asset class, human capital offers inflation protection and has characteristics similar to bonds.

Participants that ‘own’ human capital can adjust their mix of financial assets from a portfolio perspective. For example, a young participant is likely to have a long working career and thus a large amount of human capital.  As a general rule, this will allow the participant to allocate more of their financial capital to higher risk assets (i.e., stocks).  The converse is true as well.  Participants nearing retirement are likely to have traded their allocation to human capital in favor of financial asset classes. As human capital decreases as a percentage of total wealth, the participant’s ability to invest in risky assets is reduced which leads to a more conservative investment portfolio. 

The use of human capital can provide more nuanced views of risk tolerance than the example described above. The predictability of a participant’s wages will further refine their optimal risk exposure in their retirement portfolio.  If a participant works in an industry with high-income variability (i.e., construction), then this would argue for a lower risk portfolio. Another example of the use of human capital is expressed through portfolio diversification. A participant’s earning power is highly correlated to their chosen industry.  The use of the human capital asset class would argue for lowering investment allocations to the participants’ specific industry in their financial asset portfolio.  

As previously stated, incorporating human capital in the planning process is not universal in the defined contribution marketplace. Some providers have included the concept in their asset allocation process for target date funds or managed account products. Whether included or not, it’s a concept that I have seen help plan sponsors understand alternative providers’ approaches to developing asset allocation recommendations and risk tolerance determinations for various plan participant cohorts. 


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Circuits Are Split on the DOL Fiduciary Rule

Posted by Bonnie Treichel, J.D.

March 21, 2018

shutterstock_390178585_blog.jpgSince the Department of Labor’s Fiduciary Rule (fiduciary rule) was proposed in 2015, there have been staunch proponents and opponents. The Fiduciary Rule is a regulatory package that became applicable on June 9, 2017, making many more financial professionals fiduciaries under the Employee Retirement Income Security Act (ERISA). The fiduciary rule also subjected individual retirement accounts (IRAs) to ERISA. This sweeping regulatory package was subject to much partisan debate, several lawsuits, and a Presidential Memo which ordered the Department of Labor (DOL) to undergo rigorous review related to the rule’s impact on retirement investors. 

One of the lawsuits that challenged the DOL’s fiduciary rule is Market Synergy Group, Inc. v. United States Department of Labor, et al., No. 17-3038, which was filed in the 10th Circuit.  Last Tuesday, the 10th Circuit upheld the fiduciary rule – meaning that the fiduciary rule may proceed.

Two days later, in the 5th Circuit, the court reached a different conclusion in the case of Chamber of Commerce et al. v. United States Department of Labor, et al., No. 17-10238. Here, the court said that the DOL exceeded its authority by expanding the definition of “fiduciary” beyond the statutory confines of ERISA. The court in the 5th Circuit said that Congress was aware of the distinction between a stockbroker or insurance agent (which has a lesser standard) and an investment advisor (which has a fiduciary standard) and the standard that applies to them.  In short[1], the court said that Congress did not intend to the include financial salespeople in the fiduciary definition as they are understood not to be fiduciaries absent some special relationship.   

So, what does this mean for the fiduciary rule?

First, the 5th Circuit holding is not effective until May 7, 2018, which means the DOL’s fiduciary rule still applies until May 7.[2]

Second, circuit splits are the perfect opportunity for the Supreme Court to hear (and settle) the issue.  However, the Supreme Court is not required to hear the matter – just more likely.  For the Supreme Court to hear the issue, the DOL would have to ask. Some industry commentators have suggested that the DOL will let the fiduciary rule die.   

Third, the DOL could request a rehearing and if the request is granted, then the decision from the 5th Circuit will not apply until a decision by the full 5th Circuit.  This could prolong the process for a long time, which would allow the DOL time to amend the fiduciary rule and continue its current review process.[3]   

Fourth, the Securities and Exchange Commission (SEC) has announced that it is forging ahead with its own rule. Under Dodd-Frank, the SEC was granted authority to formulate a fiduciary rule and the SEC (with a full commission now) is moving ahead.

And, what does all of this mean for plan sponsors?

  • More to come from vendors: Be on the lookout for continued communications from your vendors/recordkeepers. They will presumably continue to monitor and adapt as they move through these uncharted waters. Watch for additional information regarding how your vendor will adapt to the fiduciary rule changes. For now, the fiduciary rule still applies, but only with certainty until May 7, 2018. 

  • Monitor service providers: Irrespective of the fiduciary rule, plan sponsors have a duty to monitor service providers and the materials that service providers give to participants. While some believed that the fiduciary rule created this obligation, that is not the case; with or without the fiduciary rule, plan sponsors have an ongoing duty to monitor service providers, including the information, education and advice that service providers give to participants.

  • Educate participants: Consider educating participants about rollovers. The fiduciary rule gave heightened protection to participants engaging in rollovers; if the fiduciary rule is eliminated in the future, you may consider educating your participants about the different types of financial professionals that may be working with your participants and how that impacts rollovers.

  • Know your financial professional and document: Be aware of the type of financial professional working with your plan. Multnomah Group is a fiduciary under ERISA Section 3(21).  If the fiduciary rule is eliminated in the future, some financial professionals working with retirement plans may not be fiduciaries to your plan. The plan should understand and document the type of financial professional with which it engages.

For more information on the current state of the fiduciary rule and how it may impact your plan and its participants, please contact a Multnomah Group consultant

Notes:

[1] The court in the 2-1 decision said a lot more, which is beyond the scope of this blog post.  The decision included both a majority opinion and a dissenting opinion.

[2] See Fifth Circuit Vacates Fiduciary Rule, Drinker Biddle Client Alert, March 20, 2018.

[3] See Fifth Circuit Vacates Fiduciary Rule, Drinker Biddle Client Alert, March 20, 2018.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

IRS Examiners Receive Audit Guidance Regarding RMDs for 403(b) Plans

Posted by Erik Daley, CFA

March 13, 2018

IIRS_blog.jpgn February of this year, the Internal Revenue Service (IRS) extended audit guidelines to their auditors related to required minimum distribution (RMD) failures in 403(b) plans. As part of that guidance, examiners are instructed not to challenge the tax status of a 403(b) that has failed to distribute RMDs if the plan has:

  • Searched plan, plan sponsor, and publicly available records or directories for alternative contact information
  • Used any of the search methods below:
    • commercial locator service
    • credit reporting agency
    • proprietary internet search tool for locating individuals; and
  • Attempted contact by U.S. Postal Service certified mail to the last known mailing address and through appropriate means for any address or contact information (including email addresses and telephone numbers)

This guidance would appear to be an improvement over prior examiner questions to plan sponsors that requested an even more exhaustive search for lost participants.

Unfortunately, the guidance does not declare how plan sponsors should behave in situations where the participant is not lost but refuses to act on the RMD notification.

Given the December guidance related to 403(b) plans and similar guidance provided in October of 2017 relative to other “qualified plans,” plan sponsors should examine with their providers the methods to locate lost participants and ensure that they comport with the guidance provided.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

 

Update on Interest Rates

Posted by Rex Kim

March 6, 2018

shutterstock_160392464_Blog.pngThe Chicago Mercantile Exchange (CME) provides a continuously updated look into the implied probability of policy changes from the Federal Reserve, specifically in regards to the Federal Funds rate. This is the interest rate set by the Federal Reserve, which then provides the range that banks are allowed to lend money to one another, most typically for an overnight length of time.  Today, the Federal Funds rate is targeted to be between 1.25% and 1.50%. With fifteen days to go until the next Federal Reserve Open Market Committee (FOMC) meeting, the CME tool is saying the implied probability of a rate hike at this next meeting is 83%. If proven correct, the Federal Funds rate will be between 1.50% and 1.75%.

Here are some predictions from the CME tool further into 2018:

  • June 13, 2018: 69% chance of another rate hike into the 1.75% and 2.00% range
  • Sept. 26, 2018: 45% chance of a further rate hike into the 2.00% and 2.25% range
  • Dec. 19, 2018: a 26% chance of the third rate hike into the 2.25% and 2.50% range

The FOMC provides for public viewing each committee member’s assessment of the appropriate level of Federal Funds rate. This “Dot-Plot” suggests the median expectations for Federal Funds rate are as follows:

  • 2018: 2.25%
  • 2019: 2.75%
  • 2020: 3.13%
  • Longer Run: 2.75 to 3.00%

As all the above information is readily available, it is highly likely that most market participants have already adjusted their expectations for the major asset classes. In other words, the information above is likely priced in.  What will be interesting is whether any future words from the Federal Reserve provides more fuel for the market to be spooked. After the last FOMC meeting, one of the additional words that sparked a decline in the major asset classes was the word “further.” This single word cannot take all the credit, but it did get much of the media attention.  The markets like stability and a sense of being able to see what is in the future.  Words like “further” do not provide such clarity, but instead raise fears.

However, during times of fear silver linings can be found. Low interest rates may have helped to fuel our economy back to strength and asset prices to rise; but, low rates also hinder those who are living on a fixed income.  The long-term benefit of rising interest rates is that our retiring population can feel some ease in knowing that the dollars they have will provide for a higher level of income. This reality is already being reflected in the fixed income market with higher money market yields and a re-setting of credit rates across stable value funds and annuities. 

Furthermore, the dust always settles after market storms. And it won’t only be fixed income securities that will be providing for higher yields; market participants will also see a rise in expected returns for all other major asset classes as well.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Monitoring a Managed Account Program

Posted by David Williams, CFA

March 1, 2018

shutterstock_245477752_Social.pngAs the reliance on defined contribution plans for retirement security continues to grow, participants are required to make complex decisions about the management of this important asset. Many participants feel ill-equipped to manage their accounts, and in response to that hesitancy, the retirement plan industry has developed tools to support participants through multiple product offerings. These include target date funds, lifestyle funds, balanced funds, participant investment advice, and managed accounts. The focus of this blog post is the development of managed account products and how plan sponsors can fulfill their fiduciary duties for monitoring the programs. 

Managed account programs were first developed for retirement plans in the early 2000’s. They are designed to provide a personalized investment strategy for participants based on multiple factors (e.g., age, risk tolerance, financial situation, etc.). The use of multiple factors contrasts with the most prevalent asset allocation strategy in defined contribution plans – target date funds. Target date fund selection relies largely on a participant’s anticipated retirement date. A Schwab study from 2016 found that 70% of participants would like to receive personalized investment advice for their 401(k) accounts. Managed accounts are viewed by many industry experts as offering this desired service.  Usage statistics are varied by plan and recordkeeper.  Vanguard’s 2017 How America Saves survey shows  new participants entering a plan in 2016 are largely investing (85%) in a single ‘professionally managed allocation’[1], but currently 4% of assets are invested in a managed account service. 

From a plan sponsor perspective, the decision to offer a managed account product is fiduciary in nature.  One key feature of a managed account provider is its ERISA fiduciary responsibility to participants. Similar to a plan’s investment options, the managed account provider needs to be monitored by the Committee. A Committee can accomplish this monitoring duty through their regular meetings. Below is a summary of the key elements of the managed account oversight process.

  1. Understanding the product:
    1. Firm overview – organization structure and firm history
    2. Team – description of key team members, their roles, and responsibilities
    3. Participant interface and inputs – integration with recordkeeper website, input data (default and participant initiated), and contribution strategy
    4. Portfolio construction – program objective, research tenets, assets classes utilized, minimum required funds/asset classes, active/passive fund, and implications of outside assets, or other pension income streams
    5. Portfolio oversight – asset allocation, fund, and risk monitoring
    6. Operations – fund types, expenses, and fiduciary status
  2. Reviewing enrolled participant data with the provider at regular intervals
  3. Reviewing participant communication materials and the program’s outreach strategy
  4. Reviewing program fees

The utilization of managed account programs is low despite defined contribution plan participants described need for personalized investment advice as cited in recent surveys. We expect managed account programs will continue to evolve to address participant needs of improved retirement income security and potentially garner higher utilization rates. As such, plan sponsors monitoring efforts will have to evolve with managed account programs changes.                              

Notes:

[1] Professionally managed allocation is defined by Vanguard as a participant being invested in a single target date fund, balanced fund, or managed account program.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice. 

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

NYU Plaintiffs Win Class Certification in Fiduciary Breach Case

Posted by Erik Daley, CFA

February 27, 2018

GavelBookSchool.jpgA U.S. District Court ruled recently to certify a large class of plaintiffs in the Employee Retirement Income Security Act (ERISA) fiduciary breach suit against two 403(b) plans sponsored by New York University (NYU).

The seven named plaintiffs will represent a class of at least 20,000 participants covered by the plan beginning from Aug. 9, 2010. At the core of the complaint is a claim that NYU failed to exercise its bargaining power to reduce participant expenses.

This continues the conversation of the current wave of fiduciary breach cases. We’ve discussed this in many of our prior postings:

While an important step in the case, the decision to certify the class was not unexpected. One of the more interesting claims from the co-defendants was that the named plaintiffs are inadequate representatives because they are unaware of the facts underlying the dispute. Deposition testimony seems to support that a number of the plaintiffs did not know their portfolio makeup or how revenue sharing payments worked. The court was not persuaded by the argument, stating the plaintiffs are “entitled to rely on their counsel for advice.”


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Navigating Volatile Markets

Posted by Tina Beltrone, CFA

February 20, 2018

shutterstock_160392464_Blog.png2017 was one of the least volatile years on record for the U.S. equity markets. The average daily level of the VIX, a measure of stock market volatility, was 11.09, the lowest annual average since the index’s inception in 1990. However, that calmness ended abruptly in early February. The re-emergence of equity market volatility, which spiked as markets became more turbulent, was largely attributable to concerns about rising inflation and interest rates in the U.S., especially given the changes at the Federal Reserve and the fear that rates will rise more aggressively than expected. In response to these fears, Treasuries tumbled and the 10-year Treasury yield hit a 4-year high of 2.93% by mid-February. The swings of 1,000 points or more in a day for the Dow that were experienced multiple times in early February caused quite a frenzy. While the downturn was unsettling for investors, the market reversal in the final hour of trading on Friday, February 9, staved off entering 10% “correction” territory. In the backdrop of the market downturn, the economy and corporate earnings remain strong, while unemployment and interest rates remain at historically low levels. 

Equity market volatility along with pullbacks are a normal occurrence. Most investment managers would agree that we were overdue for some type of correction. Both the Dow and the S&P 500 were up over 20% in 2017 and continued to rise sharply in January 2018. However, the sharpness of the market sell-off, partly driven by algorithm-based trading, spooked investors. These high-speed, high-data trades have become a reality for global markets. Despite the largest point loss in history for the Dow on Monday, February 5, the decline on a percentage basis did not even make it into the record books for the top 20 historical sell-offs.

While short-term stock market volatility is unnerving, it is part of the trade-off for long-term price appreciation experienced by stock market investors. It is extremely difficult to time the market – no one can predict what it will do in the short term. Disciplined investors should sit tight and stay the course, focusing on their long-term strategies.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Selecting a Service Provider for Your HSA

Posted by Bonnie Treichel, J.D.

February 15, 2018

shutterstock_587129423_HSA blog.pngIf you are following along in the conversation regarding Health Savings Accounts (HSAs) as a mechanism to help your employees enhance their retirement readiness, then keep reading. Last summer, I introduced the basics of HSAs, and my most recent post discussed the five things employers should be educating their employees on related to HSAs (if they have a High Deductible Health Plan with an HSA option). This post jumps into the duty to select and monitor HSA service providers and a few tips for what to consider during your selection process.   

Unlike many retirement plans that are subject to ERISA, in general, HSAs are not viewed as welfare benefit plans subject to ERISA,[1] which means that the more stringent duties under ERISA for selection and monitoring of your HSA service provider generally would not apply. However, the ERISA exemption that applies to HSAs is very limited and contingent upon the employer’s involvement with the HSA. In short, the more involved the employer is with the HSA, the more likely it is that the HSA will be subject to ERISA and the exemption will not apply.[2] As a best practice, we recommend following the same prudent process that you would for selection and monitoring of a service provider for an ERISA-covered retirement plan.      

So, if you have an HSA, how did you select your HSA service provider? If you don’t yet have a High Deductible Health Plan with an HSA option, but you are considering it, how are you planning to select the service provider for the HSA? You may want to consider the following when conducting a request for proposal process and/or reviewing proposals from your potential HSA service provider:

  • Fees. HSAs can involve a variety of fees. Have you considered the fees that the employer may pay, as well as the fees the employee may incur? Fees in an HSA may include but are not limited to: monthly account fees, investment fees, transfer/change fees, excess contribution fees, stop payment fees, and swipe fees. 
  • Investments. Similar to the investment considerations in a retirement plan, the same considerations exist in an HSA. Some providers do not allow investment of HSA dollars at all, but for those providers that allow investment of HSA dollars, consider whether the platform is open architecture or whether there is a limited offering of pre-selected funds available for investment.
  • Integration. For many employers, integration is critical. Working with a fewer number of vendors (i.e., the same vendor for the retirement plan and the HSA) can improve efficiencies for the employer and the employee. An integrated environment can improve outcomes. Some service providers have integration between the retirement plan and the HSA (which can include integrated websites, coordinated notice capabilities, etc.), while others have no level of integration available.    
  • Minimum Balance Requirements. One of the benefits of the HSA is its ability to be invested, but some service providers allow investing only after a minimum threshold is achieved and maintained by the employee. For example, employees must have a minimum account balance of $3,000 for their account to be invested. 

While there are several other considerations for selection and monitoring of an HSA provider, these four items include the minimum considerations.

If you’re interested in learning more about HSAs, please join our upcoming webinar on February 20 focused on the basics of HSAs, common misconceptions about HSAs, and tips for selection and monitoring of an HSA provider.

For additional information about selecting an HSA provider, contact Multnomah Group.  

Notes:

[1] See Wagner Law Group, When ERISA Applies to HSAs, available at: http://www.wagnerlawgroup.com/documents/WhenERISAAppliestoHSAs_000.pdf.

[2] Note that this is oversimplified as the exemption is beyond the scope of this post.  Please see DOL FAB 2006-2, available here: https://www.dol.gov/sites/default/files/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2006-02.pdf


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Designations for Retirement Plan Professionals

Posted by Brian Montanez, CPC, TGPC, AIF®, CPFA

February 13, 2018

shutterstock_768131263_blog_v2.pngAs an institutional retirement plan consultant, I spend an enormous amount of time educating myself and staying current on Internal Revenue Service (IRS) rules, Department of Labor (DOL) rules and opinions, case law, capital markets, and investment products; not to mention the vast amount of continuing education I do for my professional designations. The regulations surrounding retirement plans are complex, and each year more updates and regulations are added. To add value to my clients’ committees, I need to stay abreast of the ever-changing regulations, successfully interpret them, and use my understanding to help my clients demonstrate fiduciary prudence and compliance.

As you might imagine, I am a member of several professional organizations, all of which I have chosen because of the quality of the designation, support, and intellectual content provided by the groups. I am most proud of my Certified Pension Consultant (CPC) designation. It is issued by the American Society of Pension Professionals and Actuaries (ASPPA) which is conferred by benefits professionals working with institutional retirement plans with a focus on ERISA and fiduciary governance. CPCs work alongside employers to formulate, implement, administer, and maintain qualified retirement plans. One of the many reasons I respect this organization and the CPC designation is that as a candidate you must have at least three years of industry experience to apply. Additionally, a candidate is required to complete the following exams:

  • Retirement Plan Fundamental Modules
  • Defined Contribution Administrative Issues – Basic Concepts (DC-1)
  • Defined Contribution Administrative Issues – Compliance Issues (DC-2)
  • Defined Contribution Administrative Issues – Advanced Topics (DC-3)
  • Administrative Issues of Defined Benefit Plans (DB)
  • Certified Pension Consultant Modules & Written Final Exam

For a working professional, the CPC final exam takes about three years to complete, and the designation requires 40 hours of continuing education every two years. Add that to the three years of experience just to sit for the exams, and you have an educated and informed professional.

The reason I explain this is to contrast the rigor of attaining and maintaining the CPC designation, as well as other quality designations such as the Chartered Financial Analyst (CFA) conferred by the CFA Institute, with many of the other designations offered in the industry.

The CFA designation is regarded by most to be the key certification for investment professionals, especially in the areas of research and portfolio management. It seems to me that any person with an afternoon free can achieve a designation that purports them to be a retirement plan expert. Please understand there are countless designations issued by organizations ranging from a retirement plan specialist designation issued by the broker-dealers certifying that they have taken an afternoon class on retirement plans, to for-profit organizations handing out designations for an annual fee, to industry leading organizations that require substantial experience, demonstrated knowledge, and rigorous continuing education. Sadly, few people understand what is behind a designation.

The Financial Industry Regulatory Authority’s (FINRA) website offers a one-stop shop for anyone who is interested in understanding the qualifications of this alphabet soup of designations and thereby, the true expertise the so-called expert is claiming. For a detailed explanation of virtually all designations, visit: http://www.finra.org/investors/professional-designations

At this site, you can check how one financial industry credential stacks up against another. Although FINRA doesn’t approve or endorse any professional designation, firm compliance departments use FINRA’s benchmarks as part of the process of approving credentials for use on business cards.

Here’s what FINRA looks for in a credential and what it means:

Issuing Organization
Credentials issued by a for-profit organization are designed, frankly, for the organization to make a profit. Although the courses and exams leading to the credential may be on point, continuing education requirements are likely to be granted only when attending the issuing organization’s conferences and webcasts, or by using their specific materials.

Prerequisites/Experience Required
If the credential doesn’t require any prerequisites or experience, you should dig deeper. Although it’s common to have no prerequisites for an entry-level certificate program, having no previous requirements for a designation can signify a less than a robust credential.

Educational Requirements and Exam Type
These requirements are the core of any meaningful credential. Robust credentials will show a program of study, typically one or more semester-long courses. Courses should have learning objectives, study guides, and/or textbooks and supplemental webcasts or boot camps. The fewer the study options and learning objectives, the less robust the credential.

Continuing Professional Education Requirements (CPE)
CPE requirements are second only to education and exam requirements when deciding on the value of a credential. Be careful of designations that have “none” in this box on the FINRA site. Look for a minimum number of credits hours per year, and preferably 20 credits per year.

Interpreting the so-called professional credentials can be tough for a non-industry professional, and many seasoned industry veterans. The descriptions of the designations are written by highly paid and talented marketing teams, so they will all sound impressive. Before allowing yourself to be impressed, spend a few minutes using the free tools provided by FINRA to evaluate the best professional credential for you and your plans.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Savings Rate: All Participants are Not Equal

Posted by Rex Kim

February 6, 2018

Socially_Responsible_Investment.jpgWe all have heard that the U.S. stock market has historically produced an annualized return of 8%. This 8% is used as the input to calculators, spreadsheets, and other financial planning tools to provide retirement plan participants a recommendation for a savings rate. There’s another number that is frequently used: 10%. This 10% is used so often as an example of savings rate that it has almost become a recommendation. Then there’s 4%. This number suggests taking 4% of your investment portfolio value as income once in retirement. You plug these numbers into a financial planning tool and magic happens. You can retire in comfort with nearly 100% of last year’s income (when including Social Security) and still have money left at death to pass on to your heirs. Magic!

Well, not really. Recordkeepers provide for their plan sponsor clients an annual report that details how well the plan is currently working toward providing income for participants in retirement. In this report, the recordkeeper will work the mathematical magic and provide for you, the plan sponsors, a snapshot of the plan average income replacement ratio, the number of people on track versus not, and other useful information. Please do not take this as a knock on the recordkeepers’ reports. There is value in these reports. However, the value of the reports relies heavily on the methodology and inputs. Taking their reports at face value could lead to bad decisions.

Let’s start with the 8% annualized return for the U.S. stock market. That 8% historical return is derived from the very long history of our then growing industrialized nation. We are now a mature economy with future growth rates that are reasonably expected to be lower than in the early years. Also, the reality of today is that we are living in an interest rate environment that is quite low relative to history. Others would also add that equity valuations are quite high today relative to history. These and other factors suggest a more prudent number is likely lower than 8%.  Let’s try 6%. The 100% income replacement ratio drops to about 80%.  What about 5% (a number more closely resembling a balanced portfolio of stocks and bonds)? The number drops to 75%.  Not so bad in either case as both the 80% and 75% are within the suggested 70% to 100% income replacement ratio range that is often recommended. 

The above example is for someone starting at 25 years of age, earning $25,000 that first year and with salary growing at inflation. What if this person instead is earning $65,000 that first year? The magical model now tells us that this participant has an income replacement ratio (including Social Security) of about 54%. This is because Social Security accrues only up to annual income limit, which for 2018 is $128,400.  In other words, the more you make, the more you need to save for yourself as Social Security will represent a smaller percentage of your income replacement ratio. 

What level of savings rate would a participant making $65,000 that first year need to achieve the same 75% income replacement ratio as that person who is making $25,000? This person would need to save about 18% of income (versus 10%) to achieve that 75% income replacement ratio when withdrawing 4% of portfolio value for retirement income. Now imagine a report that combines all participants, despite the differences in their current salary and general life situation, into a single report and a single average number. Also, understand that these reports only deal with information that the recordkeeper has at their disposal. They do not know whether a participant owns a home, has a mortgage, has outside savings accounts, has student or consumer debt, or a myriad of other facts. In our role as retirement plan consultants, we see these reports from dozens of recordkeepers. The reports are useful and informative. However, they can also be misleading. To maximize the value of the recordkeeper’s analysis, review these on an annual basis and seek trend comparisons. Review your plan figures relative to peers. Most importantly, dig into the methodology and inputs. Do not let the headline numbers lead to changing the plan design without careful consideration of other factors.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Why We Watch List

Posted by Caryn Sanchez

February 1, 2018

shutterstock_396852841_blog.pngClients often wonder why we Watch List plan investments rather than automatically recommending funds for removal, particularly when there are manager departures or performance concerns. To answer this question, we thought we’d share a case study around one large cap value offering.

In June 2014, the investment manager announced that the fund’s founding and sole Portfolio Manager (PM) was stepping down. While this might give some investors pause, the firm announced this move over a year in advance of his planned departure date and named his successor. The successor worked alongside the PM for many years on a different strategy in the same asset class with a similar philosophy and process. While the departure of any PM can raise concerns, ultimately Multnomah Group’s Investment Committee decided that the lengthy transition period and the successor’s familiarity with the fund and its investment management did not warrant a recommendation for removal.

Over the course of 2014 and into early 2015, the fund’s relative performance suffered. On deeper analysis, we found that much of the underperformance was attributable to a single sector. The PM had a strict valuation discipline and found few opportunities to invest in the well-established quality companies he preferred, leading to a sector weight half that of his benchmark index. The sector experienced a strong rally in 2014 and into 2015, making the fund’s underweight the most significant detractor from performance during the period. In April 2015, our Investment Committee placed the fund on Watch List. In accordance with our procedures, we distributed an initial commentary and periodic updates to affected clients as we kept a close eye on performance and the progress of the portfolio manager transition.

The fund’s performance continued to be challenged through early 2015, and we saw a partial recovery in the second half of the year, but performance slipped again briefly during the first quarter of 2016. Our team continued to monitor the fund’s performance closely and found that most of the difficulties were cyclical and to be expected given the manager’s patient, value-sensitive approach. Our team also participated in conference calls and meetings with the fund’s managers to better understand performance, the progress of the manager transition, and how the new manager was implementing his views into the portfolio. In July 2016, eight months after the manager transition, our Investment Committee upgraded the fund’s status to Satisfactory.

If we had recommended this fund for removal during its most challenging performance period in mid-2015, we would have “locked in” losses for participants. By July 2016, the fund had recovered its losses, and from Aug. 1, 2016 to Dec. 31, 2017 the fund gained another 25%[1].

Notes:

[1] Performance information is provided by Morningstar, Inc.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Multnomah Group Named to 2018 PLANADVISER Top 100 Retirement Plan Advisers

Posted by Multnomah Group

January 29, 2018

2018PA_Top100.jpgMultnomah Group is excited to share that we have been named one of the 2018 PLANADVISER Top 100 Retirement Plan Advisers! This is the fifth consecutive year we have been included on the list[1]. The Top 100 Retirement Plan Advisers is an annual listing of advisor individuals and teams that stand out in the industry in terms of a series of quantitative measures. These include the dollar value of employer-sponsored retirement plan assets under administration (AUA), as well as the number of plans under advisement.

This year, we are recognized in two segments of the list, “Large Teams With $3.5 Billion or More in Retirement Plan Assets Under Advisement” and “Large Teams with 150 Retirement Plans or More Under Advisement.”

The Top 100 Retirement Plan Advisers is segmented into four groups based on the number of advisors and number of total employees including support staff: Individual advisors are one advisor with support staff; a small team comprises of two or more advisors and support staff, the total not exceeding 10; a large team is a group of 11 to 35 advisors and support staff; mega teams have 36 or more team members.

To qualify for a particular segment individuals needed a minimum of 100 plans or $950 million in retirement plan AUA; small teams had to advise at least $1.5 billion in retirement plan assets or 115 plans; large teams needed $3.5 billion or more in retirement plan AUA or 150 or more plans; and mega teams had to oversee at least $10 billion in retirement plan AUA or 300 plans.

To see the full list of 2018 PLANADVISER Top 100 Retirement Plan Advisers, click here.

Notes:

[1] Multnomah Group has been listed on the PLANADVISER Top 100 Retirement Plan Advisers in 2014, 2015, 2016, 2017, and 2018.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Recent Fidelity Announcement Reminds Plan Sponsors to Understand the Fees Associated with their Retirement Plan

Posted by Scott Cameron, CFA

January 29, 2018

shutterstock_245477752_blog.jpgFidelity made headlines last week by announcing they were going to start charging a plan service fee on assets invested in Vanguard funds on their platform. Digging into the details, the announcement has a limited immediate impact as it only applies to prospective clients who are new to Fidelity with plan assets less than $20 million. While the immediate impact is negligible for most plans, the announcement raises an issue that is becoming more prominent within the industry.

Over the past five to ten years, the retirement plan industry has experienced significant fee compression for recordkeeping services. The compression has been driven by increased fee disclosure, a strong bull market, and increased fiduciary focus, informed in some cases by an increase in retirement plan litigation. At the same time as the market has faced fee compression, many plan fiduciaries have also changed the method by which they pay for recordkeeping services, eliminating revenue sharing subsidies and in many instances moving away from asset based pricing to per participant fees. These changes have reduced fees and limit the ability for recordkeepers to increase their fees over time as they do not benefit from the rising tide of strong capital market returns.

As recordkeeping vendors have faced fee pressure, they started to look at alternative methods to increase their revenue and margins for clients. In my experience, this trend has taken two primary forms. First, recordkeepers are more aggressive in charging for “out-of-scope” services. Second, recordkeepers are looking at avenues to monetize the relationship that they have with plan participants.

With respect to “out-of-scope” services, we have seen vendors more narrowly define the core services they are providing for the bundled fee proposed during the vendor search process. In cases where the services fall outside of the “core,” they are charging hourly, fixed, or time and materials fees to cover the additional services. While many would view this as a reasonable approach, the challenge lies in that there is no consensus on what should be included in the “core” services, and there are instances where the plan fiduciary and their vendor have a differing understanding of the “core” services.

Examples we have seen include:

  • a vendor charging for changes to funds within a plan’s investment menu
  • charging for fund mergers
  • corporate acquisitions that result in plan mergers
  • charges for preparation and fulfillment of required participant disclosures

Fidelity’s announcement fits within this categorization because their rationale for this fee is that Vanguard does not provide financial support for the recordkeeping services that Fidelity provides and they also require operational standards that increase Fidelity’s costs. In general, these costs tend to be a small percentage of a plan’s total expenses. Most frequently, these fees create minimum revenue to the recordkeeper and erode the recordkeeper’s goodwill with clients as it results in unplanned fees that are a nuisance.

While out-of-scope services are primarily a nuisance to plan sponsors that create modest revenue, the opportunity for recordkeepers to monetize the participant relationships that they maintain presents a greater opportunity for recordkeepers. Historically, this was easy because the largest recordkeeping firms were affiliated with asset management organizations (either mutual fund firms, insurance companies, or banks) that populated the investment menu with proprietary investment options that generated higher nominal revenue for their higher margin asset management groups.

Over the past two decades, the market has moved away from proprietary investment management with “open-architecture” being a standard feature of all major recordkeeping platforms. Most plan sponsors require recordkeeping vendors to provide a “clean” proposal for services that are not incumbent on using any percentage of proprietary fund options. There are still exceptions, but the likelihood of using recordkeeping services to drive growth in investment management assets under management has reduced dramatically.

With that avenue off the table, the two primary methods remaining are capturing participant rollovers and managed accounts. The capture of rollovers has long been an objective of recordkeeping vendors. They benefit by maintaining those relationships for longer and potentially consolidating the participant’s other assets on their platform. Additionally, rollovers frequently move the participant out of a low-cost, institutionally-priced recordkeeping relationship into a higher fee individual relationship where the recordkeeper is likely more successful in using proprietary investment management products. Theoretically, the higher fees for the rollover IRAs are because the vendor is providing a higher level of services, but the opportunity for abuse of this relationship is high. In fact, one of the primary objectives of the Department of Labor’s (DOL) Conflicts of Interest Rule was to combat abuses in IRA rollovers.

Managed accounts are a newer method that recordkeepers are using to try and monetize relationships. Managed account services are add-on services that enable a participant to have their account professionally managed on a discretionary basis within the plan. The services can either require participants to opt-in to the program or can be used as a default, requiring participants to opt-out if they don’t want to use it. In all cases, participants that use the ongoing discretionary portfolio management services pay an asset-based fee on their assets invested using the service. Fees can vary widely but are frequently in the 0.40% - 0.60% range. Managed accounts offer an opportunity for the higher margin revenue that used to be generated through fund management.

An evaluation of the merits and drawbacks of managed accounts is outside the scope of this blog post, but the takeaway for plan sponsors is that “fee” discussion is becoming more challenging. Diligent plan fiduciaries understand the economics of their retirement plan: who they pay, how they pay them, and how that compares to the market. As recordkeepers are becoming more aggressive in trying to find other methods to generate revenue, plan fiduciaries need to take a broader analysis of the economic relationship with their vendor to understand the scope of the fees associated with their plan. This is also important because how the recordkeeper is making money may create conflicts of interest that need to be monitored by the plan fiduciary.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Treichel Earns CHSA Designation

Posted by Multnomah Group

January 24, 2018

Bonnie_Right_FullSize.jpgMultnomah Group is proud to share that our senior consultant Bonnie Treichel has earned her Certified Health Savings Adviser (CHSA) designation! As a CHSA, Bonnie further demonstrates her academic and practical understanding of how high-deductible health plans (HDHPs) and HSAs can be beneficial for both employers and employees.

Facilitated by Access Point HSA, the CHSA designation program is designed based upon research and discussions with financial professionals who are currently working in the industry on a daily basis. Therefore, the knowledge and information received through this designation program is not simply academic but is practical and immediately applicable.

Bonnie’s designation in this area further strengthens Multnomah Group’s foundation to assist clients in developing and maintaining successful retirement plan programs.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

What’s All This Confusion About? Top 5 Things Employers Should Help Employees Understand about HSAs

Posted by Bonnie Treichel, J.D.

January 23, 2018

shutterstock_461780311_blog.pngHealth Savings Accounts (HSAs) are still in their infancy, but they are growing rapidly and are particularly popular among millennials.[1] But, does everyone understand the pros/cons of HSAs well enough to make an informed decision about whether an HSA is the right fit both for the employer and the employee?

In August, I outlined some of the basics about HSAs (read more here). This post will identify five things employers with HSAs should help their employees understand about HSAs and a follow-up post next month will help plan sponsors vet their HSA service provider. 

Let’s get started:

  1. HSAs are different from Flexible Spending Accounts (FSAs) and Health Reimbursement Arrangements (HRAs). A common misconception among employees is that they must spend the money in their HSA by the end of the year. While that may be the case with an FSA, that’s not the case with an HSA. An HSA rolls over from year-to-year with no time limits. Likewise, an HSA does not have required minimum distributions once the employee hits 70 ½.   

  2. HSA limits for 2018.The HSA limits, meaning the maximum contribution into an HSA, for 2018 is $3,450 for an individual and $6,900 for a family. There is also a $1,000 catch-up for individuals age 55 and over. HSA contributions can come from the employer, the employee, friends, or family; however, the total maximum contribution remains the same regardless of the source.      
     
  3. The responsibility is on the employee, not the employer. Unlike a 401(k) or a 403(b) plan, the HSA places the responsibility on the employee. HSAs are individual accounts that are owned by the employee, which puts the responsibility on the employee to save receipts and know the limits, for example.   

  4. HSAs are savings vehicles. Fidelity annually estimates what a 65-year old couple, retiring in the current year, will need to cover healthcare and medical expenses throughout retirement. The 2017 estimate is $275,000.[2] Given the cost of healthcare in retirement, HSAs can assist employees in saving for healthcare costs in retirement today. Most employees do not realize that HSAs can be invested. While only a small number of HSA providers have an open architecture investment platform today, it will likely become the trend in the next few years. Today, many HSA providers have a limited offering of pre-selected funds available. 

  5. HSAs provide a triple tax advantage. Many employees do not realize the triple tax advantage of the HSA. Contributions are tax-free. Earnings grow tax-free. And, distributions are tax-free. 

It’s important to note that HSAs are not for everyone, as an individual with chronic health problems and substantial medical bills year-over-year may find the HSA is not an appropriate option. This post should provide an overview of key areas of confusion in the marketplace that an employer may determine are appropriate for additional education with participants. For more information regarding HSAs and the education that plan sponsors with HSAs may consider making available to employees, contact a consultant at Multnomah Group

Notes:

[1] In reviewing participation by age, a study showed that millennials (under age 26) had the highest participation in high deductible health plans at 44.6%, closely followed by millennials over age 26 at 40.3%.  Benefitfocus, “The State of Employee Benefits – 2017”. 

[2] See, Health Care Costs for Retirees Rise to an Estimated $275,000 Fidelity Analysis Shows, available at: https://www.fidelity.com/about-fidelity/employer-services/health-care-costs-for-retirees-rise.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

In 2018, Let’s Be Better

Posted by Erik Daley, CFA

January 18, 2018

I know it’s a trope, but one that annually I voluntarily participate in - creating resolutions to ring in the New Year. The list I came up with for myself is probably a pretty familiar list:

  1. Get Healthy
  2. Get Organized
  3. Spend Less
  4. Save More
  5. Learn Something New

Reflecting on my list, I’m struck by how similar these resolutions are to the work we do for so many of our clients each year. While the resolutions above are mine, you might consider them for your retirement plans as well.

Get Healthy

The retirement plan we sponsor, and the plans we consult on for our clients, are constantly changing as new participants enter and leave, investment products and markets change, and rates of saving fluctuate. The health of any retirement plan comes down to how effective it is in aiding participants in preparing for an adequate retirement. We are encouraging our clients to continue to evaluate and then improve the health of their retirement plans. 

Get Organized

Maintaining a retirement plan can be a thankless job. Dozens of responsibilities each year with consequences for failing to meet the obligations. Nearly all plan sponsors have limitations on the amount of time they can spend addressing the changing requirements of managing a retirement plan effectively. Every sponsor should have an organized process for addressing their obligations each year. Our Annual Fiduciary Program (see image below, click the image for a full PDF) is what we use with our clients. Whatever your method to ensure you are on top of your obligations as a plan sponsor, staying organized is critical. 

Multnomah Group Annual Fiduciary Program

 

Spend Less

Every week we meet with retirement plan providers, and nearly all of them have commented on the rate of fee compression in the marketplace. One of the more impactful ways to improve plan health is to minimize the impact of fees on participants. If you haven’t conducted a thorough fee benchmarking exercise in the past two years, now is the time. You’ll be surprised by what you find.

Save More

Improving participant savings rates is the most impactful step any sponsor can make towards plan health.  Investment menu improvements and fee reductions are effective at the margins, but revolutionary changes can be achieved by increasing the amount the population saves toward retirement. Behavioral finance and auto saving features continue to demonstrate their ability to positively impact savings rates and improve plan health. Your next new hire will thank you… eventually.

Learn Something New

We recently worked on trying to plot out the information that you may need to be an effective sponsor and fiduciary to your plan, and the list was longer than we expected. For nearly all of our clients, issues related to the retirement plan are only a portion (frequently a small one) of their total job responsibilities. It is impossible to become a retirement plan expert overnight (I’m two decades in and still learn something new nearly every day), but commit to picking a piece of your plan and understanding it. Over time you can increase your knowledge base and effectiveness dramatically.

We’ll help.  On Jan. 24, 2018 we’re hosting a webinar where we discuss five potential retirement plan resolutions in the new year. I hope you can join us.

We founded the firm more than fourteen years ago to help make plan sponsors more effective in helping their employees secure retirement with dignity. We appreciate you subscribing to the blog and the work you do on behalf of retirement plans.

Happy New Year.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Is Reviewing Your Retirement Program the Same Failed New Year’s Resolution Year after Year?

Posted by Stephanie Gowan

January 16, 2018

shutterstock_561708253_blog.pngDo you find digging into your current retirement plan as grueling as that new work out program you created as your New Year's Resolution? For most busy HR and finance professionals, the answer is yes. It's a mentally exhausting task, but for a plan sponsor, it's an important one.

Here are a couple of tips to get you prepared to start your retirement plan improvement resolution.

Set realistic expectations surrounding the time it will take to make changes and work backward from your target goal date.

Here are some examples:

  1. Changing recordkeepers. Most recordkeepers require 8-12 weeks to onboard your Plan to their platform. And remember, that is 8-12 weeks after you have decided on a new vendor. Sometimes the search for the right recordkeeper can take 30-90+ days.
  2. Updating investments. This requires a notice to be distributed to participants 30 days prior to your actual desired date of change. Once you have completed your investment selection process, you can expect at least a few days for the notice to be generated and you have to give employees 30 days warning.

Cultivate a committee that is educated and engaged. If your committee is not steadfast in meeting regularly and making decisions, you need to re-engage them or form a new committee.

Committee members may feel tired and overworked, and serving on a committee is just another task on their mile-long to-do list. Make sure your committee is trained on their responsibilities as fiduciaries, are fully-engaged, and make your regular committee meetings a priority. Members who drag their feet and are no-shows may limit your ability to vote and ultimately slow down the decision-making process. This can be costly to the plan sponsor and participants. Also, make sure every member on your committee knows their fiduciary responsibilities and acknowledges them.

Be informed on your Plan’s current state before trying to make decisions.

You have to know where your Plan is heading in order to navigate where you want it to go. If your team cannot help easily explain your plan design, recordkeeping capabilities, fees, and your current investment menu and operations structure it will be hard to make decisions going forward. Re-educate yourself on plan provisions and if you still feel lost, bring in a fresh pair of eyes to review your program and expose opportunities.

Self-evaluate how you feel about your program. If your program seems too complicated to understand and review, then your current structure is likely more complicated than it needs to be.

Identify the pain points and areas of confusion and low transparency in your Plan and talk to your team about ways to clean it up. Chances are, if you (the HR/finance professional) cannot easily explain the what and why, your participants won't understand the plan details either. Retirement programs have seen changes over the past decade that allow for more robust investment offerings, more simplistic fee structures, and lower fees. Ask your team how you can simplify!

Hire someone to perform due diligence or a fiduciary review.

With there being a plethora of recordkeeping providers, third party administrators's (TPA) and investment options it can be hard to differentiate value and benchmark cost. Hire an objective third party to complete the plan review for you. These are professionals who can benchmark fees, evaluate investments, review plan design concerns, and provide apples to apples comparisons should you be conducting investment or recordkeeping searches. It can take HR/finance teams weeks or even months to complete these projects internally. 


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

New Retirement Plan Loan Default Rules

Posted by Brian Montanez, CPC, TGPC, AIF®, CPFA

January 15, 2018

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Hopefully while you were celebrating the holidays this year you noticed the U.S. Congress passed, and on Dec. 22, 2017 President Trump signed into law, the Tax Cuts and Jobs Act (TCJA). While there were proposals to make significant changes to the tax status of contributions and even the deferral limits, the approved bill makes few benefits changes.

However, I do want to discuss one specific change I think will be beneficial to retirement plan participants who have taken a plan loan.

One significant provision of the TCJA affects how the Internal Revenue Service (IRS) will treat plan loans for participants who are no longer employed by the company sponsoring the retirement plan from which their loan originated. Effective Jan. 1, 2018, the TCJA allows the participant an extension of time to satisfy outstanding loan obligations. This new rule may help participants who have borrowed money from their employer’s plan avoid unexpected taxation if they terminate employment or if the Plan terminates.

The TCJA “extends the period during which a qualified plan loan offset amount may be contributed to an eligible retirement plan as a rollover contribution.”[1]

“A plan loan offset is a foreclosure on a participant’s account that occurs when the participant defaults on a plan loan, such as following termination from employment when a plan states that the loan becomes immediately payable in full and the loan is not timely repaid. When an offset occurs, the unpaid loan balance is deducted from the participant’s plan account (the loan is “offset”) and the amount of the loan offset is reported to the participant on a Form 1099-R as an actual distribution.”[2]

Under the old rules, and subject to the specific rules of your retirement plan document, you generally had until the end of the quarter after the quarter in which you stopped making loan payments to pay off the loans. If you didn’t make this deadline, you were taxed on the amount of the loan principal not yet paid.

There are two ways a participant can avoid this taxation. First, the participant can repay the loan to the Plan before the distribution occurs, permitting the Plan to pay the participant the full account balance. The second option allows the participant to receive the balance, net of the offset from the Plan. They can then add from their taxable assets the amount of the offset to the IRA. This satisfaction of the loan obligation at the time of rollover preserves the tax status of the full distribution. Under the previous law, a participant had only 60 days from the date on which the loan was offset to complete either action, which is often too little time for a participant to come up with the money. 

The new, current law provides participants more time. A participant who has a loan offset will have until his or her tax return due date (including extensions) for the year during which the loan offset occurred to roll over the taxable amount of the borrowed funds to an IRA or other employer plan. So, if a participant experienced the loan offset sometime during 2018, they would have until their tax return due date of April 15, 2019 (or, if they extended their return, until Oct. 15, 2019), to deposit the offset funds to an IRA or other employer plan.

This extension of time is available only if the loan becomes taxable due to a termination of employment or a termination of the Plan, and not because the participant had defaulted on the loan repayment while employed. This new wrinkle in the rules should be beneficial to many participants who receive unexpected offsets.  However, you may need to amend your plan documents or loan policies to address this increased flexibility.

Notes:

[1] Tax Cuts and Jobs Act, Section 1505.

[2] Drinker Biddle, Plan Sponsor Update - The Impact of Tax Reform on Qualified Plans and Fringe Benefits, available at: https://www.drinkerbiddle.com/insights/publications/2018/01/plan-sponsor-update-the-impact-of-tax-reform-on-q


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

4th Quarter 2017 Market Update

Posted by Tina Beltrone, CFA

January 11, 2018

Multnomah Group 4th Quarter 2017 Market CommentaryThe U.S. economy grew at an annualized rate of 3.2% in the most recent quarter, the fastest pace in more than two years. The current economic expansion is the third longest in modern U.S. history at over 100 months long. While growth has not been robust throughout the cycle, it has been relatively steady. Tax reform will likely have a positive impact on the economic expansion in 2018.

The labor market is solid with the unemployment rate holding steady at 4.1% in December, a 17-year low. 148,000 jobs were added in the month which was lower than expected due to retail sector job losses. Wage growth remained relatively low throughout 2017 despite the low unemployment rate. Core CPI, which strips out food and energy prices, rose 0.1% in November, up 1.7% from a year ago. This remains substantially below the 50-year average of 4.0%. The Federal Reserve’s preferred inflation measure, the personal consumption expenditures (PCE) price index excluding food and energy, has consistently undershot the Fed’s 2% target for over five years. U.S. factory activity increased more than expected in December, boosted by a surge in new order growth, signaling strong economic momentum. Consumer spending, which makes up over two-thirds of the U.S. economy, rose less than 1% for the most recent period. Consumer expectations remain at historically strong levels, despite a decline in consumer confidence in December after reaching a 17-year high in the prior month. Proposed tax cuts for an estimated 60% of households are expected to continue support robust consumption in 2018. The Fed raised interest rates by 25 basis points in December; the recent hike was the fifth increase since December 2015. A new Fed led by Jerome Powell with other appointments by President Trump will likely make for a more “hawkish” approach to monetary policy in 2018 – thus one could reasonably expect stronger actions from the Fed regarding the number and magnitude of rate hikes given the threat of inflation. 10- and 30-year Treasury bond yields increased modestly to 2.4% and 2.7% during the quarter. All fixed income sectors had positive returns for the quarter except for asset-backed securities that reported a minuscule loss. The dollar index moved modestly lower in the quarter. The Fed started reducing its bond holdings in late 2017 and will continue at a measured pace over the course of several years; this follows the expansion of its balance sheet since late 2008 as it staved off a collapse of the financial system.

The U.S. equity markets continued to soar with the S&P 500 gaining 6.6% for the quarter and 21.8% for 2017. The recent strength was partly due to upcoming tax reform - the first significant reform of the U.S. tax code since 1986. The equity markets also responded to continued attractive earnings for S&P 500 companies which should continue into 2018. The largest sector gains in the S&P 500 for the quarter were consumer discretionary and technology, increasing 9.9% and 9.0%, respectively. For the year, tech stocks led the way, increasing 39%. All sectors were in positive territory for the quarter. The forward P/E for the S&P 500 inched up to 18.2x, versus a 25-year average of 16.0x. Large cap stocks outperformed small caps for the quarter and the year. The emerging markets sector continued to rally in the fourth quarter finishing the year up 38% taking advantage of a broad-based world economic expansion and favorable commodity prices. China continued to climb higher increasing nearly 8% for the recent quarter and 54% for the year. Commodities showed signs of life late in 2017 as the Bloomberg Commodity Index gained over 4% during the fourth quarter, but ended 2017 as the second worst performing asset class. U.S. crude oil prices jumped about 16% in the quarter, finishing just shy of $60/barrel. REITs gained 2.6% for the quarter and about 9% for the year. Fundamentals remained strong for commercial real estate with positive rent growth and stable vacancy rates across nearly all core property types. Residential home prices continued to rise during the quarter based on low supply and high demand.

 To view Multnomah Group's full Capital Markets Review, please click here


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Multnomah Group Welcomes David Williams and David Imhoff

Posted by Multnomah Group

January 9, 2018

We are excited to share we’ve expanded our team with the hiring of David Williams, CFA, as a senior consultant and David Imhoff as client operations associate.

David Williams _Blog.pngIn his role as a senior consultant, David Williams is a member of Multnomah Group’s Investment Committee and works with clients advising them on investment menu construction, investment manager selection, fiduciary governance, and vendor management.

David’s background includes nearly two decades of work in the retirement plan space. Prior to Multnomah Group, he held the position of search consultant for a Washington-based search firm. David also served as a principal for a national retirement advisory firm, where he worked for more than 15 years providing investment consulting services to retirement plan sponsors, as well as endowments and foundations.

David is a member of the CFA Institute and he earned his B.S. from the University of Puget Sound.                        

David Imhoff _Blog.pngAs our client operations associate, David Imhoff is responsible for providing support to the firm's Personal Advisory Service clients and investment advisors, including data management, client reporting and billing, and account establishment/maintenance.

David earned an M.A. in Political Science and Economics from Miami University and a B.A. in Political Science from the Ohio State University.

 

 


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

We've Seen This Picture Before

Posted by Rex Kim

January 4, 2018

2017 was yet another banner year for investors with the Standard & Poor’s 500 Index providing a total return of 21.8%. This same index has now annualized at a rate of 15.8% for the past five years! What’s your prediction for market returns in 2018? For those of you that know Multnomah Group well, you know that we do not believe in market timing. We believe long-term investment success boils down to simple concepts and discipline. Unfortunately, the all too rosy picture of continued financial market performance leads to poor decisions. In order to provide a more balanced view of the future, we provide for you the exciting topic of the Yield Curve.   

Below is a graph pulled from the St. Louis Federal Reserve Bank’s website. This graph details the spread between the 10-Year Treasury Constant Maturity minus the 2-Year Treasury Constant Maturity.  Within the graph are grey bars, which mark periods of recession. This graph goes back to the summer of 1976. There’s nothing special about that year for the purpose of this blog.  (It’s simply the range that the website would allow me to graph.) 

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The point of the graph above is straightforward. Historically, the spread between the 10-Year Treasury and 2-Year Treasury has foreshadowed market events. For example, 1978, 1988, 1998, and 2006 are the years when the spread between the 10-Year and 2-Year went to zero (0%). In other words, these are the moments in time when the short-term cost of capital equaled the long-term growth expectation. Within some period of time, the U.S. economy ended up in a recession. As of the end of 2017, the spread between the 10-Year and 2-Year Treasuries was at 0.51%.  Not zero… but quite close. Dare I say trending towards zero.

Clearly, I am only showing you four data points and such a small sample size is not enough to prove a point.  However, there is a reasonable story today behind the numbers. The Federal Reserve has already signaled to the markets their expectation of raising short-term interest rates two to three times in 2018. Despite this, or maybe because of this, the long end of the Treasury curve has not moved up. At the end of 2017, 10-Year Treasuries continue to be stubbornly stuck below 2.5%.

As I said earlier in this blog, long-term investment success comes from simple concepts and discipline.  Plan sponsors can help their participants learn these concepts and be reminded of the disciplines needed through well thought out group education sessions. Two timely topics are strategic asset allocation and rebalancing.  


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Happy Holidays from Multnomah Group

Posted by Multnomah Group

December 20, 2017

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During this season, we take time to reflect upon the good things we have, like our partnership with you. We appreciate working with you and hope that the holidays and the coming year will bring you happiness and success.

Our office is closed between December 22 and New Year’s, but our consultants are available via email should you need anything.

Happy Holidays!

Multnomah Group Welcomes Becki Koldsbaek

Posted by Multnomah Group

December 15, 2017

Becki_blog.pngWe are pleased to welcome Becki Koldsbaek as our compliance support specialist! In Becki's role, she is responsible for supporting the firm's compliance program and promoting a culture of compliance. Her primary responsibilities include preparation and distribution of regulatory filings and disclosures as well as assisting the chief compliance officer to ensure that the compliance program satisfies all federal, state, and local requirements, as applicable.

 

Prior to joining Multnomah Group, Becki was a regulatory audit coordinator for a mortgage servicer.

Becki earned a B.S. in Business Management from Biola University.

As Regulation Declines, Litigation Is on the Rise

Posted by Bonnie Treichel, J.D.

December 14, 2017

GavelBookSchool.jpgA key objective of the Trump administration has been less regulation. Looking back to Feb. 3, 2017, President Trump signed a directive aimed at unwinding Dodd-Frank, and he issued a memorandum directing the Department of Labor to review the fiduciary rule. As a part of the Dodd-Frank directive, President Trump laid out core principles to empower American investors and enhance competition for American companies. Over the course of the year, both the financial services sector as well as those working in the the human resources department have witnessed a theme of less regulation from the Trump administration. 

And, while less regulation may be good in some respects, in the absence of regulation, litigation is filling the gap. For example, an update this fall by Groom Law reported that “this year has been an active year for excessive fee cases as more than 30 cases have been filed across almost every circuit in the country.  In comparison, over the past decade, there were only about 80 ERISA excessive-fee cases filed across the country.”[1]   

In the past two weeks, two new cases were filed, which may be noteworthy to you:

Birse v. CenturyLink. This class action lawsuit was filed on November 30 against one of the biggest telecommunications companies, taking aim at one particular fund (the “Large Cap Fund”) that utilized five active managers and one passive manager. Plaintiffs argue that the construction of the fund via its management structure was a design flaw because it was impossible for the fund to meet its stated investment objective. Accordingly, the plaintiffs argue a breach of fiduciary duty for the underperformance of this fund given the known (or what should have been known) design flaw.       

Teamsters Case. The second case recently filed is significant because it took aim at a new ERISA target – union plans. The class action lawsuit of Ybarra v. Board of Trustees of Supplemental Income Trust Fund, was filed against a $921 million union retirement plan in California. The plaintiffs allege similar claims to other cases we have seen in the past including breach of fiduciary duty for payment of excessive fees to two recordkeepers and use of retail share classes (as opposed to lower cost institutional share classes).

In both cases, the attorney for the plaintiffs is Franklin D. Azar & Associates based in Colorado.  While traditionally the Schlichter firm in St. Louis was the sole plaintiffs firm to file ERISA class action cases, Franklin D. Azar & Associates has now filed at least five ERISA class action cases, which may symbolize a new firm stepping in to file cases in this space. 

For plan sponsors, these cases continue to be a reminder to follow best practices and meet fiduciary responsibilities, which include but are not limited to:

  • Meet regularly
  • Follow a prudent process
  • Document the process
  • In areas where you lack expertise, hire an expert to help!

To learn more about your responsibilities under ERISA and the way in which these cases may impact your plan(s), contact a consultant at Multnomah Group. 

Note:

[1] See, Washington Watch, Plan Sponsor Fee Litigation Cases on the Rise, Fall 2017, available at: http://www.groom.com/media/publication/1888_Washington%20Watch_Fall_2017_Final.pdf.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Vendor Role Confusion: A Look at Common Misconceptions of Vendor Responsibilities

Posted by Stephanie Gowan

December 12, 2017

shutterstock_402879268_blog.pngIt’s not uncommon for a plan sponsor to feel overwhelmed trying to keep their vendors’ roles and responsibilities straight, and for a committee to feel it may have its “wires crossed” when it comes to knowing who is responsible for which roles and responsibilities. In addition, the fiduciary rule has added a layer of complexity as plan sponsors are expected to know “who is a fiduciary to my plan” and “who is providing me and my participants’ advice?”

Here are the most common misconceptions we hear when we are talking with new plan sponsors.

1) Using the term recordkeeper and third-party administrator (TPA) interchangeably. These are two different roles, and often each vendor role has a unique set of functions. Your recordkeeper may offer a “bundled” offering where they have an internal TPA unit or team who performs typical TPA functions including plan document creation and 5500 preparation. However, the function of serving as a recordkeeper and a TPA is different.

2) "I get investment advice from my recordkeeper.” Sometimes during a plan review with your recordkeeper it can feel like you are receiving recommendations and advice on your investment menu and selection. However, if you ask them, they will tell you they do not give you any investment advice, and they are not liable for plan-related investment decisions. It poses too much liability to this group. Sure, your recordkeeper may have services you can pay for to outsource investment selection and screening liability to third parties such as a Morningstar or Wilshire. However, they will not own the liability. If a conflict should arise surrounding these pre-screened investment services, they will defer to those outsourced as 3(21) and 3(38) investment co-fiduciaries. While those annual plans reviews may provide meaningful data on performance, your recordkeeper will attest they are not giving you advice on your investments, especially since the applicability date of the fiduciary rule. If you are looking for advice, hire an investment co-fiduciary.

3)My auditor reviews my plan and would tell me if anything was wrong from a fee and plan design perspective, or if anything needed to be improved.” Any experienced auditor would tell you this is the last thing they want to comment on. A good auditor is a trusted advisor, and many are well-educated on the issues facing plan sponsors today. However, their function is to review the plan for fiduciary compliance regarding plan processes, operational accuracy, and appropriate administration and control surrounding transactions. The most regarded auditors would likely say that reviewing fees, investment quality, or plan design is outside their scope of service and encourage you to have good resources and support to help you investigate these areas. It could also be argued an auditor acting as a consultant would cause them to lose their independent audit status.

4) “We offer self-directed brokerage accounts, so we are not responsible for those investments accessed through that window and our custodian handles that part for us.” Unfortunately, this is not the case. Yes, you can take the stance, “if their account suffers from their own bad decisions it’s on them.” Also, it is correct that the recordkeeper and custodian are responsible for the custody and tracking of the transactions. However, this does not alleviate you from reporting requirements and liability. The requirements related to disclosure of self-directed brokerage accounts are tedious and can feel like they may be written in a foreign language. The legal requirements of disclosure fall on the shoulders of the plan sponsor, fiduciaries, and committee members. In addition, there are instances where a broker-dealer providing the brokerage account say they cannot furnish all the required information about the account. It can grow increasingly complex when multiple brokerage windows are offered.

Lastly, it can be tough to manage the accessibility of the account with the actual provisions of the plan which can lead to disqualification and tax implications amongst other concerns.

5) “Our recordkeeper has people who provide our participants advice.” This is tricky because sometimes this is true and other times it is not. There is often a “feeling of advice,” even if your vendor does not concur. Depending on the specific agreement you have with your recordkeeper, they may have a written agreement with you stating they are a “co-fiduciary” to your participants and giving them advice. In recent discussions between our Vendor Services Committee and our clients’ recordkeeping vendors, we found few want to act as a “co-fiduciary” to your participants. Most are taking the stance of “giving guidance” which is general high-level information and responses about investment options, savings rates, and goal setting without specifically addressing risk tolerances and allocation methods and avoiding the discussion of outside accounts. For the few that want to act as a co-fiduciary to participants, they will offer a formal agreement and have a specific process in which they gather participant account data and give investment directives.

Vendors Commonly Used in Retirement Plan Administration

Let’s look at the roles of vendors commonly used in retirement plan administration and go over the basic role functions and services offered. These trusted advisors/vendors partner with you to deliver comprehensive services. When vendors synergize, plan sponsors and participants receive the best outcomes.

Recordkeeper
The primary job of the recordkeeper is to track who is in the plan, what investments they own, what money is going in or out, and to serve as the portal for plan transactions.

Services Commonly Provided

Services Typically Not Provided

  • Process employee enrollment
  • Manage and tracks employee investments
  • Log the origins of the contributions (are these pre-tax contributions, Roth, employer pre-tax match, etc.)
  • Generate 401(k) plan documents that the employer will need to deliver to employees — this includes how the plan is administered, benefits of a 401(k) plan, and specific plan features (eligibility, company match, etc.) Most recordkeepers will mail these to employees for a fee
  • Manage and record 401(k) loans and hardship withdrawals
  • Issue account statements to participants
  • Provide customer support
  • Fiduciary role
    • Plan sponsor level vs. participant level
    • Approaches may vary for each provider
  • Investment advice
    • May provide objective investment analysis, but no accompanying recommendation
  • May not provide legal advice
    • May provide ERISA consultants, but typically still recommend clients consult with their ERISA attorney
  • Sign the form 5500
  • Manage compliance work for the plan
  • Custom plan document services

 

TPA
Typically a firm providing administrative support services to a plan sponsor and/or recordkeeper when needed.

Services Commonly Provided

Services Typically Not Provided

  • Draft plan documents
  • Compliance testing
  • Prepare 5500
  • Distribute statements
  • Process loans and distributions paperwork in conjunction with recordkeeper
  • Process mailing and disclosure requirements for plan sponsor
  • Provde additional administrative support to plan sponsor
  • Sometimes an administrative co-fiduciary 3(16)
  • Investment fiduciary services
  • Investment reports or advice
  • Bookkeeping services
  • Legal advice
  • Administrative committee support
  • Participant level education
  • Voluntary correction services
  • Fee review or benchmarking

 

Investment Advisor/Plan Consultant
Typically an objective third party used to provide guidance in areas where a plan sponsor is not an expert including investment advice.

Services Commonly Provided

Services Typically Not Provided

  • Provide investment review and advice
  • Co-fiduciary support 3(21) and 3(38)
  • Conducting vendor analysis and search
  • Fee review and benchmarking
  • Comprehensive plan review - discovering administrative errors and plan design opportunities
  • Governance support
  • Making recommendations surrounding plan design and optimization
  • Assisting plan sponsors with engagement and education strategies
  • Tax advice
  • Legal advice
  • Plan testing
  • 5500 preparation
  • Bookkeeping services
  • Calculations on plan corrections, missed contributions, lost earnings, etc.
  • Plan document creation or filing
  • Filing voluntary corrections
  • Representing plaintiffs or defendants in lawsuits

 

 

Auditor
Most commonly an accounting firm which provides benefit plan audit services to employers. The Department of Labor (DOL) requires benefit plans with generally over 100 participants to engage an independent auditor to perform an independent financial statement audit. An auditor reviews a plan for ERISA noncompliance and to ensure accordance with plan documents and DOL or IRS requirements.

Services Commonly Provided

Services Typically Not Provided

  • Audits of financial statements
  • Provide advice on accounting, tax, and filing requirements for benefit plans
  • Form 5500 and Form 990 filings
  • Assistance with regulatory (DOL or IRS) examinations
  • ERISA compliance matters
  • Payroll audits
  • Review of expense reimbursement policies
  • SEC 11-K filings
    • Partial terminations
    • Various DOL and IRS correction programs
  • Assist plan sponsors with plan compliance matters included in audits of plans
  • Provide legal advice
  • Provide investment advice
  • Act as a co-fiduciary to plan sponsor or participants
  • Bookkeeping or recordkeeping services
  • Fee review or benchmarking
  • Vendor Searches
  • Any services that would impair auditor independence

 

Attorney
Typically advises plan sponsors on the tax and ERISA requirements.

Services Commonly Provided

Services Typically Not Provided

  • Prepare and review plan documents, summary plan descriptions, and communications
  • Prepare and submit determination letter applications
  • Prepare filings, including excise tax filings and annual reports
  • Consult on plan operations and legal requirements, fix administrative errors, and prepare VCP applications
  • Consult on fiduciary rules and prohibited transactions
  • Assist with DOL/IRS audits
  • Analyze prohibited transaction issues
  • Respond to participant claims/lawsuits
  • Consult on issues requiring attorney/client privilege
  • Act as a plan fiduciary
  • Provide investment advice
  • Plan remittance calculations
  • Numbers crunching - nondiscrimination testing, actuarial calculations, calculation of lost earnings (other than DOL calculator)
  • Fee benchmarking on plan vendors or investments
  • Give investment advice
  • Give tax advice
  • Provide participant advice

 

 


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Understanding & Responding to Participant Inquiries - Form 8955-SSA

Posted by Brian Montanez, CPC, TGPC, AIF®, CPFA

December 7, 2017

f8955ssa_blog2.pngUnder Employee Retirement Income Security Act (ERISA), each plan sponsor must notify the IRS of a terminated employee who has a vested benefit in their Plan. If you are subject to ERISA, this is done via Form 8955-SSA (Form 8955). This is the Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits and is due by the deadline, including extensions, for the 5500 filing of the year in which the participant terminated employment. Although it is not required, some non-ERISA plans may choose to voluntarily file the form to keep former employees informed of their benefits.

The Form 8955 is used by the Social Security Administration (SSA) to remind participants of “potential” pension benefits they may be entitled to. However, these SSA statements are notoriously unreliable because plan administrators have always been more diligent about listing participants on the Form 8955 than they are at removing them once the participant's asset are distributed from the Plan. In fact, I have a few clients that have employees who terminated employment over a decade ago and have received a letter from the SSA saying that the employer “MAY” owe the participant a specific dollar amount. And yes, the “MAY” was capitalized in the IRS letter sent to my client’s participant.

The form instructions give plan sponsors the choice to include participants separating in the current reporting year or in the prior reporting year. However, using those separating in the prior year is generally an easier approach because it reduces the urgency to capture current termination data by period-end. Additionally, reporting in the plan year following separation provides participants additional time to plan and take their distributions, thereby reducing the number of reportable separated participants.

Form 8955-SSA allows you to “delete” separated participants who were previously reported if their vested benefits were subsequently distributed in full. Unfortunately, this is often overlooked, resulting in a participant who has already taken their distribution to receive a formal letter from the SSA saying they still have money in the Plan that they are entitled to. And yes, participants will assume that your Plan still has money that is owed to them.

To verify if separated participants were previously reported, you should refer to previously filed Forms 8955 or, for a qualified plan, the Schedule SSA attached to Form 5500 filed for 2008 and earlier years.

It is a best practice to include previously reported separated participants as deletions in the year that full distribution occurs. If terminated participants, who were previously reported, are not subsequently deleted following a full distribution of their vested benefits, the SSA is likely to notify the separated participants or their beneficiaries applying for Social Security benefits that deferred vested benefits may remain in your Plan, and that participant will undoubtedly call you.

If a participant does reach out to you, please understand that is your responsibility to research the Plan’s historical records to validate, or update the information provided by the SSA. The first step we recommend is to reach out to your vendors to get written confirmation of the participants distributions.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Blog Miniseries: Investment Manager Selection for Actively-Managed Funds Episode 4: Portfolio Construction & Risk

Posted by Caryn Sanchez

December 5, 2017

Blog-Post-Mini-Series-IM-IMAGE_v2.pngThe investment process and portfolio construction go hand-in-hand as the test of a manager’s investment philosophy. The process shows us how managers incorporate their philosophy into their portfolio decisions. Portfolio construction is the final exhibit of their investment philosophy. Retirement plan investments are intended to work for participants over the long-term, so as we’ve stated earlier in this series we believe the consistency of investment philosophy and management are key to manager selection. We want funds that will continue to fulfill the same role in investment menus today, tomorrow, and five years from now.

There are several aspects of portfolio construction that we look at to gauge a manager’s execution of their investment philosophy. One part of this review is an evaluation of the manager’s holdings range, percentage of the portfolio invested in the top 10 holdings, and annual turnover. We compare these elements to the investment manager’s stated philosophy and process. If the manager self-identifies as a high-conviction manager with a high degree of confidence in every holding, we would expect a relatively small number of holdings with a large percentage in the fund’s top ten. A manager that seeks to diversify individual company risks would be expected to have a smaller percentage of assets in their top ten. The annual turnover is evidence of a manager’s adherence to their investment process. If the fund’s manager uses a 12- to 18-month investment horizon for their company analysis and projections, we would anticipate a higher annual turnover rate, likely at or above 50%. A manager that states a 3- to 5-year investment horizon is expected to hold companies for the long-term and their annual turnover number should reflect that.

Another piece of the puzzle is the portfolio’s stated benchmark; does the benchmark fit their investment style? If they’re an international manager with some emerging markets exposure, we’d expect them to use a benchmark that has some emerging market component. If they’re a value fund, we’d expect them to use a value-oriented benchmark. Why is this important? Managers frequently set limits on their portfolio’s investable universe and exposures to match their benchmark index. While many managers place few hard restrictions on their investable universe, a number of managers limit their investable universe to match the characteristics of their benchmark (usually market cap and degree of exposure to international companies) while other managers restrict their universe to the constituents of the index. 

The prospectus benchmark can also influence portfolio constraints on international exposure as well as sector, industry, and security weights. These constraints also serve as valuable evidence of a fund’s degree of adherence to its investment mandate. Some portfolio managers use an absolute approach, such as a cap of 25% on investment in any one sector. Other managers use a relative approach and assign an acceptable range of investment based on the index weight; continuing with our sector example, a fund may limit its exposure to +/- 2% of the benchmark weight. These constraints also serve to inform performance expectations. As of October 31, financial stocks made up more than a quarter of the weight of the Russell 1000® Index. Much of a large cap value manager’s benchmark-relative performance over the last few years can be explained by their financials weight relative to the benchmark. The size of the relative range therefore also becomes an important element of the fund’s risk controls.

Investors should be compensated with performance commensurate to the fund’s degree of risk. That said, most plan sponsors don’t want plan investments to assume more than a moderate amount of risk. Portfolio managers have many tools to mitigate risk such as the strength of their research process or quantitative models; absolute or benchmark-relative constraints on investment based on geography, sector, industry, and individual security levels; and factor exposures (such as quality and momentum). In our review process, we look at the manager’s risk procedures: how frequently they review portfolio risks, what reports they review, and how they are held accountable for their portfolio’s risk, performance, and adherence to investment philosophy.

Some smaller firms keep risk management limited to the team level and use a quantitative reporting group to generate regular risk exposure and performance attribution reports. Most managers use these reports to look for unintended risks rather than as hard warnings. Many larger investment management firms take risk awareness and management a step further and include regular risk reviews (typically semi-annual or annual) by the chief investment officer (CIO), senior investment staff, chief risk officer (CRO), and/or fund boards. In these cases, we typically look at the degrees of separation between portfolio managers and risk oversight, with a preference for strong risk reviews and risk departments that report directly to the CIO or CRO.

A fund’s stated investment process, construction, and risk management give our team necessary insight into an investment manager’s ability to execute on their stated philosophy and mandate. These elements provide evidence of an investment manager’s consistency and thus their long-term ability to maintain a specified role in the plan sponsor’s investment menu and provide participants with a necessary tool for building a diversified retirement portfolio.   

To read our previous posts in this series, see below.

Episode 1: Introduction
Episode 2: Philosophy & Process
Episode 3: Team Structure


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

DOL Extends Transition Period for Fiduciary Rule Exemptions

Posted by Bonnie Treichel, J.D.

November 30, 2017

shutterstock_390178585_blog.jpgSince the proposed rule was released in 2015[1], it has been a long and bumpy road for the Department of Labor’s Fiduciary Rule. This week via a much-anticipated final rule, the Department of Labor extended the current transition period for the DOL fiduciary rule exemptions. The transition period was set to expire Jan. 1, 2018, but has now been extended to July 1, 2019. During this 18-month extension, the Labor Department will pursue President Trump’s directive as set forth in his February 3 Memorandum by reassessing the rule's impact on retirement advice. Further, this additional time may allow the Labor Department to coordinate with the Securities and Exchange Commission.[2]

What’s this mean for your plan?

  • What applies? Don’t let this confuse you. Some provisions of the fiduciary rule started on June 9, 2017. This final rule does not change the provisions that commenced on June 9, which include: (1) many more financial professionals became fiduciaries on June 9 given the new definition of advice; and (2) the impartial conduct standards which are a part of the Best Interest Contract Exemption still apply.

  • What doesn’t apply? The mechanism that makes the fiduciary rule (and its heightened standards) enforceable are postponed. Specifically, the legally binding contract between the financial professional and the retirement account client, stating that the clients’ interests come first, is being postponed until July 2019.[3]

  • Will regulators enforce the rules? The Labor Department will not pursue claims against fiduciaries during this 18-month period so long as the financial professional and financial institution make a good faith effort to comply. The Internal Revenue Service is taking the same stance of non-enforcement during this 18-month period.

In sum, more financial professionals became fiduciaries in June, but there is a lack of enforcement mechanisms in place until July 2019 to ensure that these new fiduciaries are living up to their new, heightened standards. To learn more about how this specifically impacts your plan or participants, contact a Multnomah Group consultant

Notes:

[1] Prior to the proposed rule in 2015, the Department of Labor previously released a substantially different version of the fiduciary rule, which was released during the first term of the Obama administration; that version of the rule never became a final rule. 

[2] On June 1, 2017, the SEC – under the direction of Jay Clayton – issued a request for public comment related to the appropriate standards of conduct for broker dealers and investment advisors, available here: https://www.sec.gov/news/public-statement/statement-chairman-clayton-2017-05-31.  

[3] Additional provisions are being postponed, as more clearly articulated in the Transition Guidance and the final rule.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Blog Miniseries: Investment Manager Selection for Actively-Managed Funds Episode 3: Team Structure

Posted by Tina Beltrone, CFA

November 14, 2017

Blog-Post-Mini-Series-IM-IMAGE_v2.pngWhat is Multnomah Group looking for within a mutual fund’s team structure? There are no hard and fast rules for how a team should be organized - it simply needs to make sense for the organization and support the success of the investment strategy.  

Here are the key attributes we analyze for each fund:

Portfolio Managers (PMs)

  • roles
  • tenure
  • other responsibilities
  • decision-making authority

Analysts

  • resources dedicated to the strategy
  • centralized resources
  • tenure and background of analysts
  • turnover

Team Dynamics

  • how PMs and analysts work together to generate ideas
  • team culture
  • compensation structure

Our process combines the review of information obtained from due diligence interviews with investment managers, mutual fund presentation decks, and independent fund research from third-party providers. From this information, we look for stable and experienced teams, including both PMs and analysts, who are dedicated to the success of the respective fund’s investment strategy.

We do not have a specific preference for the size and formation of the PM team; we accept multiple approaches including co-PM models, star manager models, and a combination of one lead-PM supported by co-PMs. Our initial focus is on each PM’s tenure on the fund and skill set within the asset class. Unexpected changes in management are considered a red flag for the fund given the critical role the PMs take in executing the fund’s strategy to ultimately achieve strong and consistent relative performance. 

If a lead PM is nearing retirement, we like to see good communication from the investment manager well in advance of retirement regarding the timing of the shift and who the new lead PM will be. Ideally, we like to see the heir apparent taking on a co-PM role for several years prior to passing the torch. Also, we are concerned with additional roles that PMs take on. We carefully monitor the number of other strategies that are managed by PMs plus managerial responsibilities (e.g., CIO) that could take time away from his or her PM role.  Decision-making authority is key to understanding team structure – we are open to both single decision makers and team consensus methods. Overall, the manager needs to clearly articulate why this strategy works for the fund and must consistently manage to this.

With regard to analysts, the focus is on the years of experience within their respective teams as well as earlier positions and background. Many times, the PMs also act as analysts given that many of them came up through the ranks in analyst roles. We look at their assignments – whether they follow a specific sector or industry or if they are generalists. We like to see management define their analysts as ‘career analysts’ with long tenures and strong industry depth. We watch turnover to see if the environment is conducive to a successful working climate. If the manager has a centralized research unit, we seek to understand how the two teams work together. We ask management to articulate how the analysts interact with the PMs, both formally and on an informal basis. Do the analysts work hand-in-hand with the PMs or do they work independently? We also look at the compensation structure of the team including incentives and bonuses – since we want to see staff retention and a structure that rewards individuals on a longer-term basis. If retention isn’t strong, the fund may lose a key PM which could jeopardize its future.

There is no right or wrong way of structuring a team, but each model must make sense for their respective mutual fund. We like to hear this articulated in a clear and concise manner with conviction that the chosen method will successfully enhance the fund’s investment strategy.

Keep an eye out for the last blog post in our miniseries on Investment Manager Selection as we cover portfolio construction/risk controls. Our blog post miniseries will conclude with an in-depth white paper delving into the heart of Multnomah Group’s investment manager selection. 

To read our previous posts in this series, see below.

Episode 1: Introduction
Episode 2: Philosophy & Process


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

White Paper: Non-profit Board of Directors Involvement in Retirement Programs

Posted by Stephanie Gowan

November 13, 2017

shutterstock_260251187_blog.pngAt Multnomah Group, we work with many board-run non-profit organizations and are often exposed to managements’ working relationship with their company’s board of directors (BOD). We see first-hand how organizations interact with their board and take directives. Each organization has a unique relationship with its BOD, which raises different opportunities and challenges.

In our new White Paper, we strive to shed light on a grey area for a company’s management:  the BOD’s involvement in the administration of the 403(b) retirement program.

Read our White Paper “Non-profit Board of Directors Involvement in Retirement Programs.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Senate Tax Proposal Unveiled: Impact on Retirement Plans

Posted by Bonnie Treichel, J.D.

November 10, 2017

shutterstock_525236995.jpgYesterday on our blog, Erik warned that the Senate Committee on Finance was preparing to release their tax reform proposal and, in fact, they did. The Senate proposal (available here) is both good news and bad news for retirement plans.  

The good news for retirement plans is that we continue to see (just like in the House proposal discussed on our blog earlier this week) that there is not a cap on pre-tax contributions limited to $2,400, as discussed at one time. 

In other words, major “Rothification” has not been present in the proposals from either the House or the Senate. 

The bad news for retirement plans is that there were a few other nuances in the Senate proposal that could limit retirement savings – particularly for nonqualified plans and 403(b) plans. While our analysis is still preliminary, the Senate proposal[1] unveiled yesterday by Senator Orrin Hatch included:

  • Conformity of contribution limits for all employer-sponsored retirement plans. This essentially impacts 403(b) plans and 457(b) plans as it applies a “single aggregate limit to contributions for an employee in a governmental section 457(b) plan and elective deferrals for the same employee under a section 401(k) plan or a 403(b) plan of the same employer. Thus, the limit for governmental section 457(b) plans is coordinated with the limit for section 401(k) and 403(b) plans in the same manner as the limits are coordinated under present law for elective deferrals to section 401(k) and section 403(b) plans.”  Further, the proposal “eliminates the special rules allowing employer contributions to 403(b) plans for up to five years after termination of employment.”[2]
  • Capping catch-up contributions. For high-income earners making $500,000 or more, catch-up contributions will not be allowed.
  • 10% early withdrawal tax to governmental 457(b) plans. Unless there is an exception, there will be a tax to distributions from a governmental section 457(b) plan before age 59 ½ to the extent the distribution is included in income. 

Once again, this proposal is merely that – a proposal. Multnomah Group will continue to monitor the status of the tax reform process as it relates to retirement plans but, for now, onward with the legislative process.

Notes:

[1] See, Description of the Chairman’s Mark of the Tax Cuts and Jobs Act, available at: https://www.finance.senate.gov/imo/media/doc/11.9.17%20Chairman's%20Mark.pdf, at page 177. 

[2] See, Description of the Chairman’s Mark of the Tax Cuts and Jobs Act, available at: https://www.finance.senate.gov/imo/media/doc/11.9.17%20Chairman's%20Mark.pdf, at page 179. 


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Senate Tax Reform Bill May Be Released Today

Posted by Erik Daley, CFA

November 9, 2017

USCapitolWithFlag.jpgThere is an expectation that the Senate may release their proposed version of a tax reform bill today. With the proposed House bill having limited impact on retirement accounts (see our blog post discussing the retirement plan impacts), and the President speaking out against material changes to how qualified retirement plans work, the Senate's bill would likely be the last potential obstacle in preserving the current qualified retirement system.

Yesterday, a group of Democratic Senators issued a letter to Senators Hatch (R-UT) and Wyden (D-OR) urging them to offer protection to the current tax structure and limits (see our 2018 IRS Limits reference material) afforded to qualified retirement plans.
 
Stay tuned for more information as it becomes available.
 

Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

How are Retirement Plans Faring in the Tax Reform Proposal?

Posted by Bonnie Treichel, J.D.

November 8, 2017

Audit.jpgEarlier this year, Scott Cameron outlined some of the options around tax reform as it relates to retirement plans, but now the time has come for the parties to put pen to paper. On September 27, the Trump Administration released the outline of its proposed tax reform plan and shortly thereafter the House Ways and Means Committee, led by Republican Kevin Brady, began work on the Tax Cuts and Jobs Act, which was released on Thursday, November 2. Now, it’s time for the House Ways and Means Committee to begin their markup of the proposed legislation this week. 

So far, how does your company’s retirement plan fare under the proposed tax scheme? Overall, retirement plans survived, but the battle isn’t over and the devil is often in the details. Much of the gossip around Washington leading up to the proposed Tax Cuts and Jobs Act led many to believe that there might be a cap of $2,400 on pre-tax contributions to retirement plans. That provision was not included in the proposed legislation.   

What’s included? The proposed legislation does include several provisions that would impact retirement plans, including:

  • Nonqualified Deferred Compensation. For those with nonqualified plans, there could be substantial impacts. Section 3801 of the legislation provides that an employee would be taxed on compensation as soon as there is no substantial risk of forfeiture, which means that employees could no longer defer compensation on a tax-deferred basis to a 401(k) excess plan, since they are typically vested in the deferrals.[1]  For more information on this provision, consult with a qualified tax attorney or tax professional.   

  • Loans and Hardship Distributions. For those plans that allow loans, the proposed bill would lengthen the time that employees who have left the firm/company have to pay back a loan. The current rules allow for 60 days to pay back the loan whereas the proposed legislation would allow up until the individual files his/her tax return for that year. Additionally, if the plan allows for hardships, the proposed legislation changes the rules such that a participant can continue to make contributions to the retirement plan while taking a hardship; the current rules require a six-month suspension of contributions upon hardship distribution. Second, if permitted by the plan, hardships would now be allowed from employer money as well as account earnings (rather than distribution solely from employee funds).

  • In-service Distributions. For those defined benefit plans and governmental plans, distributions are not allowed until age 62. Under the proposed rules, in-service distributions would now be allowed at age 59 ½, if permitted by the plan.   

The above items outline proposed legislation, which have not been passed and, hence, no action is required by plan sponsors at this time. For now, stay tuned as the process is just getting started. The proposed legislation discussed in this post comes from the House and there is much opportunity for markup of the House bill (taking place this week) as well as the chance for the Senate to propose their own version.  For more information about how tax reform may impact your retirement plan(s), contact your Multnomah Group consultant

Note:

[1] See, Nevin Adams, Could Tax Reform Destroy Deferred Compensation? available at: http://www.napa-net.org/news/technical-competence/legislation/could-tax-reform-destroy-deferred-compensation/?mqsc=E3918490&utm_source=WhatCountsEmail&utm_medium=NAPA_Net_ListNapa-Net%20Daily&utm_campaign=2017-11-06_eNewsNAPA_Mon.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Is Your Retirement Plan Stuck in the 80s, Back When You Started It?

Posted by Stephanie Roupe

November 7, 2017

shutterstock_602238326_blog.jpgIs your retirement plan still drumming along to the beat of a Kenny Loggins’ 80s hit? Sure, high top sneakers and high waisted jeans have made a comeback; however, there is a reason why no one drives a DeLorean or gets giant perms anymore. They are impractical and out of style.

Time flies by and technology is always changing, so it doesn’t take long for a program and the recordkeeping technologies associated with it to feel antiquated. Here is a look at some of the most common “old school” practices and provisions we see in retirement programs today and some of newer, sleeker options being offered to plan participants. It might be time to retire that Jazzercise video and throw away your hair scrunchies.

Old School

  • Separate salary reduction/deferral agreements from investment election/enrollment forms. Why? Having these two processes separate is like eating a peanut butter sandwich followed by a jelly roll a week later. The two just go better together. The participant is actively in the enrollment process and can elect contribution amounts at once, saving time and keeping them engaged in the enrollment process. Many fail to make an investment election later when the processes are separate.

  • Paper enrollment/loan and distribution forms. Unless you are looking to create a historic library of loan documents on display in the HR office, you can forego the paper forms and save yourself the filing cabinet space. In addition, when enrollment and other requests occur online there is a digital time stamp and record. No forms to worry about submitting on time, no scanning to be done, no dates to dispute, and all the necessary information is safely stored with the recordkeeper.

  • A lengthy deferred enrollment. Deferring enrollment may delay a participant’s desire to enroll forever. Why? Muscle memory. If a participant’s pay check is exactly $1,000 every two weeks and then six months later it is reduced to $900, that participant will notice and more than likely miss their beloved $100. If you are looking to save dollars on employee match and push back enrollment eligibility, you might try dual eligibility. Set one date for enrollment and a later date for employer match.

  • Offering a proprietary investment lineup. Sure, you offer a great recordkeeper but do you need to offer only their funds? Also, is that money manager really the best at every single asset class? Money managers will tell you themselves they are not the best in every class. Let participants diversify with best in class investments and the use of several mutual fund families. Also, show you have a process to selecting investments besides picking all funds that start with the letter F.

  • Offering annuity products. Wait… aren’t annuities guaranteeing me income and providing fixed rates of return? Not always in retirement plans. Annuities will commonly serve as investment vehicles that operate similar to a mutual fund. Yes, it can be argued annuities have a place in the right situation; however, more often than not, their best home is not in your retirement plan investment menu. They offer low fee transparency, can be spendy, and frequently have liquidity restraints. Meanwhile, they do not offer the same perks of the annuity we usually think about when the term annuity comes to mind.

  • Not having a smart phone app. This means no instant access for millennials and those heavily dependent on their hand-held devices. Also, blue collar workers without daily access to a computer may not have a way to access their account easily without an app.

  • Owning the approval process for loans, hardship withdrawals, and distributions. Does your HR team really want the extra work and do you want to be responsible for approving and denying these requests? Acting as big brother over loans and distributions is a thing of the past, leave it to the pro’s (your recordkeeper or TPA).

  • Revenue sharing. Using investments that collect revenue from participants and sharing it with vendors is a thing of the past. It is hard for participants to determine the actual expense of the investment objectively and to understand the line item expenses that go into retirement plan administration. Use zero-revenue sharing investments for heightened transparency and negotiate with vendors for flat transparent fees.

New School

Here are some modernized capabilities offered by recordkeepers and a few administrative practices that will help you stay ahead of the curve and relevant.

  • Auto-features. Make enrollment and annual increases a no brainer. Roughly 90% of those automatically enrolled do not opt out. It’s easy, it's painless, and allows participants to start saving with little to no effort.

  • Mobile access. This provides participants with the ability to not only see their account balance but to make changes to investments and contributions via their smart phone app or text message.

  • Gamification. This makes enrollment interactive and fun with game like interfaces and participant directed challenges.

  • Competition and goal setting. We get it, you’ve got millennials that are competitive who want to keep pace and exceed what their peers are doing. Some recordkeepers show what others in a participant's age group are saving as a percent of earnings versus that participant pushing that participant to keep pace with his/her peers. 

  • Financial planning tools. Many recordkeepers offer robust technology which enables a participant to enter outside account balances so that the participants can get a better idea of their whole financial picture to determine if their savings rate is appropriate.

  • Calculating retirement income needs with chronic healthcare conditions in mind. We tend to fear the unknown and one of the big unknowns in retirement is healthcare and prescriptions spend. An educated consumer can more accurately save what’s required taking into account the additional premiums associated with chronic conditions.

  • Streamlined investment menus. As a plan sponsor, it is your duty to select and monitor providers and investments. Give your employees a hand with a diverse, clean, and uncluttered investment menu showing the best in class options for each of the key asset classes you want to include. Too many investments and duplicate options in an asset class such as large cap growth can confuse participants and leave them in a state of “analysis paralysis,” so give them a hand by building a strong menu.

  • Plan demographic studies. Identify who is saving and which groups need more help. With good data you can target your messaging and help bring specific targeted education to those in needs such as pre-retirees. 

You may enjoy the “old school” approach and still wear your Keds around town; however, we see administrative ease and better participant outcomes when a plan has a modernized look and feel to both the administrators and participants. So, get out there, and try some updated provisions! You can still listen to class rock on the weekend…we won’t tell, in fact we will probably join you.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Reviewing Your Auditor’s Communication Letter(s)

Posted by Brian Montanez, CPC, TGPC, AIF®, CPFA

October 31, 2017

shutterstock_178241852_(1).jpgAutumn is upon us; the nights are closing in, and your auditor has left the building. At least for many of my clients with an ERISA retirement plan with a December 31 plan year end that’s what’s happening. So, we are done with the audit, right? Not really.

If your retirement plan is auditable, your auditors are required to make certain communications to “those charged with governance,” such as the person(s) or committee (Persons) with responsibility for overseeing the Plan’s operations. These communications, while sometimes verbal, are usually issued via one of two communication letters: (1) the SAS 114: The Auditor’s Communication with Those Charged with Governance letter or (2) the SAS 115 Letter: Communicating Internal Control Related Matters Identified in an Audit.

For most plans, the Persons charged with governance may include the audit committee of the Board or the appropriate group overseeing the financial reporting process of the Plan, such as the employee benefits committee, administrative committee, plan administrator, or responsible party. For some plans, it may be a single executive, such as the chief financial officer.

The Persons charged with governance of your Plan should expect to receive and review these communications from your plan auditor with the understanding that the Department of Labor will often see a copy of the auditor’s findings as well as any successor auditor.

This “SAS 114” letter is an American Institute of CPAs (AICPA) required communication letter for all financial statement audits. The purpose of the letter is to communicate to those charged with governance, any significant findings and other information, such as disagreements with management, audit adjustments, and significant estimates that aren’t communicated in the audited financial statements. These are findings that must be understood and addressed by the Persons charged with governance.  

The “SAS 115” letter is usually issued when any significant deficiencies or material weaknesses would have been discussed with management during the audit, but are not required to be communicated in written form. In performing an audit of your Plan’s internal controls and plan financials, your auditors are required to obtain an understanding of the Plan’s operations and internal controls. In doing so, they may become aware of matters related to your Plan’s internal control that may be considered deficiencies, significant deficiencies, or material weaknesses.

These are matters that the person in charge of the Plan must familiarize themselves with to establish a plan of correction and prevention.

Following is a description of each potential observation:

Deficiencies in Internal Control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis.

Significant Deficiencies. A significant deficiency is a deficiency, or a combination of efficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.

Material Weaknesses. A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis.

Even if your plan auditor does not identify material weaknesses or deficiencies that would require written communication, he or she is likely to communicate insignificant deficiencies or recommendations for how to improve the plans operations, security, or governance via a “Management Letter.” Some auditors may prefer to have a conversation with the Persons in charge of the Plan to make sure the comments are understood.

As mentioned earlier, auditors are not required to make these communications in writing (SAS 115 letter) unless, in the auditor’s professional judgment, verbal communication would not be adequate. Therefore, no letter can be a good thing but is not an all clear signal.

Regardless of the form of communication, both letters should be reviewed with each affected party to ensure the accuracy of plan operations and the integrity of the plans assets and financial reporting. In my years of working with Committees, I have found that when the audit is complete, the Persons in charge want to move on with their other pressing tasks. But when there are observations, I find they do not always understand the issues that are identified. That’s where I, as an experienced retirement plan consultant, can help interpret the findings and assist my clients in evaluating and effectively correcting the observations.

For more information on Internal Controls see our White Paper.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Home Country Bias

Posted by Rex Kim

October 25, 2017

shutterstock_416963155_blog.pngAccording to the 2017 Investment Company Fact Book published by the Investment Company Institute, investors’ capital in defined contribution and other retirement plans held $7.6 trillion or 56% in U.S. or global equity funds. Out of this $7.6 trillion, $5.9 trillion or 77% is held in U.S. equities. U.S. investors continue to exhibit a strong preference towards domestic securities, commonly termed “Home Country Bias.” There is not one exact method to get at the appropriate level of international exposure to have in one’s portfolio; however, there are generally accepted methodologies. 

The most common methods are weighting by market capitalization and size of Gross Domestic Product (GDP). Under the market capitalization method, (depending on the index used) the U.S. equity market represents between 45% to 50% of the world. Utilizing the GDP method, the U.S. provides approximately 25% of the world’s GDP. Under these two methods, allocation to the U.S. would range between 25% to 50%.  This is in stark contrast to the average allocation by U.S. investors of 77%. We are not recommending a range of 25% to 50% as there are other factors at play. For example, older individuals closer to retirement should have more U.S. exposure in order to reduce currency risk. However, we see this issue even with younger participants.

Due to the nature of defined contribution plans being participant directed, a retirement plan committee has little control in determining the participant population’s asset allocation and specifically geographic allocation.  That said, there are steps the committee could take to, at a minimum, provide for opportunities to help steer participants toward having a more broadly diversified geographic exposure in their portfolios.

Selecting an appropriate Qualified Default Investment Alternative (QDIA). This is a powerful means to assist participants achieve greater geographic diversification, especially given current trends by participants increasingly concentrating their investments with the QDIA, in particular target date funds.  Regardless of whether your Plan has selected target date funds, risk based funds, or managed accounts, be sure that your selection for this category is with a manager that has a well thought out investment philosophy towards geographic selection. 

Investment menus that are well constructed will have numerous investment choices that provide exposure to international markets. We sometimes see menus that have a clear tilt towards offering many funds focused on the U.S. markets, with limited international options. As participants sometimes make the “1/n” mistake, having a disproportionate amount of U.S. investment choices and less international options leads to the problem of having too little geographic diversification. From our perspective, participants should be provided with a similar amount of options in the international space as domestic choices. The menu should have passive index options in international markets as well as active funds. Further, the active funds should provide some exposure to emerging markets and smaller companies. As noted in a previous blog post (Riding The Roller Coaster of Emerging Markets, July 18, 2017), we believe having some capital invested in emerging markets and international smaller companies is quite beneficial to long term success; however, we tend to prefer gaining exposure to those asset classes within a more broadly diversified portfolio rather than focused solely in those two areas.

Each participant has control over their portfolio. Participants, however, continue to focus their investments on U.S. assets likely due to familiarity and other behavioral biases. Hopefully, the two examples of possible solutions mentioned above will help committees think through the investment menu more thoughtfully. These solutions may help to mitigate the issue of lack of geographic diversification.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

2018 IRS Contribution/Benefits Limits

Posted by Erik Daley, CFA

October 20, 2017

IRS_blog.jpgThe Internal Revenue Service (IRS) has announced the cost‑of‑living adjustments affecting pension plans and other retirement-related limitations for the 2018 tax year.

Although many of the limits remain unchanged from 2017, some of the highlights include:

  • The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $18,000 to $18,500. The annual benefit under a defined benefit plan will increase from $210,000 to $215,000
  • The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan remains unchanged at $6,000.
  • The limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) is increased from $215,000 to $220,000.

For additional information, see our 2018 Maximum Benefits and Contribution Limits reference material.

Understanding the Millennial Saver and Building a Retirement Program that Speaks Their Language

Posted by Stephanie Roupe

October 17, 2017

shutterstock_681289639_blog.jpgFirst, communicate with millennials using all emojis (…just kidding!). It seems the generational cohort called the millennials, those identified as individuals born between 1982 and 2000, cannot catch a break from scrutiny. Millennials have been called entitled, job hopping, and overly sensitive, and they have been blamed for single-handedly killing the napkin and beer industry with their paper towel using, wine drinking ways.

They have also been labeled bad savers; however, they have undergone some of the toughest economic challenges since our parents and grandparents who survived the great depression in the 1930s.

Our experiences help define and shape us, which is definitely the case for the millennial saver. Here are a few unique challenges facing the millennial saver.

  • This generation is said to be more skeptical about financial markets. Can you blame them? Most of this group has lived through two different 40-plus% equity market declines in the same decade right as they entered the work force. That is something that has not happened since the Great Depression.

  • Millennials are less likely to marry according to Pew Research[1], fewer millennials will be married by age 32 compared to prior generations. The good news is a larger percentage of them will remain married than previous generations. The bad news is there will not be an additional income for increased household savings, compounding, and dual social security later.
  • Student loans have skyrocketed, a recent study conducted by Harvard University found that 42% of millennials had some type of student loan debt. [2]

  • According to a recent study done by The Council of Economic Advisers[3], millennials are less likely to own a home. Home ownership is positive for most households given price appreciation and the ability for families to leverage their purchase. Renters do not build equity to utilize in the future.

  • The landscape of employee benefits has changed significantly. According to the Employee Benefit Research Institute,[4] only 51% of workers have employers that sponsor retirement plans.

  • They will live longer due to medical advancements.

These reasons, among others, are why we see millennials saving differently than other generations. For example, millennials tend to hold more cash. According to a Brookings Institution study, 52% of those aged 21-36 said their savings was in cash vs. 23% for savers of other ages. This variance reflects both the intentions of young people to save for homes and repay student loans in addition to the lingering skepticism of the financial markets and services industry. It’s no mystery why they drink more wine than the other cohorts.

What does more cash, single income, a mountain of student loans, and limited access to a qualified savings plan mean? The struggles of saving for a timely retirement are exacerbated for this generation.

This leaves employers wondering, “how can we make it easy for them to save?”

Millennials are well-educated, smart shoppers with a wealth of information at their fingertips who value convenience.  

Here is what we know works for this group.

  • Auto-enrollment. According to a Vanguard study[5], in 2013 66% of the participants being auto-enrolled were millennials.

  • Automatic annual increases. According to the same Vanguard study, 16% of participants chose to increase their contribution annually. Of that 16%, the majority were millennials.

  • Professionally managed allocations. Target Dates and Managed Account solutions are more often adopted by millennials[6].

  • Cost efficient programs and low cost investment offerings. Millennials are savvy purchasers and have a wealth of information available to them. They tend to rely on technology and use comparative data. Offering a well-priced program with low investment expense is a draw to a millennial who would pay more to invest on a retail basis.

  • Free money. If you match them, they will join. It is common for the younger generations to feel unmotivated to save through employer sponsored programs when a match is absent.

  • Technology. Mobile applications and educational software make it both easy for this generation to make decisions and changes pertaining to their accounts quickly. Educational software and planning tools allow them to get educated and track goals on their own time.

The days of defined benefit plans are numbered and most millennials will be expected to fully fund their retirements themselves. The good news is millennials are motivated to save. It seems the consistent theme for success is making it easy for these busy wine drinking, paper towel users.

Notes:

[1] Pew Research Center, Social and Demographic Trends (http://www.pewsocialtrends.org/2014/03/07/millennials-in-adulthood/)

[2] Harvard IOP at the Kennedy School (http://iop.harvard.edu/student-debt-viewed-major-problem-financial-considerations-important-factor-most-millennials-when)

[3] Obama Whitehouse Archives (https://obamawhitehouse.archives.gov/sites/default/files/docs/millennials_report.pdf)

[4] Employee Benefits Research Institute (https://www.ebri.org/pdf/EBRI_IB_405_Oct14.RetPart.pdf)

[5] Vanguard.com (https://institutional.vanguard.com/iam/pdf/GENERP.pdf?cbdForceDomain=true)

[6] Voya Investment Management White Paper (https://investments.voya.com/idc/groups/public/documents/general_webpage_content/146904.pdf)


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

3rd Quarter 2017 Market Update

Posted by Tina Beltrone, CFA

October 12, 2017

Q3 2017 Market Commentary_blog.jpgThe U.S. economy grew at an annualized rate of 3.1% in the most recent quarter, recording its quickest pace in more than two years. Momentum will likely slow in the upcoming quarter as Hurricanes Harvey and Irma temporarily curbed activity. The current economic expansion is in its 9th year, the 3rd longest expansion since the Civil War. Core CPI, which strips out food and energy prices, remained unchanged at 1.7% in August; this is substantially below its 50-year average of 4.1%.

The unemployment rate is at a 16-year low of 4.2%. Average hourly wages have grown 2.9% over the past 12 months. The effects of the active hurricane season were partly responsible for wage pressure since low wage industries like leisure and hospitality recorded large job losses in September, temporarily boosting average wages. In September, 33,000 jobs were lost. This is the first monthly drop in payrolls in seven years.

U.S. factory activity hit a 13-year high in September given strong gains in new orders and raw material prices. Service sector activity is at a 12-year high. Consumer spending, which makes up over two-thirds of the U.S. economy, grew 3.3% in the most recent quarter, the fastest in a year.

The Federal Reserve plans to reduce its bond holdings at a measured pace over the course of several years. This follows the expansion of its balance sheet from under $1 trillion to over $4 trillion as the Fed initiated quantitative easing to support the markets after the Financial Crisis of 2008. The Fed has never unwound such a large amount of assets before. The last interest rate hike was in June, the 4th increase since December 2015. At quarter end, the 10- and 30-year Treasury bond yields increased modestly to 2.3% and 2.9%. Treasury bond yields moved up following the recent unemployment report that hinted at possible signs of inflation. The Bloomberg Barclays U.S. Aggregate Index inched up 0.85% during the quarter. Developed international and emerging market bonds returned 2.5% and 2.4%, respectively. High yield bonds reported strong returns at 1.8% as yields decreased modestly to 5.5%.

The U.S. stock market continued to climb higher despite political and geopolitical risks. The S&P 500 gaining 4.5% during the third quarter, returning 14.2% for year-to-date. The largest sector gains in the S&P 500 for the quarter were technology and energy, increasing 8.7% and 6.8%, respectively. The consumer staples sector was the only sector to decline, down 1.4%. The forward P/E for the S&P 500 inched up to 17.7x, versus a 25-year average of 16.0x. Small cap stocks outperformed large caps during the quarter, a reversal from the prior quarter. Growth stocks outperformed value stocks for the period. The CBOE Volatility Index (VIX Index) remained low, potentially setting the market up for disappointment. The emerging markets sector continued to rally, gaining 8.0% in the quarter helped by Latin America (up 15.1%) and Emerging Asia (up 7.2%). China was the strongest market in Emerging Asia increasing 14.7%, with a year-to-date gain of 43.2%. Developed Europe (ex-UK) gained 7.0% while the UK gained 5.2%. Market strength across these regions can be partly explained by the synchronized global recovery as nearly all major markets are experiencing positive growth in real economic activity.

The Bloomberg Commodity Index improved modestly for the quarter gaining 2.3%, yet it remained the worst performing asset class for year-to-date. U.S. crude oil prices jumped 12.3%, finishing at $51.67 per barrel. Despite the rebound, oil prices remained down 3.8% for year-to-date. Gold prices increased 3.4% to $1,284 per troy ounce. REITs gained 0.6% for the quarter and 6.0% for year-to-date. Net operating income for U.S. real estate grew 5.2% for the most recent quarter available. While real estate fundamentals remain strong, the cycle appears to be in the latter stages of its recovery.

To view Multnomah Group's full Capital Markets Review, please click here.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Revisiting Cybersecurity: Action Items for Plan Participants

Posted by Bonnie Treichel, J.D.

October 10, 2017

Revisiting Cybersecurity: Action Items for Plan ParticipantsIn a prior post, I discussed cybersecurity and the fiduciary responsibility that plan sponsors have to participants to put in place appropriate safeguards.  Since that post, cyberattacks have continued, including one major cyberhack on Equifax, which reportedly resulted in the stolen personal information of at least 143 million customers in the United States.[1] 

So, what about retirement accounts?  Can they be hacked? 

Yes.  Retirement accounts are just like any other online financial account, and they can fall prey to hackers in a similar fashion. Consider the personal information that a retirement account may contain: name, date of birth, social security number, address, and, potentially, banking information. Accordingly, retirement accounts are a target for cyberattacks, and while plan sponsors can take steps to prevent these attacks – primarily in the selection and monitoring of service providers that have the appropriate safeguards in place[2] - sponsors should also educate participants regarding the steps participants can take to prevent attacks. 

Consider educating participants regarding the following:

  • Remind participants about the Plan and its online features. Participants often forget about the retirement plan – particularly if it has automatic enrollment features. Remind participants that they may have previously set-up online access to their retirement account.   
  • Treat retirement plan accounts just like any other online account. Unlike online bank accounts that participants go to as frequently as every day or once per week week, participants may have the perception that their retirement account is different. Remind participants that their online access to their retirement plan account is just like access to any other financial services account (just like a bank account). For example, participants should remember to reset passwords and PINS for these accounts on a recurring basis. 
  • Remind participants to practice “computer safety.” In general, participants should update computer operating systems, browsers, and software. Consider reminding participants about safety with respect to firewalls and antivirus software. Remember that participants are likely accessing their retirement accounts both at work and at home. 
  • Assist participants in understanding heightened levels of authentication. Many service providers are heightening security in response to recent threats and attacks and utilizing features such as two-factor authentication as a result. Help your participants understand features such as two-factor authentication, voice authentication, and similar features.

The above is far from exhaustive in nature, but it exemplifies the steps plan sponsors can take to educate participants about the risks related to retirement plan accounts as a target for cyberattacks.  For additional resources for your participants, reach out to your recordkeeper, as many recordkeepers are now providing detailed communications and education for participants related to cyber best practices.  For other questions about how this applies to your plan, please contact a Multnomah Group consultant

Notes:

[1] According to AARP, available at: http://www.aarp.org/money/scams-fraud/info-2017/equifax-cyber-attack-data-breach-fd.html.

[2] See Cybersecurity: What Steps Are You Taking To Meet Your Fiduciary Responsibilities?, available at: http://blog.multnomahgroup.com/forward-thinking/cybersecurity-what-steps-are-you-taking-to-meet-your-fiduciary-responsibilities.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Fidelity’s Recent Case Win Highlights the Need for Fiduciary Oversight of Plan Vendors

Posted by Scott Cameron, CFA

October 5, 2017

shutterstock_566003863-(1)_blog.pngFidelity recently won a dismissal from a lawsuit brought by participants in the Delta Family-Care Savings Plan regarding the Plan’s managed account provider, Financial Engines, and its self-directed brokerage program. The lawsuit was an excessive fee lawsuit centering on:

  • revenue Fidelity received from Financial Engines for being on Fidelity’s platform, which created a breach of fiduciary duty by Fidelity (according to the plaintiffs)
  • breach of the duty of loyalty by Fidelity for exercising discretionary authority and not selecting the least expensive share class available in the self-directed brokerage account

Regarding the first claim that Fidelity breached its fiduciary duty to the Plan by receiving such excessive compensation, the court found that the plaintiffs failed to state a claim. In siding with Fidelity on the motion to dismiss, the presiding judge found that Fidelity, as a service provider to the Plan, was not acting in a fiduciary capacity. The judge’s decision is consistent with case law that regularly finds service providers are not fiduciaries under ERISA (as it relates to this specific issue).

In dismissing the lawsuit, the judge found that the named fiduciary in this case was the Delta retirement plan committee (who wasn’t a party to the lawsuit).  The Delta retirement plan committee appointed Financial Engines as an investment manager to the Plan and, therefore, it had the responsibility to prudently select and monitor them. Similarly, the self-directed brokerage account was an investment option selected by the Delta retirement plan committee and they had the responsibility with respect to that decision.

The judge’s decision doesn’t create any new fiduciary responsibilities, but it does highlight an area of fiduciary oversight that I believe many plan fiduciaries overlook. Most recordkeeping vendors offer a single managed account solution and a single self-directed brokerage account solution. In my experience, plan sponsors elect to offer both options to provide choices for their plan participants. But, because only a single solution is frequently available with any recordkeeper, the plan fiduciaries do not complete the full level of due diligence and monitoring that they should; the type of due diligence they regularly complete in selecting a recordkeeper or an investment option.

As plan fiduciaries, it is important to remember that these are services requiring a fiduciary process for selecting and monitoring the service provider. You don’t get a free pass because your vendor only offers one choice or because your participants get to decide whether they want to use the service.

If you need help in reviewing your service providers and the ancillary services they provide, feel free to contact a Multnomah Group consultant.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Monitoring Recordkeeping and Administration: Things to Consider

Posted by Brian Montanez, CPC, TGPC, AIF®, CPFA

October 3, 2017

shutterstock_245477752_Social.pngAs I mentioned in my August blog post, “Monitoring Recordkeepers’ Advice and Education Services: Things to Consider,” benchmarking plan fees is just the beginning of prudent oversight of recordkeepers. Here, I talk about the nuts and bolts of a practical review.

Retaining a recordkeeper to perform plan administration and recordkeeping services is a fiduciary function and, as such, plan fiduciaries are required to periodically monitor their recordkeeper. For certain recordkeeping and administration services, this is pretty straightforward. As plan fiduciaries, you monitor your vendor to make sure they are processing contributions, distributions, and loans in an accurate and timely manner; performing annual compliance testing and 5500 preparation; and making updates to your plan document when changes are required.

But that is just the beginning. An employer should establish, document, and follow a formal review process at reasonable intervals to decide if the recordkeeper is performing its contracted services in an appropriate manner. When monitoring service providers, consider these prudent steps to ensure they are performing the agreed-upon services:

  • Reviewing your contract with your service provider to understand the agreed upon services and determining if the vendor is acting as an ERISA 3(16) fiduciary.
  • Reviewing the vendors’ 408(b)(2) fee disclosure.
  • Evaluating any notices received from the service provider about possible changes to their services or compensation and the other information they provided when hired.
  • Confirm timeliness and accuracy of vendor’s contributions and loan repayment processing.
  • Confirm timeliness and accuracy of disclosure and notification delivery.
  • Reviewing the auditor’s comments in the Statement on Standards for Attestation Engagements (SSAE) 16 (Vendor Internal Controls) for any impact on your plan.
  • Review the process for loan and distribution approvals as well as source documentation retention. (Never dispose of any records)
  • Confirming actual fees charged to participants and retained from investments.
  • Reviewing plan level record retention. (Don’t dispose of any records)
  • Checking actual fees charged.
  • Reviewing your service team’s mistakes, frequency of mistakes, and proposed restitution.
  • Review timeliness and accuracy of compliance testing, 5500 filing, and who is responsible for determining Highly Compensating Employees categorization, and which Nondiscrimination Tests need to be performed.
  • Read any reports they provide for errors or unusual activity.
  • Following up on participant complaints.

Plan sponsors have a duty to act in the best interests of their participants, and reviewing the operational integrity of the recordkeepers plays an important role in helping provide the employees with a quality retirement plan. Adding a regular review of your plan’s recordkeeper will help you fulfill your fiduciary responsibilities, improve the level of service that you and your participants receive, and likely reduce overall fees.

For more information please see one of the below resources:

See AICPA “Effective Monitoring of Outsourced Plan Recordkeeping and Reporting Functions.”
See DOL “Meeting Your Fiduciary Responsibilities.”
See our white paper on internal controls.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

New Look, Same Forward Thinking Solutions

Posted by Erik Daley, CFA

October 2, 2017

You may begin to notice a few changes around Multnomah Group’s digital space. We are happy to announce the launch of our new corporate identity!

Brand-Refresh.png

Our refreshed identity pays tribute to the foundation of Multnomah Group and our history in the Pacific Northwest while conveying our progressive approach to the future. We are the same forward thinking Multnomah Group team you know, just with an updated look and feel.

The design rationale for our new corporate identity was founded on the need to have a brand that accurately represents the work and people that make up Multnomah Group through the use of a strong, clean design. New to our visual identity is the “M” mark. This design is a nod to the well-known waterfall in the Pacific Northwest from which our name is derived.

As we transition into the use of our new branding you will begin to see our website, email communications, print materials, and social media adopting this new identity.

We look forward to our continued client service under our new identity.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Multnomah Group Named to 2017 Financial Times 401 Top Retirement Plan Advisers

Posted by Erik Daley, CFA

September 27, 2017

FT_401_Advisers_Logo2017.pngMultnomah Group is proud to announce that we have been named to the 2017 edition of the Financial Times 401 Top Retirement Plan Advisers (FT 401), according to a list released today by the Financial Times. This is the third consecutive year the firm has been included on the list.

The list recognizes the top financial advisors who specialize in serving defined contribution (DC) retirement plans. It lists Multnomah Group among an impressive cohort of elite advisors: the “average” advisor in this year’s FT 401 has 19 years of experience advising defined contribution retirement plans and manages $1.6 billion in retirement plan assets. The FT 401 advisors hail from 38 states and Washington, D.C.

This is the third annual FT 401 list, produced independently by the Financial Times in collaboration with Ignites Research, a subsidiary of the Financial Times that provides business intelligence on asset management. The Financial Times is one of the world’s leading news organizations, recognized internationally for its authority, integrity, and accuracy.

The complete list of advisors can be viewed on the Financial Times website, available here.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investm

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Fee Wars: Friend or Foe?

Posted by Rex Kim

September 26, 2017

shutterstock_196183694.jpgBlackRock, the large investment company based in New York, recently slashed prices for many of their passive index offerings in late 2016.  Schwab and Fidelity followed along and reduced prices for many of their passive index funds. Others are also following the same path. Of course, all this fee reduction is good for the end investor.  And certainly we would recommend to  our clients that they ask about these fee changes. However, there are other considerations to think about when selecting passive index options for your investment menu.

To be clear, we always recommend our plan sponsors be thoughtful about their selection of passive index funds to put on the investment menu; and this analysis should include fees. However, the magnitude of these fee changes impacts the participant less than one would think. Take, for example, a fund going from 12 bps to 10 bps in expense ratio.  For a participant with $10,000 in this particular product, their annual fee goes from $12 to $10. Now, depending on how many zeroes a participant has more or less around that example, the magnitude of the fee change is greater or less in dollar terms.  However, the extra dollars in the participant’s pockets could be easily wiped away by other factors.

Many passive index strategies are easy to replicate. The fund manager simply buys these liquid securities in the appropriate amounts and rebalances the portfolio on occasion to keep it all balanced relative to the benchmark index.  However, there are other investment strategies in which replication is more difficult.  Take the example of fixed income.  Unlike in a typical passive large cap index strategy where the portfolio manager can readily go out to the market to purchase or sell shares of highly liquid securities, a portfolio manager of a passive fixed income strategy does not always have the same luxury. This is especially true when it comes to matching exposures of less liquid securities such as high yield, securitized products, emerging market debt, among other sectors.  Or take the example of small caps, the portfolio managers again face the difficulty of finding securities liquid enough to replicate the index. For both examples, the portfolio manager must go beyond simply buying the exact security in the exact amount. Instead, they may need to replicate the exposure. For example, instead of buying Apple at the exact percentage, the portfolio manager may need to purchase a basket of stocks that in sum may act like Apple. Imagine doing this for even less liquid securities such as a pool of securitized agency mortgages.  The issue of liquidity is one of numerous portfolio management issues in building a passive index strategy. This issue can become difficult to manage especially during high volatility periods such as The Great Financial Crisis, when securities become more volatile and the cost of illiquidity rises.

Besides the portfolio management issues, plan sponsors also need to work within the constraints or offerings of their vendor. In order to access these products with reduced fees, the investment minimum may often be too high for a particular plan. In other cases, the product may not be available on the platform offered by your recordkeeper. 

Although the recent fee wars are a welcomed competition between investment management firms, please be mindful of the dollars you could lose in trying to save pennies by not considering other factors in selecting a passive index fund. 


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

A Win for Colleges and Universities

Posted by Bonnie Treichel, J.D.

September 22, 2017

GavelBookSchool.jpgColleges and universities became the new target in retirement plan litigation in August 2016. Since then, 16 elite colleges and universities have faced class action lawsuits for a variety of claims including multiple recordkeepers, which resulted in higher fees for participants; too many total investment options and duplicative investment options which created confusion for participants; revenue sharing arrangements that led to excessive fees to service providers or as “kickbacks” to the plan sponsor; utilization of funds that contained multiple expenses and multiple layers of expenses; and an array of other novel claims.[1]

In response to these claims, some of the colleges and universities fired back with motions to dismiss and over the summer, the courts started to rule on these motions. While some of the claims were dismissed in the Princeton, Columbia, NYU, Duke, and Emory cases, in each case, many of the claims survived and the cases moved ahead. 

Yesterday, a court in the Eastern District of Pennsylvania went a different direction in the case of Sweda v. University of Pennsylvania[2].  Here, the court ruled in favor of the University finding, among other things:

  • Requirement to include a Proprietary Fund. The plaintiffs argued that by “allowing TIAA-CREF to mandate the inclusion of the CREF Stock Account and Money Market Account in the Plan” the defendants committed the Plan to an “imprudent arrangement.” The court analogized to a bundled cable arrangement and found no breach of fiduciary duty.
  • Excessive Fees & Fee Structure. Citing Renfro v. Unisys Corp.[3], the court rejected the claims related to multiple vendors which allegedly caused excessive fees and the claim that the Plan should have had a flat fee charge instead of an asset-based charge. The court stated: “the plaintiffs need something more than a claim that there may be (or even are) cheaper options available. The plaintiffs must show that there were no reasonable alternatives given to plan participants to choose from, which the plaintiffs have not pled.”
  • Unreasonable Investment Management Fees. On the plaintiff’s claim of unreasonable investment management fees, again citing Renfro, the court stated: “The plaintiffs’ argument that fiduciaries must maintain a myopic focus on the singular goal of lower fees was soundly rejected in Renfro.”  And, the court here agreed with Renfro.    
  • Too Many Investment Options. The plaintiffs also argued that by offering too many investment options, there was participant confusion and, hence, paralysis. However, the plaintiffs failed to point to one single participant that was confused by the investment options and, accordingly, this claim was dismissed. 

A big win for the University of Pennsylvania and a change in course for the cases against colleges and universities. Stay tuned for more updates on this case and others in the litigation against colleges and universities, as the score is now 5 to 1 on motions to dismiss. 

Notes:

[1] For a deep dive on these class action lawsuits, listen to our webinar available here.

[2] See Memorandum of the Court with Order to Follow of Sweda v. University of Pennsylvania, available here: https://www.bloomberglaw.com/public/desktop/document/SWEDA_et_al_v_THE_UNIVERSITY_OF_PENNSYLVANIA_et_al_Docket_No_216c/4?1506093564.

[3] See, Renfro v. Unisys Corp., available here: http://www2.ca3.uscourts.gov/opinarch/102447p.pdf.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Multnomah Group Named to NAPA Top DC Advisor Firms List

Posted by Scott Cameron, CFA

September 21, 2017

2017_NAPA_TopDCAdvisorFirms-Logo.pngMultnomah Group is pleased to announce we have been included on the National Association of Plan Advisors’ (NAPA) inaugural Top DC Plan Advisors list.

The NAPA Top DC Advisor Firm list highlights the nation’s leading retirement plan advisor firms. Unlike other lists, NAPA focused on firms, rather than individuals, and on the defined contribution (DC) practice specifically.

Multnomah Group is placed second out of 250 advisors included on the list, ranked by total DC plan assets supported.

To view the full list of NAPA’s Top DC Advisor Firms, click here.

Note: There is no charge to be included in the NAPA Top DC Advisor Firm listing. To be included, all data was self-submitted and detailed as of 12/31/2016.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Blog Miniseries: Investment Manager Selection for Actively-Managed Funds Episode 2: Philosophy & Process

Posted by Tina Beltrone, CFA

September 21, 2017

Blog-Miniseries-image.pngWith thousands of mutual fund offerings within the actively-managed fund space, how does Multnomah Group successfully identify attractive funds within each asset class? The process begins with an initial screening to narrow the universe to a manageable list of strategies that have previously demonstrated consistency in performance and execution based on various metrics. From there, the hard work begins. 

We spend the majority of our time reviewing qualitative aspects of mutual funds including the philosophy and process of each fund that screens well within its asset class. So, what exactly are we looking for in philosophy and process to cause us to recommend a fund? 

Our firm believes mutual funds must have well thought out and clearly defined investment philosophies and processes. The process must be repeatable. As my colleague, Caryn Sanchez, stated in Multnomah Group’s last blog post in this series, if the Portfolio Manager (PM) is committed to the process and avoids wandering between styles based on market movements, this is the best way to ensure that returns are repeatable. For our firm to have conviction in a fund’s philosophy and process, we must also feel strongly about the entire investment team and its parent organization. We look for successful and tenured PM teams with strong research efforts drawing on resources from dedicated and/or centralized analyst teams, and astute traders.  We prefer that teams have fewer administrative distractions, so they are able to stay focused on their respective fund’s success and are willing to learn from past mistakes.

Every investment manager believes they have a differentiated approach that helps them stand above their peers. At Multnomah Group, we seek to understand each investment manager’s unique philosophy. Some managers pursue unique characteristics inherent in the asset class they cover, such as a large value manager who concentrates on dividend-paying companies because the PM believes dividends are a signal of fiscal discipline and dampen portfolio volatility over the long term.

Each fund we analyze possesses its own unique investment process since there are many ways to achieve success. Areas within the investment process that funds and their teams can differ include: (a) how ideas are generated by the team, (b) the evaluation process, (c) how the team works together to get a new idea into the portfolio, (d) industry biases inherent within the fund, (e) the PM’s sell discipline strategy. Our goal is to understand these nuances and determine if the process is attractive and sound. 

To arrive at this decision, we review quarterly presentation decks, fund commentary and attribution, and other documents from the investment manager. We also read independent fund research from third party providers to ascertain their perspective (even though we may disagree with their viewpoint). We then complete a due diligence meeting or conference call with the manager if the fund appears interesting and meets our standards. The purpose of the due diligence interview is to determine the manager’s depth, discipline, passion, and skill level. We drill management on the key points of the investment process mentioned above to determine how sound their methodology is. We inquire about their holdings to ensure that they align with the fund’s investment philosophy. By digging deeper, we seek to identify funds that can successfully combine the strong fundamental due diligence of its team with strong stock picking instincts of its PMs, while staying within the boundaries of individual fund’s investment guidelines. We acknowledge that investment styles can temporarily go out of favor, thus we must be patient with funds that go through a slump. 

Keep an eye out for upcoming posts in our miniseries on Investment Manager Selection as we cover additional areas of due diligence including portfolio construction, risk controls, and team structure. Our blog post miniseries will conclude with an in-depth white paper delving into the heart of Multnomah Group’s investment manager selection. To read Episode 1 in the miniseries, click here.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Why Meeting Minutes Matter

Posted by Erik Daley, CFA

September 19, 2017

shutterstock_575773597_blog.pngI am very fortunate to have the opportunity to work with exceptional organizations and assist them in managing one of their primary employee benefit packages: their retirement savings.  I work with committee members who are focused on improving their retirement plans and helping their employees develop a more secure retirement future.  We educate clients on the importance of good process in making decisions, and we then get to see the fruits of our clients’ work.

There is, however, one aspect of my job that I dread: drafting meeting minutes.  For many of our clients, we draft their committee minutes for them. The minutes help to document the decisions they’ve made and develop a defined record of the decisions we’ve made together.  Minutes are important.  They are likely the most concrete documentation of fiduciary prudence and are reviewed by auditors, regulators, and potentially litigators, should the need arise.

While analyzing data and making decisions is fun, frequently recounting those decisions and reducing them to paper can be mind-numbing.  We have done extensive training with our team internally on the importance and best practices for drafting retirement meeting minutes. I thought we might share some of those insights with you.

  1. Meeting minutes are not court transcripts. Who said what is not important, what was discussed and decided are the key points.
  2. Don’t record your meetings (if you do, destroy the tapes once the minutes have been drafted). Conversations without context never sound good, and recordings will be edited to the least flattering moments if kept.
  3. Keep supporting materials with the minutes. The minutes record, the decisions, and the data that was used to support the decisions are frequently included in the supporting materials (an investment report for example).
  4. Brevity is the soul of wit. Not even the Committee is interested in a set of minutes that extends for pages. Be thorough, but concise.
  5. Write with precision. Be cautious of generalities and discussions that don’t lead to a conclusion. Minutes should clearly and quickly delineate the current direction of the Committee.
  6. Get your minutes approved. Each meeting, the Committee should approve (or amend and approve) the meeting minutes. Allowing the Committee to weigh in on topics or decisions from their perspective is a crucial step in recording the history of the Committee.

Please note, none of the above makes drafting minutes any more enjoyable, but we do hope that the information adds some tools to use on your next set of retirement plan committee meeting minutes.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Blog Miniseries: Investment Manager Selection for Actively-Managed Funds Episode 1: Introduction

Posted by Caryn Sanchez

September 14, 2017

Blog-Miniseries-image.pngRetirement plan investment menu design depends on two key decisions: what asset classes are to be included and what mutual funds (or other investment vehicles) should be used. In our investment manager selection miniseries, we will discuss how Multnomah Group conducts the investment manager due diligence that underlies our actively-managed fund recommendations. Over the course of several blog posts we will discuss how we evaluate philosophy and process, portfolio construction and risk controls, and team structure. Our blog post miniseries will conclude with an in-depth white paper delving into the heart of Multnomah Group’s investment manager selection.  

To kick off the series, we’re taking a moment to explain our philosophy on the construction of an actively-managed fund menu or menu “tier”.[1]  

The primary objective of investment menu design is to provide participants with the building blocks of a properly diversified portfolio. At the same time, we need to ensure that participants don’t become overwhelmed by the number of choices available and make adverse decisions (or make no decisions). In order to balance these needs, we believe that the best design for an actively-managed fund menu provides fund options that are differentiated by asset class and investment style. While the needs of each plan may differ based on participant population and retirement benefit design, a basic investment menu should include the following asset classes:

  • core or core “plus” bond
  • large value
  • large growth
  • small value
  • small growth
  • foreign large value
  • foreign large growth

Some employers may prefer to expand the menu a bit further to include asset classes such as real estate or emerging markets equity, but the principles here remain the same: the investment options should be distinct and differentiated. An optimal retirement plan menu includes “style-pure” options: fund managers that are dedicated to either value or growth, not managers who wander between these styles based on market movements. And while historical returns are not an indicator of future results, we look for managers who have demonstrated a commitment to their investment philosophy and process as this is the best means available to ensure that returns are repeatable, and not a function of luck.

Keep an eye out for the next episode in our miniseries: Philosophy & Process.

Notes:

[1] For the purpose of this series, we’ve specifically excluded asset allocation funds (including target date funds) and index funds due to their differing considerations in due diligence and menu construction needs.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Tax Reform and the Impact on Retirement Plans

Posted by Scott Cameron, CFA

September 12, 2017

Audit.jpgOne of President Trump’s primary objectives for his first year in office was comprehensive tax reform.   In April 2017, the White House released an initial tax plan that suggested removal of all individual deductions except for mortgage interest and charitable donations. Later, the Trump Administration clarified that it would also keep the deduction for tax deferred retirement contribution; however, there continues to be inconsistency in messaging from the White House and details of the White House proposal are scarce.  Based on previous Republican proposals, a plan for comprehensive tax reform is likely to focus on reducing marginal tax rates, reducing the number of tax brackets, and limiting deductions and tax credits.

Background.  Any time tax reform is discussed, retirement plans are a part of that discussion because of how the government scores proposals, using a 10-year time frame. While traditional retirement plan contributions serve to defer the taxes until retirement, in most cases, those taxes are deferred past the 10-year budget scoring window. As a result, the budget score shows retirement plan contributions as a large tax expenditure, with the U.S. Treasury reporting it at more than $100 billion annually. The largest tax expenditures are for health insurance and mortgage interest. In contrast to retirement contributions, these expenditures permanently reduce government receipts rather than defer them to the future.

As Congress looks to reform the tax code and potentially reduce taxes, they must grapple with how the scoring will impact the federal deficit and the long-term impact on the federal debt. This is where retirement plans come into play. One way to offset the reduction in tax rates is to limit large deductions, such as retirement plan contributions. This could be done in one of two ways, to varying degrees of extremity.

Two Options.  First, some or all, employee deferrals could be mandated to be Roth contributions. Roth contributions are not tax deductible when they are made and the tax benefit is achieved down the road in retirement when withdrawals are made tax-free. Because the benefit will typically occur past the 10-year budget window, this approach looks attractive to budget planners that are focused on the 10-year budget score. In this scenario, employer contributions would likely continue to be tax-deductible in the year they were made with income taxes due upon withdrawal in retirement, in order to encourage ongoing employer contributions.

Second, the deductions could be limited to lower tax bracket rates. Because the current tax system uses graduated rates and retirement plan contributions reduce marginal income, the greatest tax benefits go to those in the highest income brackets. High-income earners receive a greater tax benefit from contributing to their retirement plan than low-income workers because they are in a tax bracket with a higher marginal rate. Because of this, one option would be to limit the deduction to a lower marginal benefit. If that was done, everyone would receive the same, lower level of tax benefit for saving into their retirement account. This approach is likely to raise less in tax revenue than a full or partial Roth mandate but is still an option that could be considered.

Retirement Industry Perspectives.  Many in the retirement industry are concerned about any changes to the tax code that would make saving for retirement more challenging for individuals. Right now, it appears that there is a lot of discussion about the “Roth-ification” of retirement plans, as it helps with the current deficit. The concern among many is that without the immediate incentive of a tax deduction, employees will save even less for their retirement, forcing everyone to fall further behind in terms of retirement security.

Ultimately, comprehensive tax reform is not an easy thing to accomplish, even with a Congress and executive branch controlled by the same party. It remains to be seen what, if anything, will be proposed and how it would impact retirement plans. If tax reform moves ahead it is worth monitoring to see what, if any, impact it will have on retirement policy.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

To the Top and Back in 10 years: Tibble v. Edison

Posted by Bonnie Treichel, J.D.

September 7, 2017

GavelBookSchool.jpgWhen you think about the headlines related to ERISA class action cases, you usually see a lot of settlements because very few ERISA litigation cases make it past discovery and the early pleading stages of the case.  Why? First, litigation is expensive and includes the cost of attorneys, expert witnesses, depositions, travel costs, and more.  Second, litigation involves both time and stress for key officers and personnel at the institution. Third, litigation requires the company’s (or university’s) deepest, darkest secrets to be revealed on the record (unless subject to privilege).  ERISA cases present an even more compelling reason to settle, as ERISA is complicated – making it difficult to present a comprehensible case to a judge and his/her clerks. Given that so many cases settle, when there’s finally one that doesn’t, it’s critical to take note of the case’s outcome and what that means for plan sponsors. This case is Tibble v. Edison

Last month, a California District Court found for the plaintiff employees, represented by St. Louis-based Schlichter, Bogard & Denton, in the case of Tibble v. Edison. Ending a decade of litigation, the court found that the plan sponsor and its financial advisors breached their fiduciary duty to the Plan and its employees. 

This case is important because (1) it was one of only two 401(k) excessive fee cases to ever go to trial and result in a judgment on the merits; and (2) it is the only 401(k) excessive fee case to make it all the way to the Supreme Court. Further, the case offers the following lessons for plan sponsors:

  • Meet Regularly: Fiduciaries and/or the Committee should meet at regular intervals and be prepared during such meetings to review the investments and take action thereafter, if needed. The holding suggests that meeting once per year to review the investments and/or share class and then make changes would be insufficient.
  • Share Class Selection: Fiduciaries to the Plan should know the share classes available and be proactive about making a share class selection and/or changing share class when a new share class becomes available.  When fiduciaries determine that they will not use a new, lower cost share class, the Plan’s fiduciaries should be able to articulate why and document such decisions (i.e., show a prudent process).
  • Document Decisions for Investment Selection: This case is chiefly important because it establishes in writing that there is an ongoing duty to monitor the Plan’s investments. Accordingly, fiduciaries should document the fund selected (and associated share class) and over time continue to document the rationale for retaining funds and respective share class during the monitoring process.

The August 2017 finding against the defendants totals approximately $7.5 million in damages from 2001 to 2011, plus an additional $5.6 million in damages post 2011 (which was stipulated to this month), totaling approximately $13 million in damages to the plaintiffs.  The only remaining item is attorneys fees, which the plaintiffs will seek in a coming motion before the court.    

For more information about this case or similar cases that have settled, contact your Multnomah Group Consultant and be on the lookout for the 2017 Regulatory Update, which summarizes cases from the past year. 


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

No Company Match? Don’t Worry! You Can Still Engage Employees to Participate in Your Retirement Plan

Posted by Stephanie Roupe

September 6, 2017

shutterstock_247134121_blog.jpgIn our current world of post-economic recovery, quickly growing startups, and yet-to-be profitable organizations, it can be a struggle for an employer to offer a retirement plan match for employees.  I have had countless conversations with human resources professionals about the lack of excitement surrounding work place savings when there is not a company match. Employees want to know, what’s in it for me?

How about tax benefits, inexpensive investment options, low barriers to entry for less expensive share classes, and the beauty of having to do practically nothing to get started?

Do those sound like good reasons?

You might be thinking “yes,” but your employees may still need some convincing. Benefits cost more for employees than ever, defined retirement benefits are lower than before, and millennials are scarred from starting their careers during the recession.

Let’s take a quick look at the tangible benefits of saving in a qualified plan for participants so we can help paint a clear picture for employees.

Tax benefits. 1) Your contribution to a qualified saving plan is tax deductible, as long as it’s within the IRS limits. 2) Tax-deferred growth: investment earnings in a qualified savings plan are tax-deferred. This allows for compounding and growth unprohibited by annual taxation.

Inexpensive investment options. A well-built retirement program will use retirement share classes which waive expense loads or institutional share classes with no additional fees.

Low barriers to entry for less expensive share classes. When you’re shopping on your own for mutual funds you will quickly find the less expensive share classes come with a minimum buy-in, so not everyone has enough money to access the preferred share classes which typically charge lower fees. An investor without the minimum buy-in will most likely end up buying a retail share class such A, B, or C shares which come with sales charges.

The beauty of having to do practically nothing to get started. A significant number of plans today automatically enroll employees at a specific eligibility point based on their employment. If that is not an option, enrollment is a basic online or paper form requiring little information for a participant to get started. It is certainly less paperwork than when someone opens a personal brokerage account.

You’re thinking this sound good, right? But how do I communicate these benefits to my employee audience?

The medium you choose to convey information to your employees is important. You could have a mascot dancing with a sandwich board in the parking lot (OK, I’m kidding, but that could bring a lot of energy to the topic!) or you might have a company newsletter you utilize. Having a deliverable that’s easily accessible and well-written is a good start. How you deliver your message is important and should aim to resonate with the employee population given your unique culture, but no matter how an organization decides to share the information, creating a clear and easy to understand message is most important. Be sure you highlight all the benefits you can offer, that can go a long way toward employee engagement.

Here are a couple of ideas when building your employee communications.

  1. If you’re making any changes to the plan make sure those changes are clearly communicated. If the changes are positive make sure your employees know how the changes are good for them. Be sure to explain the current state of the proposed variable changing and let them know what they can expect going forward. Examples of positive changes could be:
    • switching to a well-known vendor with advanced technology
    • reducing fees
    • improving investment menu
    • hiring support who can educate your employees on retirement and savings

  2. Be proud of a well-designed program. Brag about the benefits of your program. For example:
    • employer pays all plan administration fees
    • favorable eligibility

  3. Boast the access to investment tools and guidance offered by your recordkeeper. For example:
    • goal setting tools
    • data aggregation, planning using your whole financial picture
    • recommended allocation based on risk
    • managed accounts

  4. Money talks! If it’s a good deal, tell them! For example:
    • employer paid administration fees
    • low costs of participation
    • well-priced investment options

  5. Tell the story of compounding. Let them know not saving today may cost them tomorrow.

  6. Taxes! Not only is the deduction helpful today but there are very few places to earn on a tax-deferred basis.

  7. Don’t let them forget it. Continue to remind your employees of the tool you have provided and keep the conversation going.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Monitoring Recordkeepers’ Advice and Education Services: Things to Consider

Posted by Brian Montanez, CPC, TGPC, AIF®, CPFA

August 30, 2017

shutterstock_402879268_blog.pngIf you are reading this blog, you surely understand that plan fiduciaries have an obligation to monitor their investments and the fees participants pay. Over the past decade, knowledgeable plan fiduciaries have instituted regular fee benchmarking to monitor and negotiate the fees they are paying for plan services. Coinciding with the implementation of regular fee benchmarking has been a steady decline in plan fees. But is fee benchmarking enough?

Retaining a recordkeeper to perform plan administration, recordkeeping, and participant education services is a fiduciary function and, as such, plan fiduciaries are required to periodically monitor their recordkeeper to ensure they are performing the agreed-upon services. For certain recordkeeping and administration services, this is pretty straightforward. As plan fiduciaries, you monitor your vendor to make sure your they are processing contributions, distributions, and loans; performing annual compliance testing and 5500 services; and updating your plan document when you request amendments or changes.

While these services are generally monitored by most plan fiduciaries, one major overlooked area of vendor management is with respect to participant education, communication, and advice. In my experience, this is often an area of focus when plan fiduciaries conduct a vendor search, but once a vendor is chosen, ongoing oversight of the education and communication services provided by the vendor is neglected as plan fiduciaries deal with the myriad of other issues on their plate.

The new Department of Labor (DOL) fiduciary rule, and the resulting changes in some vendors’ business models, raises the responsibility for monitoring the services that your vendor provides to employees.

In order to monitor the contractual participant services start by reviewing what you have contracted for and how many days are being delivered. Additionally, and more specifically, plan fiduciaries need to consider:

  • Is the provider offering education or advice for investments and distribution decisions? If so, will it use salaried or commission staff or use a third-party for these services?
  • What is their approach to the DOL fiduciary rule?
  • Will services be provided in person, online, or via a call center?
  • How broad is the financial education and advice they provide? Is it focused only on retirement or more broadly focused on financial wellness?
  • Are there any potential conflicts of interest in the vendor’s service model? If so, how do they mitigate them?
  • Do they use proprietary or third-party investment models (either as education or point in time advice)? If so, how does the vendor assist the participants in understanding the questions and answers of the third-party system?
  • Does the provider have aggregation tools to use in retirement readiness calculations?
  • Has the provider delivered the agreed upon services outlined in the contract?
  • How are they measuring the efficacy of their efforts?
  • What other resources do service providers offer participants?
  • Have there been any participant complaints about these services?

Adding a regular review of your Plan’s participant services vendor will help you fulfill your fiduciary responsibilities and will also likely improve the level of service that your participants receive from their vendor. If you need help getting started please feel free to contact a Multnomah Group consultant.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Trusting Our Gut: Why We Rely on Our Judgment to Understand Manager Performance

Posted by Rex Kim

August 24, 2017

shutterstock_600492404_blog.pngIn her latest blog post Tina Beltrone, our senior investment analyst, rightly notes the following: “Active and passive strategies unquestionably offer both advantages and disadvantages. If active management is selected, choose managers that offer lower-cost funds. The funds should have well-conceived philosophies with reliable and repeatable investment processes backed by a tenured team of portfolio managers and analysts who have the tools in place to yield strong performance in the long run.” The importance of Tina’s statement sets the core of our investment philosophy – that qualitative assessment of managers plays a critical role in guiding our judgment. 

One particular reason why we rely on our judgment is that using recent performance and benchmarks alone to understand a manager’s performance can lead to the wrong conclusions. In 2014, we made the recommendation of a Core Plus bond manager to replace PIMCO’s Total Return Bond Fund. Unfortunately, our newly recommended manager did not perform well immediately following our suggestion to switch to the fund. This manager was early in their increasing exposure to energy related bonds and emerging markets bonds, in particular local currency bonds. This shift in positions was not made on a whim, but made after considerable amount of analysis. The poor timing of a major shift in the portfolio led to an underperformance relative to the Barclays Aggregate Index of nearly 5.0% in 2015.

This drives home the importance of knowing your manager from a qualitative perspective. This amount of underperformance on a purely numerical review may lead some investors to redeem their money.  However, our judgment told us to stay the course. As Tina said, “well-conceived philosophies with reliable and repeatable investment processes” provides us comfort in sticking with managers who have short term periods of underperformance. And, we also know that solely relying on relative performance to benchmarks can lead to wrong conclusions.

This fund is a Core Plus bond fund, which means the fund will tend to exhibit greater variability of returns than the benchmark. This higher volatility comes from overweight bets in riskier securities such as high yield and emerging markets debt. However, we also know security selection in these types of instruments may generate excess returns as they tend to be less researched and thus less competitive to find undervalued securities than in, for example, U.S. Treasuries or investment grade corporate bonds.

Our quantitative tools confirmed our thoughts. Utilizing rolling regression statistics to separate returns from the market (or index), security selection, and timing, this quantitative review showed that their issue largely came from poor timing of increasing wagers on high yield and emerging markets bonds. Security selection remained strong. In fact, despite this short period of substantial underperformance, their five year security selection has provided excess returns to the benchmark and total excess returns of more than 1.5%. 

Active funds will go through periods of sustained underperformance to passive investments. During times when active management is attacked, it’s important to keep focused on the long-term thesis behind investing in active funds. 


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

We Have a New Committee Member, Now What?

Posted by Scott Cameron, CFA

August 22, 2017

shutterstock_587129423_v3.pngThis quarter I had two client meetings where a new member was added to the Plan’s fiduciary committee. This isn’t an uncommon occurrence. All established fiduciary committees will experience some level of turnover over time, either because of self-imposed term limits or because of the natural turnover of employees joining or leaving an organization, or switching roles within an organization.

Integrating a new member can be cumbersome. They usually lack the institutional knowledge to understand how the committee has come together, what the roles and responsibilities of the respective committee members are, and what decisions have been made in the past by the committee and the institution concerning the retirement plan.

To integrate a new member into the fiduciary committee, we believe it is necessary to have a formalized training program specifically for the new committee member. This training program focuses on three distinct areas of education: understanding fiduciary responsibilities, familiarizing yourself with the Plan’s governing documents, and understanding the Plan’s achievements and current events.

Understanding Fiduciary Responsibilities

I have yet to have a client whose fiduciary committee members were full-time plan fiduciaries with no other responsibilities in their job. As an experienced consultant who deals with fiduciary responsibilities every day, I sometimes forget the clients I work with aren’t steeped in the language of fiduciary responsibility, living and breathing it every day. Similarly, many long-time committee members forget what it was once like to be a new committee member and to hear the “fiduciary” word for the first time.

To get a new committee member acclimated to his/her fiduciary responsibilities, it is important to provide a primer on the basics of the law from which fiduciary responsibility is derived and what that means for the individual serving in a fiduciary capacity.  It can also be helpful to provide any materials related to protections the plan sponsor will provide for those willing to take on fiduciary responsibility related to the Plan (i.e. indemnification, insurance, etc.).    

The Plan’s Governing Documents

To be effective, a new committee member needs to understand his/her role and the responsibilities that he/she has, as well as the processes for making decisions regarding the plan. The best way to understand that is to review the Plan’s specific governing documents. These documents vary by plan and committee but typically include a committee charter, investment policy statement, and at a minimum include the plan document.

The committee charter establishes the authority of the committee and delegates certain specific responsibilities from the plan sponsor (typically the board) to the committee. Reading the charter should give a new member a sense of what he/she is supposed to be doing. Also, reading the charter should help a new member understand what he/she is not going to be doing. In some cases, new committee members join thinking they will have input on settlor functions (for example, helping decide on employer contributions or other plan design decisions). While some committees may address these topics and provide recommendations to the Plan’s settlor, these decisions are not typically the purview of the committee members operating in their fiduciary role.

The investment policy statement governs the process for selecting and monitoring the investment options available within the Plan. Selection and monitoring of investment options is a primary responsibility of most committees, and all committee members should be aware of the process as defined in the investment policy statement and the criteria that are to be used in evaluation.

The plan document is the overall governing document for the Plan. While new committee members don’t need to be as intimately familiar with it as those specifically tasked with administering the Plan (i.e. human resources, payroll, and benefits staff), they should have a general understanding of the plan design and plan provisions.

The Plan’s Achievements and Current Events

Lastly, the new committee member training should bring the new member up to speed on the Plan, which vendors they use, how the investment menu has been structured, and what products are included in the menu, among other plan initiatives and priorities. The context of the Plan is incredibly important in trying to evaluate decisions that are put before the committee as committee members seek to prioritize among a broad set of fiduciary responsibilities, which can often feel overwhelming to even the most diligent fiduciaries.

Unfortunately, many committees don’t do a very good job of laying this foundation and providing the right context, leading to problems with committees having to back-track to relitigate prior decisions; many times, the committee has to change their agenda priorities to address the new member’s questions because of failure to provide the proper context for fiduciary decision making. To gain that context, new committee members should review past meeting minutes, past investment reports, and speak with existing members to gain the institutional knowledge that the existing members maintain. If they do that outside of the committee meetings, they will be better able to participate in the decision-making and the committee meetings will be more efficient and proactive.

Summary

Turnover among plan fiduciaries is a natural occurrence. When organized and proactive, it can breathe new perspectives and fresh insights into a committee. When done poorly, it can lead to frustrations among both new and old members and slow down the progress of the Plan. If you would like help organizing your fiduciary process, feel free to reach out to us.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

More Than Yield… Don’t Let Yield Be The Only Arbiter of Your Plan’s Cash Option

Posted by Erik Daley, CFA

August 17, 2017

Stacked_Coins_Blog.pngWhen onboarding new clients, we typically have the opportunity to review work previously done by consulting firms who worked with the client before us.  I’m always astonished to see the frequency that cash positions were neglected and not reviewed, or if they were reviewed, the casual nature of the review.  Most of the previous consultants focused on yield (return) alone without adequately addressing the tradeoffs that can generate yield, even when those tradeoffs are material. 

For cash equivalent (money market, stable value, fixed annuity) products, there are three items that will allow for higher yields: duration, liquidity, and quality.  Any competent review of cash products must, at a minimum, control for these three factors.

Duration. For cash products, the duration of the fixed income securities used to populate the portfolios should materially impact yield.  Fixed income securities with longer durations (holding periods) generate higher returns than products with shorter durations.  For example, think of a typical CD at a bank,  three-year CDs have higher yields than three-month CDs.  The risk of yield lies in the rising rate environments (like the one we’ve experienced in recent months) negatively impacting the value of longer duration securities more than shorter duration securities.  As a result, cash equivalent positions with longer durations may have to decrease yield as interest rates rise.

Liquidity. One of the primary attributes of money market investments is that the cash is available to investors immediately.  Money can be added or withdrawn at any time.  Frequently, stable value and fixed annuity positions restrict participant and plan sponsor liquidity.  Restricting liquidity controls cash flows, and allows portfolio manager longer time horizons with which to invest and thereby accept more risk.  However, the yield liquidity restricted products can generate is often offset by those limitations.  Participants fail to understand liquidity restrictions until they are prohibited from acting in their accounts, and plan sponsors only pay the price of liquidity when they want to make a change in providers of investment portfolios.

Quality. Rational investors only buy more speculative investments when they are rewarded for those investments with higher expected returns.  The trade-off being the higher return in exchange for the possibility the investment doesn’t produce the expected return.  One way for cash managers to increase return is to purchase more speculative fixed income securities with the cash.  While some may fail to produce, in aggregate the returns of all securities should be higher. 

One of the substantial changes to money market regulations in 2016 was to reduce the degree to which money market funds could reduce the quality of their holdings.  However, fixed annuity and stable value portfolios frequently use quality as a method to supplement yield.

In comparing products looking at yield alone, without controlling for these factors, will result in the potential for bad decisions, or at minimum, uninformed ones. 

In the wake of changes in money market regulations in 2016, we delivered a presentation that addressed the changes and the status of the cash equivalent marketplace.  Given the current rising rate environment, now may be a good time to review that topic again. 


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Tug of War: The Active vs. Passive Debate

Posted by Tina Beltrone, CFA

August 15, 2017

shutterstock_561640528_blog.pngIt is a well-known fact that few active managers can consistently beat the market, especially over long-term periods.  In fact, Morningstar calculated that 2016 proved to be a particularly difficult year with only about 26% of active U.S. equity funds beating their composite passive benchmark, versus 41% in 2015. 

Morningstar also notes that long-term success rates were generally higher among U.S. small cap, U.S. mid cap, and foreign stocks, but lowest among U.S. large cap funds.  This can be explained by the fact that large U.S. stocks are the most widely followed securities in the world making pricing inefficiencies harder to come by.  At year-end 2016, 63.7% of assets were actively managed, however, this is declining rapidly, down from 72% just three years ago.  Despite better success rates for some asset categories, all have seen outflows from active to passive, with some categories worse than others.  Yet, is the grass greener on the other side? 

Investors are plowing money into passively-managed funds given extremely low expense ratios, simplicity and transparency, tax efficient status, and subpar management performance for many actively-managed funds.  However, it is not as simple as it may seem.  Passively-managed funds have no regard for fundamental information, valuations, or business models as the funds buy stocks in the same proportion as the indexes that they track.  Passive funds are clearly an easy way to bet on any market without overweighting the wrong stocks, but the funds cannot raise cash or diversify away investment risks.  If a sector or industry gets too expensive, passive funds are not set up to exit these.  Many theorize that it will take a market correction for flows to reverse as active managers might be able to control the damage on the way down.  Only time will tell.

Yes, it is true that actively-managed funds generally have higher fees and trading costs, and because of the far fewer names owned in active funds, these funds carry company specific risks.  However, there are positives to owning active funds.  These funds can control risk by limiting exposures to sectors, industries, and companies and typically apply quality standards when selecting stocks.  For the year-to-date period through July 31, 2017, JP Morgan pointed out that 53% of active managers are outperforming their respective indexes, up from 32% over the same period in 2016.

Active and passive strategies unquestionably offer both advantages and disadvantages.  If active management is selected, choose managers that offer lower-cost funds. The funds should have well-conceived philosophies with reliable and repeatable investment processes backed by a tenured team of portfolio managers and analysts who have the tools in place to yield strong performance in the long run. 


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Right Side of History

Posted by Erik Daley, CFA

August 10, 2017

US_Dept_of_Labor_-_Image_-_05_27_16.jpgThis week it became known that the Department of Labor is proposing another extension to the fiduciary rule – this time as an 18-month extension of the current “transition period” related to the applicability date of the fiduciary rule. The rule is certainly complex, we’ve written and spoke on it countless times.

At its heart, the rule seeks to expand the group of parties whose activities constitute investment advice when servicing retirement plans and their participants, hence making these parties fiduciaries under ERISA. 

In addition, the rule seeks to bring IRA rollovers within the scope. By expanding the definition and including IRAs, many parties have had to adjust their servicing procedures. Further, the Department of Labor (and potentially plaintiff’s attorneys) has a clearer path to take action against parties under the definition that fail to meet the ERISA fiduciary standard, one of the highest known to law.

We hope that this latest round of delays is just that: delays. Since the inception of our firm, Multnomah Group has embraced our role as fiduciaries and will continue to do so. While serving plan sponsors and their participants, we have seen first-hand the damage that bad actors can have on retirement plan success and how financial professionals not bound by the higher ERISA fiduciary duty can reduce the effectiveness of a career worth of savings during the IRA rollover process.

Whether this rule, or some other, plan participants deserve more.

For more information on the fiduciary rule and what plan sponsors should do to remain compliant, watch our latest webinar recording.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

The Investment Manager's Dilemma: Sector Allocation Decisions

Posted by Caryn Sanchez

August 8, 2017

Some indices have come to dominate asset class investing, such as the Russell 1000® Value, used to represent the large cap value asset class, and the MSCI All Country World Index (ACWI) ex-USA to represent international asset classes. While portfolio benchmarks are a useful tool for understanding how well an investment manager has performed, investors must understand that index construction methodologies can lead to structural biases. We expect passive index funds to match the performance of the benchmark they seek to replicate, roughly plus or minus their fund expense ratio. That’s fairly straightforward. However, when we use active managers, we expect them to generate alpha (return in excess of the benchmark) and thus we should expect some portfolio differentiation.

The Russell 1000® index is one of the most common benchmarks for large cap investments; the Russell 1000® Value & Russell 1000® Growth indices are subsets. To obtain the style indices, Russell uses financial ratios including price-to-earnings (P/E), price-to-book (P/B), and dividend yield to determine whether a constituent is classified as a value or growth stock. This calculation methodology results in strong sector biases in both of the style indices. The Russell 1000® Growth is dominated by technology stocks, which make up 32.43% of the index and the Value index is disproportionately exposed to financials at 25.21% of the index (by comparison, the next largest sector in either index comprises less than 15%).

Why is it important to understand these structural biases? Let us look to the foreign large value category and its benchmark, the MSCI ACWI ex-USA Large Value, for a current example. MSCI uses price-to-book, price-to-earnings (forward), and dividend yield to identify the value constituents of the parent index; since financial companies typically have fewer tangible assets, statistically, these companies will often appear “cheap” relative to other market sectors. Accordingly, the MSCI ACWI ex-USA Large Value index has historically demonstrated a strong bias to financials, which currently comprise 39.87% of the index. Many investment managers seek to mitigate portfolio risk through sector diversification and manage sector exposures with either an absolute or benchmark-relative constraint. Several of the foreign large value investment managers we’ve spoken with in the last few months have expressed concern about the benchmark’s heavy weight to financials and are holding relatively smaller amounts in the sector. Indeed, peer group’s average weight to financials is just 23.31%.   

For the one-year period ended July 31, financials have been one of the best performing sectors of the MSCI ACWI ex-USA Large Value Index, boasting a return of 35.94%. Given the lower average weight to financials, it is unsurprising that the peer group, on average, underperformed the benchmark by more than 390 basis points.

See chart:

Benchmark_Blog_Chart_v3.png



Click on the chart for a larger image.

Please note: Peer group and index performance information provided is as of July 31, 2017. Peer group and index breakdowns by sector are based on long-only holdings. Peer group and index data provided by Morningstar.       



Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

HSAs: Bringing a Discussion about Health to Retirement Savings

Posted by Bonnie Treichel, J.D.

August 1, 2017

Stacked_Coins_Blog.pngYou read it right.  You are on the right blog.  This is still the Multnomah Group blog, and we still work with retirement plans.  What you may not know is that a conversation about health – specifically, health savings accounts – is now making its way into the retirement savings conversation.  But why?  Health savings accounts afford an opportunity to do more than pay for this year’s health expenses.  Health savings accounts (HSAs) provide significant tax advantages and allow for retirement savings. 

What is an HSA?

HSAs, not to be confused with Flex Spending Accounts (FSAs), were introduced in 2003.  HSAs are an IRA-type of account that allows individuals with a high deductible health plan to contribute to an account to be used for qualified medical expenses. 

The unique features of an HSA include (but are not limited to):

  • Eligibility is dependent upon having a high deductible health plan.[1]
  • The funds contributed to the HSA do not have to be used in the same year they are contributed; the funds rollover year after year, meaning an individual can fund his/her cost of healthcare in retirement by saving today.
  • HSAs can receive contributions from individual employees or from employers (or both).
  • HSAs have a triple tax advantage! First, contributions by employees are excludable from an employee’s income and are not subject to federal income tax or employment tax withholding.  Second, HSAs accumulate on a tax-free basis, and finally, there is no tax on the distribution from the HSA so long as it is used for a qualified medical expense. 
  • HSAs are individual accounts and move with the individual; in other words, they are portable.[2]

Why does this matter for plan sponsors?

Plan sponsors may take note of HSAs for a few reasons.  First, HSAs are on the rise.  A recent study by Morningstar predicts that from 2016 to 2018, the assets in HSAs will increase by 40%.[3]  Studies show that employers often favor high deductible health plans, which are less expensive for employers, and give employees some “skin in the game.”[4]  As the study explains, if employees have a high deductible, they will take better care of themselves and seek out preventative care, likely avoiding discretionary or unnecessary care.  

Second, the legislative landscape – though a moving target – is something to watch.  While it remains to be seen what will come of the American Health Care Act (or similar legislation), there are efforts on Capitol Hill to increase (potentially double) the limits for HSAs.  Further, the Cadillac Tax, which has a delayed implementation to 2020, would also make high deductible health plans more favorable, and hence create an increasing opportunity for HSAs. 

Third, as mentioned above, employers can contribute to HSAs, coupled with the fact that HSAs are a retirement savings vehicle.  This makes HSAs part of both a retirement savings discussion and a total benefits discussion.  Recall, HSAs do not have to be spent within the same year contributions are made to the HSA.  As the cost of healthcare continues to rise, HSAs can become part of a comprehensive retirement planning strategy for many individuals, making this potentially an attractive benefit for employees.

HSAs are on the rise and primarily in the large plan market.  If you are interested in continuing the conversation about HSAs and learning more about how HSAs fit into your total benefits plan including your retirement strategy, contact a Multnomah Group Consultant

 

Notes:

[1] Note that other conditions apply; for example, individuals cannot be entitled to Medicare and cannot be a dependent.  These issues are beyond the scope of this post.

[2] This blog post provides a high-level overview of the features of an HSA, but is not comprehensive on this particular subject matter. 

[3] See Morningstar, 2017 Health Savings Account Landscape, citing Devenir Research 2016 Year-End HSA Market Statistics & Trends.

[4] See Morningstar, 2017 Health Savings Account Landscape. 



Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

So, You Have a Committee… Now What?

Posted by Erik Daley

July 26, 2017

shutterstock_349797617_blog.png

In the past, we have written several pieces to help sponsors stand up to a retirement plan committee (See most recent: Internal Controls for Retirement Plans White Paper). We have discussed members, term duration, responsibilities, and documentation.  All of which is useful information, but what do you do once the committee is finalized and now they look to you for direction and training?

Standing up to a committee is the easy part, developing their knowledge and effectiveness is more difficult. 

In most committees, many members don’t spend a significant portion of their time working on retirement plan issues. Whether members work in human resources, finance, or elsewhere within the organization, retirement planning is far down on their list of priorities.  Additionally, because many members may only touch their retirement plan committee work for 12 hours or less annually, their ability to stay abreast of changes in law and best practices are materially compromised. 

I’ve had the opportunity to work with dozens of committees during my career and it is clear to me that the effectiveness of Committees varies dramatically from organization to organization.  There are two material indicators to a Committee's effectiveness: knowledge and direction.

In my experience, the more knowledgeable the committee, the more effective they become. Acting efficiently when the information dictates the need frequently comes down to how well the committee understands the questions at hand.  Whether it is as simple as the replacement of an investment manager or as complicated as changing providers, committees with a low level of retirement plan familiarity are understandably hesitant to act and may require multiple meetings to finalize a decision. A more knowledgeable committee can act (or chose not to act) more quickly.

Similar to educating participants in dollar cost averaging or asset allocation, educating adults in the unique aspects of retirement plan management can be challenging.  Committees should be working to develop and document education efforts.  Whether education is conducted internally, or you utilize external resources, providing opportunities for the committee to stay in touch with retirement plan topics between meetings is an important opportunity to improve the effectiveness of your committee.

Tracking the training that is occurring is an excellent opportunity for the fiduciary to document their prudence and is a question likely to be asked if the Department of Labor auditors come calling.  Further, if your committee members cannot or will not take advantage of the training opportunities afforded them, it may be worthwhile to reconsider their role with the committee. 

Last, committees with goals outperform committees without them.  As adults, we’ve all been told to write down our goals to create accountability to them.  Committees should similarly have goals or objectives to improve their accountability. 

Most committees have Charters that define their responsibilities and liability, as well as Investment Policies that define how they review and select investments.  However, the most effective committees I have worked with also have a formal timeline addressing their priorities and a formal or informal set of goals for the Plan that help them make decisions.  Without it, committees are left acting (or not acting) on suggestions and recommendations from providers and consultants without a clear understanding of the why, and with no ability to review the success of the decisions they make. 

Small changes to how you orient and educate committees can have a tremendous impact on their effectiveness. Our Resource Center has a variety of training presentations which you might find to be a helpful place to start.

An Overview of Retirement Plan Fees

Posted by Brian Montanez, CPC, TGPC, AIF®, CPFA

July 20, 2017

shutterstock_245477752_blog.jpgAccording to the Department of Labor (DOL): “Among other duties, fiduciaries have a responsibility to ensure that the services provided to their plan are necessary and that the cost of those services is reasonable.” However, fees charged in the retirement plan industry are confusing and opaque to say the least.

In this blog, I will introduce the common fees found in retirement plans. 

Asset-based Fees

The evidence shows the largest element of costs for retirement plans are asset-based fees and expenses. The fees are typically imposed as expense ratios of the investment products, mortality, and expense fees imposed on assets in group annuities, and wrap fees on non-annuity assets.

Asset-based fees generally comprise 75% to 95% of the total fees and expenses paid from plan assets, and can classified in three categories:

1. Investment Produce Fees (Expense Ratio)

A Mutual Fund, or Collective Investment Trust Fund, is a professionally managed type of collective investment product that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities. They typically have a fund manager that actively manages the money (Active Managed Fund) on a regular basis or are invested in accordance with a specific index (Index Fund).  The Expense Ratio is the fee charged as a percentage of the assets invested in a particular mutual fund.

The expense ratio can be broken down into two main categories:

Investment Management Fee

This fee is charged to pay for the function of investment management; mainly the portfolio manager’s time, the internal research and support of the investment management organization, and other associated expenses related to deciding which securities the mutual fund will acquire or sell. Typically, this fee ranges from 0.25% to 1.0% of assets in the fund.

Revenue-Sharing

This fee usually consists of 12b-1 Fees, Shareholder Servicing fees, Sub-Transfer Agency Fees, and Commissions. 12b-1 fees are charged by some mutual funds to cover the expense associated with marketing and distributing as well as to pay the Third-Party Administrator (TPA) for plan administration or recordkeeping services. We find that this fee generally ranges between 0.25% and 1.0% of invested assets.

2. Insurance Fees 

Insurance companies frequently use variable annuity contracts as the funding vehicle for smaller retirement plans. The investment products are generally a mix of proprietary and non-proprietary investment products contained in separate accounts offered to participants. The variable annuity contract can include a “Variable Asset Charge” or other additional fees wrapped around the investment alternatives. Participants select from among the investment alternatives offered, and the returns to their individual accounts are reduced by the amount of any additional charges built into the contract. Variable annuity contracts also include one or more insurance elements. Generally, these elements include an annuity feature or interest and expense guarantees, and sometimes a death benefit is provided during the term of the contract. However, most of the Variable Asset Charge will pay for general administration, recordkeeping, participant services, and commissions paid to the selling agent and/or broker.

3. Asset-based Wrap Fee

In cases where the vendor does not receive revenue sharing and does not utilize an insurance contract, they may assess a wrap fee on the retirement plan. The wrap fee is an all-inclusive asset-based fee imposed on the value of total assets in an account. These fees are a catch-all that can be used to pay for plan services from compliance testing to trust reporting. A wrap fee may cover all the expenses except for itemized fees and investment management costs, and will be in addition to the fees the investment products charge.

Per Participant Fees

Per participant fees are calculated as a flat charge per participant or eligible employee. These fees are typically assessed per participant in addition to other annual fees. Depending on how the retirement plan is structured, the expenses are charged directly to the participant’s account, or billed directly to the plan sponsor. These fees are similar to Itemized Fees in that they are charged for administration services. The difference is that these fees are charged for plan level services rather than for a specific service being performed. 

Itemized Service Fees

Itemized Fees are typically charged on an as-incurred basis, and may be paid by the plan sponsor, by the plan, or by the participant. They are fees for specific services detailed in the vendor’s service agreement. Some itemized fees are charged for a specific Itemized initiated by the participant such as a loan or distribution, while others are charged for a specific plan level service such as the preparation and filing of the Form 5500 or performing required Nondiscrimination testing. In other cases, the asset-based fee may cover these services. Check your services agreement.

Conclusion

According to Warren Buffet, “Price is what you pay. Value is what you get.” But the first step is understanding what you pay.

For more information, please join our webinar on this topic on August 29 (registration information coming soon!) or read our white paper A Guide to Retirement Plan Fees and Expenses.


Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  

Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

Riding The Roller Coaster of Emerging Markets

Posted by Rex Kim

July 18, 2017

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According to a 2017 study provided by the World Bank, emerging countries are expected to continue to represent an increasingly larger portion of world gross domestic product (GDP) and market capitalization. The World Bank is projecting global growth at 2.9% over the next few years.  This is largely due to the accelerating growth expectations for emerging markets of 4.7%. 

Advanced economies of the United States, Euro Area, and Japan are expected to grow at a combined 1.7%.  Emerging markets is clearly the driving force behind world economic growth. 

The decision to have a fund focused solely on emerging markets is a question we get on occasion. 

Our recommendation tends to favor NOT having an emerging markets fund on the investment menu.  Wait… Why not?  You just said that it’s becoming more and more important!

Below is a table showing the annual returns for the region over the past 10 years:

Year

Return

2017 (YTD 7-10-17)

+18.59%

2016

+11.19%

2015

-14.92%

2014

-2.19%

2013

-2.60%

2012

+18.22%

2011

-18.42%

2010

+18.88%

2009

+78.51%

2008

-53.33%

2007

+39.42%

 

As the above table highlights, investing in emerging markets can provide for an exciting (or scary!) roller coaster ride.  Emerging markets tend to be one of the most volatile investments, owing to both the general riskiness of the companies and changes to currency values, which are driven by issues arising from less predictable governments.

We do believe having exposure to the emerging markets is vital for long-term investment success.  However, we also need to construct a strategy that dampens the impact of poor decisions by participants stemming from behavioral mistakes.

Two common mistakes made by participants are 1) 1/n fund allocation and 2) allowing emotions (fear and greed) dictate timing of investments.  In either case, the overall riskiness of emerging markets tends to exacerbate these tendencies.  A strategy we favor is obtaining exposure to emerging markets via international equity funds that have a consistent level of exposure to emerging markets, typically an amount equal to the percentage the region represents of the world’s market capitalization.  (As of today, this is about 10% to 20% depending on the index.) We find that this strategy of investment menu design gets participants more consistency at the appropriate level of exposure to emerging markets, escaping the two common mistakes noted earlier. This line of thought can also be applied to other asset classes such as commodities, risky bonds such as high yield and structured products, and other more volatile investments.

During periods of strong returns for any asset class, such as emerging markets over the past two years, it can be tempting to put such investment options onto the investment menu.  However, a more productive strategy would be thinking through the investment menu design with a long-term perspective and focusing on how to manage participant behavior (and mistakes).