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Fiduciary News Trending Topics for ERISA Plan Sponsors: Week Ending 6/10/11

June 13
00:02 2011

1020805_25983300_Trending_Topics_2011.06.10_stock_xchng_royalty_free_300Welcome to Fiduciary News Trending Topics. Each Monday, we’ll give you a quick synopsis of the major news events and trends impacting ERISA plan sponsors, 401k fiduciaries and those in the business of supporting these fine folks. If you smile when you read these entertaining snippets, well, that’s the idea. If you think we’re missing something important, then please let us know.

Fiduciary News Lead Story:
How Should a 401k Plan Sponsor Construct an Appropriate Investment Policy Statement?” (Fiduciary News, June 7, 2011). For those who believe an Investment Policy Statement (IPS) for an ERISA retirement plan helps reduce fiduciary liability, here’s a nine step process for creating a strong IPS.

ETFs – They’re Good, No, They’re Bad, No, They’re…:
The headlines conflict, people are taking sides shareholders are buying, shareholders are selling, what’s happening to the world? One this is clear, ETFs are having normal growing pains. We’ll soon know whether ETFs become a tacit standard or just the latest investing cult a la index funds. Wait a minute. Aren’t they mostly index funds?
Exchange-traded funds popularity draws concerns,” (Financial Times, June 6, 2011) These things are breeding faster than rabbits, well, at least as fast as smart phone apps. This comprehensive article clearly draws the line between the purported similarities of ETFs and the derivatives responsible for the 2008 credit crisis.
Professionals shifting to ETFs from mutual funds,” (MarketWatch, June 6, 2011) Professionals don’t like waiting for the 4:00pm close for a trade to execute. Still, the author sees a world where both ETFs and mutual funds co-exist.
FaithShares Pulls Plug On Quartet Of Christian ETFs,” (Financial Planning, June 6, 2011) It turns out there’s just not enough interest in them.
In May, ETFs Had First Monthly Outflow in 9 Months,” (Barrons, June 7, 2011) The title says it all.
Mutual funds lose their battle with ETFs,” (MarketWatch, June 8, 2011) Chuck Jaffe, while admitting he’s not selling his mutual funds anytime soon, restates all the advantages of ETFs. Surprisingly, because Jaffe is usually so thorough, he gives the disadvantages only a passing glance and doesn’t really fully explore the untested nature of the active side of ETFs. A better title might have been “Index Funds lose their battle with ETFs.”
Is the ETF Story Over?” (On Wall Street, June 8, 2011) A classic what-have-you-done-for-me-lately story. Here’s a hint: What did the market do in May? Most ETFs are nothing more than index funds – and one’s that are easy to trade out of on a whim. It would be interesting to see if mutual fund index funds suffered similar losses in May compared to ETFs. If not, then that might be a behavioral case against ETFs.

Fiduciary – Standing Strong on the Standard:
As we near the end game, last minute public lobbying grows more intense. The DOL’s Phyllis Borzi held her ground and promises to have a new rule out by the end of the year, albeit with possibly a long transition period.
Does the Fiduciary Standard Cost Too Much? Not So Fast,” (Advisor One, June 7, 2011) Knut Rostad, the founder and chairman of The Committee for the Fiduciary Standard, tells it like it is. The “costs” opponents refer to are theoretical, not tangible. What Rostad omits is the fact there are similar “costs” to not having the fiduciary standard.
Former EBSA Head Campbell to DOL: Re-Propose Fiduciary Rule,” (Advisor One, June 8, 2011) Don’t read what he used to do, read what he’s doing now and where he’s doing it. Translation: Lawyer tells insurance company conference the DOL’s proposed rule will be challenged by lawyers (probably at the behest of, let’s guess, insurance companies). Borzi remains unflappable.

Fees – I Hate to Say “I Told You So,..”:
I spoke to the DOL specifically about the eventual end game if they insisted on focusing too much on fees. I told them they would – intentionally or unintentionally – force fiduciaries to limit investment choices to passive funds. Worse, this switch would come not because they perform better (studies show they do not consistently perform better than actively managed portfolios), but merely because they have lower expense ratios. The spokesman for the DOL insisted this wouldn’t happen. Yet, a year later…
Shedding Light on Excessive 401k Fees,” (New York Times, June 3, 2011) This story starts with such promise and partially refutes the first article under Major Plan Sponsor Moves and News below. It immediately attacks the idea that mutual fund expense ratios represent the only fees associated with mutual funds and then explains most (but not all) of the other fees. Unfortunately, it then turns into a typical generalized piece, losing its relevance for all but the largest (billion dollar +) plans.
DOL’s Rule 408(b)(2) Saga Continues: Further Compliance Extension Likely,” (Advisor One, June 2, 2011) Because the Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) has yet to come up with the final rules, the January 1, 2012 deadline might be pushed back further.
12(b)-1 ruling eases fund firms’, B-Ds’ worries — for now,” (InvestmentNews, June 8, 2011) Relax, sports fans, this only deal with past sins. The real news is that we’ve now defined it as a sin, so the future remains bright.
Investors Prefer Commissions to Account Fees, Cerulli Study Says,” (Bloomberg, June 7, 2011) The survey fails to distinguish between investors looking for brokerage services (where you should pay commissions) and those look for fiduciary services (where commissions are generally an illegal prohibited transaction). Come to think of it, didn’t earlier surveys show investors don’t know the difference between the two?
The Secret to Sharply Cutting 401k Fees,” (USNews.com, June 8, 2011) Wow, the author here has certainly taken a large gulp of the passive investing Kool-Aid, and it looks like Schwab has, too. This piece commits the same kind of “Snapshot-in-Time” anomaly when comparing returns between passive and active. Worse, the article misleads by claiming the 1% difference you can save by investing in index funds would save the investor $115K over 30 years. Of course, using this same theoretical calculation with the actual returns in the “Lost Decade” that opened the Millennium, we’d discover that by investing in just the average (i.e., not the best, nor the top quintile nor even an above average) multi-cap value fund, you would have earned 4% more per year compared to investing in a passive S&P 500 index fund. This means you would have made up that “$115K” difference in just 8 years. It just goes to show, you get what you pay for.

Investments – A You a Man or a Machine?:
If you had a choice, would you control your own destiny or would you allow some institution to run the rest of your life. If our leading behavior economist wants to take the personal our of personal decision making while even the Chinese government places that burden on
The Annuity Puzzle for Retirement Investing,” (New York Times, June 4, 2011) Here’s a bit of irony: Famous behavioral economics researcher who earned his reputation showing the average person doesn’t make utility maximizing (primary because the average person doesn’t have the average utility maximum) now questions why people don’t make utility maximizing decisions. Truth be told, either the University of Chicago has turned Richard Thaler to the dark side or this is just a promo piece from some insurance company’s marketing material.
Pension Plans for the Rest of Us,” (Wall Street Journal, June 4, 2011) Just comparing this article with the above shows the difference in the quality of reporting between the two seminal newspapers of the country. Here we get a balanced article – complete with comparative test drives – covering various “virtual pension plan” alternatives (N.B.: These are not annuities).
FPA in China: How the Chinese Invest Now and for Retirement,” (Advisor One, June 1, 2011) Read this article and discover: 1) The Chinese are smart (the associate the term “financial planning” not with goal setting but with selling investment products); and, 2) In some aspects, America is more socialist than China (the Chinese government does not offer a “social security safety net” for retirees and citizens have to take responsibility for this themselves.

Major Plan Sponsor Moves and News:
What are other plan sponsors and fiduciaries doing with their plans? And how are participants responding? The latest in legal proceedings involving plan sponsors and fiduciaries.
Getting Going: What They Won’t Tell You About Rollovers,” (Wall Street Journal, June 4, 2011)
Loans From 401k Plans Are on the Rise As Investors Tap Their Inner Banker,” (Wall Street Journal, June 7, 2011)
ICI Urges DOL to Make Electronic Delivery Default for 401k Plans,” (Financial Planning, June 8, 2011)
Scary study shows 401k matching doesn’t work,” (BenefitsPro, June 8, 2011)

Wisdom from Some of Our Favorite Blogs:
fi360 Blog: CFP Board Case Histories: Analysis of a Planner’s Fiduciary Duty can be Unnerving at Times
fi360 Blog: Fiduciary Links: Goldman Sachs a case study on raising the bar of professionalism
401kBasics: How Long Do I Have To Pay Back a Home Loan From My 401k?

Hot Tips from Popular Web Resources:
SunGuard Relius: Modifications to Participant and Service Provider Fee Regulations

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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