Jon Chambers

Just a couple of quick observations: 1) Selling stocks at an apparently "inopportune" time isn't really that big a deal if they are replaced with mutual funds that invest in similar securities. Conditions that cause the stocks to recover are also highly likely to be favorable for funds investing in similar stocks. 2) If you really need to have full control over your investments, don't invest through a qualified plan. Plan investments are owned beneficially for the participant through a trust. The trustee gets the final say on the investment. This is why it's not against any law for the plan to require you to liquidate your stocks. Unfortunately, as plan sponsors and providers seek to make plans appear as if participants have full control over their investments, this important point seems to have been lost. 3) Although Demosthenes makes a good and valid suggestion, in my experience, very few plans permit in-kind in service distributions. It's worth checking, but unlikely to be successful.

I don't want to get into a shouting match. It's clear you believe passionately in the approach. Based on your profile and your web site links, I presume you are affiliated with ICM Asset, one of the providers delivering the service described in the article (I saw the original when it appeared in Plan Sponsor). This isn't intended as a slam, but you may not be completely objective about your firm's services. And you have to agree that the very fact that Plan Sponsor did a feature article on the company illustrates that the approach taken was unusual enough to generate interest. Further, lifestyle funds aren't necessarily expensive. Vanguard's LifeStrategy funds charge 0.28%, all in. I'm not aware of an individualized advice product that can get close to that rate for both advice and investment management. Furthermore, Vanguard is now offering participant level investment advice through Financial Engines for no additional charge. From a fiduciary standpoint, selecting an investment advisor for a DB plan is a materially different proposition than selecting an investment advisor for a participant directed DC plan. First, if the DB advisor performs poorly, the DB plan sponsor will face a greater funding requirement. If the DC advisor performs poorly, plan participants will face a substandard retirement. Different parties bear the cost of poor performance, which is what drives the liability. Further, the DC advisor has a much tougher job. Delivering specific and appropriate advice to thousands of participants is more challenging that delivering specific and appropriate advice to one plan. The chance of a mistake that leads to liability is consequently much higher in the DC environment. I find it interesting that the article indicates that ProManage was the only advisor willing to take on the fiduciary responsibility of making completely automatic contribution allocations for employees. This tells me that few investment advisors see this approach as a viable business model. I'm sure that your company does a good job and takes its fiduciary role seriously. Your fees are also probably reasonable. If you go back to my earlier posts, you'll note that my concerns stemmed from the fact that the DOL seemed to be minimizing the fiduciary role played by the advisor. You have to agree that many so-called investment advisors are more interested in pushing product and maximizing their compensation than in providing high quality, low cost services to clients. These people also tend to have the best sales skills. Pity the poor plan sponsors that select these entities to act as the approved advisor. Do you think that those plan sponsors would face no fiduciary liability? Do you think that they wouldn't have been better off trying to comply with the ERISA 404© guidelines? Finally, the utilization numbers cited are good, but not that unusual. On-line investment advice providers typically find about 50% of the plan population will use the service if it's paid for by the plan sponsor. Our experience working with a cross-section of plan sponsors for whom we provide investment education and model portfolios is that 50% to 70% of assets end up in the models that we design--higher than the 50% of assets cited in the article. My point is not that your approach is bad--I actually think it's good and commendable. It's that very few organizations deliver quality services using this model, that delivering service under the model is difficult and costly, that the model could easily be co-opted by unscrupulous providers, and that alternate models offer the possibility of comparable results at lower cost, with less potential fiduciary liability for the sponsor. Is there a place in the market for your company's programs? Yes. Is it right for everyone? No.

I won't disagree with your closing point. Controlling the cost of funds used through the plan is a fiduciary responsibility, a focal point for the DOL and an issue that is likely to be increasingly litigated (see the Nationwide case). But I'm not sure how having the sponsor hire an investment advisor that plan participants can choose to work with (or not) helps matters much. Either the advisor works closely with the individual participant, which is admirable and desirable, but drives up the cost astronomically, or the advisor relies on model portfolios and automated risk tolerance profiling--techniques that are simply a less efficient replication of what could be done with lifestyle funds and on-line investment advice. And selecting the approved advisor is a fiduciary function that adds significantly to the plan sponsor's potential liability. The real problem stems from a system that forces 35 million participants to choose how to invest their retirement assets (even if one choice is to hire an advisor). I'm non a Luddite who believes we should go back to the days of no investment choice. And I am an investment advisor, so I'd be pleased if I thought that professionally managed accounts were a viable solution. I'm simply suggesting that if, on the margin, corporations allocated slightly more of their benefit dollars to professionally managed DB plans, and slightly less to participant directed DC plans, over time, the average participant would see a dramatic improvement in their retirement security.

My point about the DOL no longer supporting independent advice is a relative one. Sure they still support it, but they also support "conflicted" advice, as their support for the Boehner bill illustrates, and as the new Sun America opinion letter shows. I thought the DOLs position had more integrity when it was more consistent. Compare the Frost opinion letter to the Sun America opinion letter and you'll see what I mean. I don't disagree with your contention that education has been ineffective, and that most participants would be better off passing investment responsibility to a qualified third party. I'm simply stating that having 35 million (your number) participants hire qualified investment advisors to manage their DC assets is inherently more costly, and over the long run, probably less effective, than having 35,000 plan sponsors (my number, assuming 1,000 participants/plan) hire qualified investment advisors to manage their DB plans. I'm afraid that we are introducing the potential for increased investment "slippage" by driving up investment costs, at the very time that market returns appear to be diminished. I'm not suggesting solutions, I'm simply identifying a problem, and suggesting that with its new policies, the DOL isn't helping the situation.

In fact, in 1979, Constantinides proved mathematically that Dollar Cost Averaging (DCA) produced inferior expected investment results relative to investing as a lump sum at the start of the period. Numerous other academic studies reached the same conclusion, using both a theoretical approach and real world studies comparing DCA to lump sums. Kirk is right that you can't generalize. However, we can generally state that there are three types of investment markets--rising markets, falling markets and flat markets. Lump sum is better in rising markets, DCA better in falling (although not investing at all would be better yet), and the two approaches generate roughly equivalent results. Rising markets are more common than falling markets, and gains tend to be larger than losses (if this weren't true, stocks would have negative expected returns, and noone would invest in them). Although this is an oversimplification of the pro lump-sum argument, (Constantinides proof compared a series of small bets to one large bet, and proved that the cumulative impact of the small bets was equal to the large bet, hence the greater expected return from the large bet outweighed the risk reduction from the small bets), I think it illustrates why DCA can't reasonably be expected to work. Investment theory notwithstanding, DCA continues to be touted as a preferred approach by most of the major investment providers.

I'd suggest that the DOL is softening their position on prohibited transactions, which, although consistent with their support for the Boehner bill, may not reflect a good public policy decision. Although I'm generally relatively conservative politically, it does worry me that a new administration may reverse the prior administration's policies in the goal of being "business friendly" before they have a complete understanding of the implications of their decisions. More broadly, I think we are starting to see the shake-out from transitioning the focus of our retirement system from a DB to a DC structure, and from an employer directed system to a participant directed system. During the bull market of the late '90s, employees clamored for more control. In the recent bear market, employees are clamoring for more help. I'm afraid that they may get what they are asking for, but it won't be what they need. By softening the PT rules, we may be making it easier for investment providers to push their own products, even when these products may not be in the best interest of participants. I'd rather see the DOL pushing for more, simpler disclosure, and advocating the use of truly independent advice providers, such as mPower, Financial Engines and Morningstar ClearFuture. Unfortunately, the lobby for investment providers is much stronger than the lobby for the independent advice providers.

Readers of this thread might be interested in an article I wrote a couple of years back on this topic. It's more focused on fiduciary issues, and complexities related to multi-broker IDAs not structured as a DVP arrangement. Here's the link for anyone that's interested. http://www.advisorsquare.com/advisors/schu...ns/82713135.pdf

Here's what I was able to find (on a website maintained by Klosterman Capital Corporation). It doesn't appear that New York has adopted UPIA yet, although they are in the minority in that regard. "The Uniform Prudent Investor Act is a new law, concerning the investment of trust funds by fiduciaries. The Commissioners on Uniform State Laws adopted it in statutory form and recommended that all states enact it in 1994. It has since been adopted by 36 states, including Alaska, Arizona, Arkansas, California, Colorado, Connecticut, District of Columbia, Hawaii, Idaho, Indiana, Iowa, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Utah, Vermont, Virginia, Washington, West Virginia, and Wyoming. " Hope this helps,

In reply to Fred's posts, the state law rules are hard to quantify, since they vary from state to state. For many years, many states had "legal lists" of approved investments that wouldn't be challenged, even if they were used in an inappropriate manner. Recently, many (but not all) states have adopted the Uniform Prudent Investor Act (UPIA), which generally applies standards from the Third Restatement of Trusts, that track closely to the ERISA standards. Despite the adoption of the UPIA standards, I think it's fair to say that most people believe that ERISA prudence standards are higher than state law standards, because of the judicial interpretation that "prudent man (person)" means prudent expert.

As you may know, ERISA and the IRC are more focused on describing what you can't do, than describing what you can or should do. The definition of a party in interest is ERISA 3(14). If you don't fit any definition on that list, presumably you are independent from the plan. For prohibited transaction rules, review ERISA 406. If the transaction is not between the plan and a party in interest, presumably it is not prohibited.

Moe, once again, the trustee can be paid from the plan where they are not a party in interest prior to being hired. They potentially get into trouble where they benefit financially from there role as trustee. This is where you see all the issues relating to trustees collecting 12b-1 fees from mutual funds that they recommend (this is generally not permitted, although may be ok in limited circumstances--see for example the "Frost" opinion letter [DOL ERISA Opinion Letter 97-15A]).

Thanks BenefitsLawyer, for a good summary of the rules. Moe, back to your point about the TPA, there is no prohibited transaction if the TPA that is engaged and is paid from the plan is otherwise independent from the plan. But consider the scenario where the TPA firm is owned by the spouse of a partner in the company engaging the TPA firm. The partner in the company is clearly a fiduciary, as they are acting as Plan Administrator. The spouse is linked to the hiring fiduciary. Thus, you have self-dealing and consequently a prohibited transaction. Another scenario--the independent TPA also has an investment advisory affiliate. The TPA firm recommends that the plan sponsor hire the investment advisory affiliate. This is probably still ok, since the TPA firm is not a fiduciary, but it's getting grayer. Turn it around, with an investment advisor with a TPA affiliate that is recommended, and it's probably not ok, because the investment advisor is a fiduciary that benefits from the TPA firm being hired. General rule--don't conduct ERISA plan business with affiliated parties. If you want to break the general rule, be sure to get a legal opinion from a qualified attorney.

"Party in interest" includes all fiduciaries, anyone providing services to the plan, any employer, direct relatives of anyone named above, several other categories, and all 10% or greater partners in pretty much any organization serving or related to the plan. See ERISA Section 3(14). The three guys are clearly parties-in-interest, as employer, and in additional roles, such as trustee, investment advisor, etc. The Internal Revenue Code and ERISA both contain outright prohibitions against direct or indirect economic transactions involving plan assets and parties-in-interest, unless the transaction is covered by an exemption. The Code refers to these individuals as "disqualified persons". To answer your questions, it appears that there is a conflict of interest under both the Code and ERISA. If anyone is receiving compensation from the Plan, either as a commission, or as fees in the RIA capacity, such compensation is probably a prohibited transaction, and would need to be corrected.

While I agree that the current answer should be "c", I also think that the facts that have come out so far look extremely bad for the Enron fiduciaries. However, plan lawsuits may be only part of their problems. If you are interested in following progress of the suit, you may want to check out www.enronsuit.com.

Only very generally. The concept is that public organizations need to make their board meetings accessible to the public, must post agendas in advance, and must let the public know what was discussed and what was decided. The Act extends to retirement plan administrative committees, which is where I have encountered it. Don't know what the cite is, but presume it is State law.

I've clipped from the 404© regs below. Briefly, the 404© regs don't apply to employer securities, unless they meet the exceptions listed below. Note subpoints (iii) and (iv), which, when read in the double negative form, says that employer securities must be publicly traded in order for 404© relief to apply. "(ii) Paragraph (d)(2)(i) does not apply (added by me--this is the section under which 404c provides transactional relief) with respect to any instruction, which if implemented--.... (E) Would result in a direct or indirect:... (4) Acquisition or sale of any employer security except to the extent that: (i) Such securities are qualifying employer securities (as defined in section 407(d)(5) of the Act); (ii) Such securities are stock or an equity interest in a publicly traded partnership (as defined in section 7704(B) of the Internal Revenue Code of 1986), but only if such partnership is an existing partnership as defined in section 10211©(2)(A) of the Revenue Act of 1987 (Public Law 100-203); (iii) Such securities are publicly traded on a national exchange or other generally recognized market; (iv) Such securities are traded with sufficient frequency and in sufficient volume to assure that participant and beneficiary directions to buy or sell the security may be acted upon promptly and efficiently; (v) Information provided to shareholders of such securities is provided to participants and beneficiaries with accounts holding such securities; (vi) Voting, tender and similar rights with respect to such securities are passed through to participants and beneficiaries with accounts holding such securities; (vii) Information relating to the purchase, holding, and sale of securities, and the exercise of voting, tender and similar rights with respect to such securities by participants and beneficiaries, is maintained in accordance with procedures which are designed to safeguard the confidentiality of such information, except to the extent necessary to comply with Federal laws or state laws not preempted by the Act; (viii) The plan designates a fiduciary who is responsible for ensuring that: The procedures required under subparagraph (d)(2)(ii)(E)(4)(vii) are sufficient to safeguard the confidentiality of the information described in that subparagraph, such procedures are being followed, and the independent fiduciary required by subparagraph (d)(2)(ii)(E)(4)(ix) is appointed; and (ix) An independent fiduciary is appointed to carry out activities relating to any situations which the fiduciary designated by the plan for purposes of subparagraph (d)(2)(ii)(E)(4)(viii) determines involve a potential for undue employer influence upon participants and beneficiaries with regard to the direct or indirect exercise of shareholder rights. For purposes of this subparagraph, a fiduciary is not independent if the fiduciary is affiliated with any sponsor of the plan." Hope this helps,

RLL-- Don't intend to get into a shouting match, but if you read your own reply, you indicate that "The securities law issues can be dealt with...particularly when employee contributions and investment directions are not permitted with respect to employer stock." In this case, it's clear that investment directions would be permitted on the employer stock. I don't purport to be an expert on securities law issues, but I am passingly familiar with the registration and filing requirements, which are quite onerous and often overlooked. Perhaps "should be avoided at any cost" was a little strong. Let me rephrase to "should only be entered into after all the direct and indirect costs of the transaction have been fully considered." I don't consider myself to be a conventional investment adviser, and I'm not in the slightest concerned with defending my turf. I am very concerned with self-dealing in qualified plans, which, in my experience, is the typical underlying rationale for including non-public employer securities in a plan. I'm well aware that qualified securities attorneys can deal with the securities laws, and that they are usually well-paid to do so. However, most securities lawyers that I have worked with can't deal with the ethics of using a retirement benefit plan as the vehicle for funding a speculative, illiquid investment in employer stock. By their very nature, retirement plans must cover rank and file employees who don't understand the risks implicit in non-public stock. If the intent of using stock is to promote broad-based employee ownership, there are typically better methods than a 401(k) match. It sounds to me like the company is looking for a way to duck what would otherwise be a cash obligation, and I think that that is wrong. Of course, I don't have all the facts, and I may be rushing to judgement. But I don't appreciate having my motivations questioned.

Never heard of Code 791, or mandatory education. Are you referring to education for plan participants or for plan service providers? It could be some sort of continuing professional education requirement relating to service providers only. I can tell you that the 404© regs specifically provide that education is not required for plan participants.

Good question. I'm not aware of any NASD restrictions, but we are a non-NASD SEC goverened firm, so I'm not fully up to speed on the NASD rules. In general, I think your conclusion seems reasonable, but I could be proven wrong.

404© is largely irrelevant to this issue. The quick answer, is yes there are many issues to be considered. First, would the plan meet any of the class PTEs (PTCE 77-3 is most likely). Then, is the selection of the proprietary fund supported by the plan's investment policy statement and an independent investment fiduciary (see the recent First Union case, and the terms of the settlement). While proprietary funds aren't prohibited, they raise numerous potential fiduciary concerns.

Couple of quick comments. First, 404© relief from fiduciary liability for investment decisions is transactional in nature, and you don't really "qualify" in the traditional sense of the term. You either get the transactional relief or you don't. With that background, consider the question further. Employer chooses to fund the matching contribution in employer stock. That's an employer election--clearly no 404© relief relating to the contribution transaction. Once the contributions are made in the form of stock, participants can elect to sell. What the client is hoping for is that this permissible election provides 404© relief. The answer to that is maybe. It depends on many more facts than you have presented. The really quick answer is that having non-publicly traded employer stock in a qualified plan (other than an ESOP) introduces numerous fiduciary and securities law issues, and should be avoided at almost any cost. I doubt that 404© is likely to be your main problem.

Any realistic assessment of the pros and cons of life insurance inside a plan is likely to conclude that the insurance should be kept out of the plan. It's just too costly. Here's one quick illustration of the problem. Remember that one of the big selling points of insurance is the implicit tax-deferred investment growth on the cash value of the policy. Insurance sales types will tell you this makes up for many of the costs of the policy. But you get tax-deferred growth anyway in a qualified plan. Insurance agents have told me that they love to sell insurance through a plan because they get a ready source of cash for additional premiums from the annual contribution, so the policy is less likely to lapse. Seems like a weak argument to me, for everyone except the agent who collects a huge commission every year.

Don't have time to answer all your questions, but if you have a broker/consultant involved, they should be able to help you. A stable value fund is a managed combination of GICs and similar investments from numerous insurance companies (issuers). As such they are significantly less risky than a GIC from a single insurance company. In my opinion, a stable value fund is a far superior option to a single issuer GIC, but maintains most of the desirable characteristics of a GIC. You pay the manager to run the fund, like a mutual fund. Typical fees range from 0.20% to 0.50%. Manager tenure is how long the manager has been running the fund. Since stable value funds purchase relatively long term contracts, the review that you do will be valid for a reasonable period of time. Number of issuers and issuer concentration is unlikely to change overnight, similarly, average ratings may go up or down, but don't tend to change too rapidly. It's unlikely that a fund that has historically focussed on highly rated issuers will shift rapidly to lower rated issuers. In fact, most stable value fund managers will stop using a given issuer if its ratings drop significantly. Of course, the choice of any given contract is based on many factors, including the guaranteed crediting rate, credit quality, liquidity, etc. For a stable value fund, it's typical to require 12 months notice of termination, although many funds waive the notice requirement. You can typically get a sense of whether notice would be waived by looking at the fund's cash flows and cash position. Funds with little cash and low cash flows are unlikely to be able to waive the notice, particularly if your plan has a large position in the fund. I suggest you check out www.morley.com for more information. Although it is a sales site, there is a very good glossary of terms, and some reasonably objective information regarding these products. Morley is one of the leading stable value fund managers, but there are also plenty of other good managers out there. I'd definitely recommend considering stable value funds as an alternative to a traditional GIC or insurance separate account product. Hope this helps,

If I were selecting a stable value fund, I'd want to know: Current yield Number of issuers Distribution of assets across issuers Distribution of ratings across issuers Use of synthetics/policy on synthetics Manager tenure Management fee Liquidity policies Termination notification requirements These are just a few of the issues off the top of my head. I'm sure there are many more. Market value adjustments typically don't apply to stable value funds, although they are common in single issuer contracts. I'd strongly recommend staying away from a single issuer contract.

Schwab has the broadest range of investment choice that I'm aware of. Of course, defining "best of the best" is very difficult. Which investment is best? The one with the best performance (it's probably about to change, look at Janus over the past year or so)? The one with the most consistent performance? The one with the lowest fees? It's questions like these that make me happy to be an investment consultant.