Blue Ridge ESOP Associates
(Charlottesville VA / Telecommute)
Retirement Plan Consultant
Cetera Retirement Plan Specialists
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Well, of course, we do.
We started last month's LIA$FACTS$ with a similar title and the same opening phrase. The subject was the actuarially thrilling one of Gain & Loss.
Independence used to be obtained by virtue of the fact that different service vendors did different things. One seldom had one vendor providing both products and advice.
Several consulting firms, including those that used to be accounting firms, found that their growth was limited by not expanding services into areas previously unserved. They moved into the new areas, establishing "maginot" lines between specialties. Several firms used separate corporate entities to achieve the appearance of separation, while others merely established rules or depended on the professional body requirements of their professionals.
Of course, when your money depends on another's performance, you and (s)he are not independent! Most firms treat this symptom by disclosure, explicit and/or implicit.
Since Japan has few consulting firms, one might ask how it applies here.
In retirement plan design and cost, it applies to the insurers and the trust banks; the carriers. They fill much of the void not yet penetrated by the consulting firms.
As an organization grows in Japan, it reaches a first hurtle at about ten employees. It is then that the firm must put its employment rules in writing and make the written document available to its employees. The government also gets a copy and changes become more difficult. Unlike the U.S. retroactive changes are difficult to implement in Japan.
At this time, the organization will probably formalize a "Retirement Allowance Plan."
For formalizing the plan, the Japanese government permits tax deductions against corporate income in advance of paying benefits to terminating employees. Such a plan satisfies the Japanese requirement of "funding."
In time, the organization will grow to a size (25 to 100 employees) that will interest a carrier. The carrier will approach the firm, suggesting a TQPP ("Tax Qualified Pension Plan"), showing financial advantages in buying one. They seek to sell a financial product.
At this time, the organization should employ an independent (fee only) consultant. The carrier cannot independently recommend their own products. Unlike the carrier, the consultant will show the organization the costs and risks associated with the product. The organization is then able to evaluate proposals from a position of knowledge.
After the product is purchased, the organization faces offers from the carrier to do the various valuations required for accounting and other reasons. Regardless of cost, the organization, again, should hire an independent consultant to do these valuations.
As with the danger implicit in having the same person on both sides of any transaction, having the investor of the assets do the work that tells you how you are doing is dangerous.
We can tangibly demonstrate the advantages of independent advice by sharing a couple of the horror stories we have encountered over the years of our practice:
- Actuarial assumptions that are wildly outside any range of reasonableness. The most offensive one we have seen is salary scale assumptions rising to several points above the discount rate.
- Reported assets less than two thirds of the correct amount due to error on the part of the carrier. Without independent asset gain and loss analysis, such an error would remain undisclosed for years and perhaps for the life of the contract.
- Participant data that had lost touch with the actual participants.
- Plans being valued differing from the actual plan providing benefits.
Each of these was caught by virtue of the independence of the consultant; nothing would be lost by doing a thorough review.
Obviously, implicit in all of the above is the assumption that the consultant is professionally qualified to do the work and also subject to a requirement of independence by the qualifying organizations. The lawyer who helps you put together your work rules is not in a position to cost your retirement benefits, despite his professional independence.
We ask your continued indulgences in the coming new year and years. We promise to continue to provide the most technically proficient and cost effective retirement plan actuarial consulting available in Tokyo.
We really feel that our twin purposes are to raise the standard and lower the costs of actuarial advice. They can only be met by knowing the needs of our clients. We thank you for helping us achieve these goals.
You have been reading the online edition of LIA $FACTS$, the monthly fax newsletter of Lohmann International Associates. For further information, please visit our home page on the Web or send e-mail to Les Lohmann.