In the corporate world, human resources is often the ugly stepsister. It's a department that spends money rather than making it, always has someone annoyed at it and is rarely viewed as an asset to the company. You may choose to disagree with those assertions, but that's not what this piece is about.
Just the other day, I wrote about being clear in your documents. Today, I move along the spectrum from clarity to care.
My motivation for writing this is a Supreme Court case fashioned as Yates v United States. It's not a case that relates to human resources. It's not a case that relates to anything that most HR departments ever even think about.
It's about fishing. Yes, you read that right. Mr. Yates is a commercial fisherman. And, in that role, Mr. Yates has some people who work for him. Mr. Yates and his workers were caught with undersized grouper and were ordered to leave them in the boat as evidence. Mr. Yates ordered his men to throw the grouper back in the water and they did. Mr. Yates was charged with a crime.
Of course he was, you might think. He and his workers were violating federal law by catching undersized grouper.
Hold on. That's not what he was charged with violating. Mr. Yates was charged with violating the Sarbanes-Oxley Act (SOX or SarbOx). You remember SOX. It was passed in 2002 to help the federal government to combat underhanded business practices such as those that were found at Enron. But, in this case, Mr. Yates was accused of the destruction of "any record, document, or tangible object" for the purpose of obstructing a federal investigation. Had he been found guilty and lost his appeal(s), he could have had to serve 20 years in a federal penitentiary.
Okay, so you just know that I am going to tell you that SCOTUS voted 9-0 to throw this case out. Wrong. The vote was 5-4 with Justice Kagan joining the utlra-conservative wing of the Court on the side that felt that Mr. Yates should, in fact, suffer the consequences of SarbOx). (By the way, you should all consider reading Kagan's dissent as it is the first one that I have seen that references Dr. Seuss.)
So, what's my point?
We all need to take care. Congress especially should take care, It is often their loose wording of the bills that they pass that causes this sort of unintended consequence.
But, perhaps more than other corporate functions, HR needs to take care. HR and its programs tends to be subject to lots of laws that either were never intended for HR or had a small component that was that was embedded in a much larger law. When the latter occurs, that benefits or compensation or workplace practice component tends to be drafted very quickly by people who may not have particular experience in that area.
Nobody can keep up with all of this stuff. But, plaintiff's bar seems to look for unusual wording in statute that can be applied in ways that would appear to have never been intended by the drafters.
So, I give a word (several actually) to the wise. No matter how sound your practices appear to be, it may wise to consider how they could be twisted and misconstrued to violate something. Can someone argue discrimination on the basis of age, gender, race, ethnicity, religion, sexual orientation, or anything else because of your well-intentioned policies? As strange as it seems, the prudent approach may be to work backwards. Start by assuming that your policies violate everything possible and work backwards to prove that they don't.
And don't forget to read about the application of One Fish, Two Fish, Red Fish, Blue Fish to Sarbanes-Oxley.
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Thursday, February 26, 2015
Tuesday, February 24, 2015
Say What You Mean in Your Documents
I've long been a proponent of saying what you mean in your plan documents, be they related to benefits, compensation, or anything else. If you know what your intent is, what could possibly be the harm in saying so.
One of my colleagues was good enough to point me in the direction of Gill v Bausch and Lomb, a 2nd Circuit case in which the plan document drafting was a bit sloppy. Without going into all the gory legal details, as I feel certain you can find an article written by an attorney that will do so, the case hinges on whether under the terms of the nonqualified plan, a retired participant is a Retiree or a Participant. It is entirely clear that defendants wanted these individuals to be participants, but it was just as clear to the court that they were Retirees who were eligible for different, more favorable treatment.
All of this could have been avoided. I'm certain that the attorneys who drafted the plan document took all reasonable care in doing so, but attorneys are human and they miss things. In my experience, in benefit and compensation plans, when they do miss something, it is most likely to be administrative or calculational in nature.
You see, very few attorneys who practice in these areas ever actually administer a plan or perform calculations related to a plan. So, when an attorney writes a plan document, it is almost always crystal clear to that particular attorney how he or she would interpret it. Sometimes, others would not agree.
I have seen documents that ask the person performing the calculations to exercise mathematical prowess that does not exist in homo sapiens. I have seen administrative practices written into plans that sounded really good, except that those practices could not actually be followed by any third party administrator.
Before I rant further, let me say that most document work done by most attorneys is very good. I am not trying to disparage the entire legal community here. But, there is always room to make a document say exactly what is intended.
While some would tell me that flexibility, especially when given to the administrator, is a good thing, I beg to differ. If we consider a not entirely hypothetical situation, Plan A is administered by TPA B from 2000 until 2013. TPA B used the discretion in Plan A's document to set certain practices that were convenient within their systems. At the end of 2013, the sponsor of Plan A fired TPA B and hired TPA C to administer the plan. TPA B's notes on its practices and procedures were pretty good, but did not cover every little detail of some of the discretionary practices. Without intending to, TPA C changed some of the administrative practices.
That may or may not be a big deal, but it's a lawsuit just waiting to happen.
I have a few suggestions. I have rarely gotten an attorney to agree with me on all of these (often some, but rarely all), but I am going to say them anyway.
One of my colleagues was good enough to point me in the direction of Gill v Bausch and Lomb, a 2nd Circuit case in which the plan document drafting was a bit sloppy. Without going into all the gory legal details, as I feel certain you can find an article written by an attorney that will do so, the case hinges on whether under the terms of the nonqualified plan, a retired participant is a Retiree or a Participant. It is entirely clear that defendants wanted these individuals to be participants, but it was just as clear to the court that they were Retirees who were eligible for different, more favorable treatment.
All of this could have been avoided. I'm certain that the attorneys who drafted the plan document took all reasonable care in doing so, but attorneys are human and they miss things. In my experience, in benefit and compensation plans, when they do miss something, it is most likely to be administrative or calculational in nature.
You see, very few attorneys who practice in these areas ever actually administer a plan or perform calculations related to a plan. So, when an attorney writes a plan document, it is almost always crystal clear to that particular attorney how he or she would interpret it. Sometimes, others would not agree.
I have seen documents that ask the person performing the calculations to exercise mathematical prowess that does not exist in homo sapiens. I have seen administrative practices written into plans that sounded really good, except that those practices could not actually be followed by any third party administrator.
Before I rant further, let me say that most document work done by most attorneys is very good. I am not trying to disparage the entire legal community here. But, there is always room to make a document say exactly what is intended.
While some would tell me that flexibility, especially when given to the administrator, is a good thing, I beg to differ. If we consider a not entirely hypothetical situation, Plan A is administered by TPA B from 2000 until 2013. TPA B used the discretion in Plan A's document to set certain practices that were convenient within their systems. At the end of 2013, the sponsor of Plan A fired TPA B and hired TPA C to administer the plan. TPA B's notes on its practices and procedures were pretty good, but did not cover every little detail of some of the discretionary practices. Without intending to, TPA C changed some of the administrative practices.
That may or may not be a big deal, but it's a lawsuit just waiting to happen.
I have a few suggestions. I have rarely gotten an attorney to agree with me on all of these (often some, but rarely all), but I am going to say them anyway.
- Have the document reviewed by someone who could or will be administering it. See what they think it says to do.
- Have the calculational elements reviewed by someone who understands how the calculations are supposed to work.
- And for the most controversial of them all, put something in the plan document that looks like "the intent of this section is illustrated by the following example." That's right. If you mean that a result is to be rounded to 4 decimal places, put it in the example. If you mean that rounding takes place after the second step and that 3 more calculations are done after that, put it in the example. If a methodology applies to active and retired participants, put that in the example.
You do want to win those lawsuits or better yet, not be sued at all.
Friday, February 13, 2015
Employer Retirement Plan Priorities -- Cut Risks and Costs Says Survey
This morning, I opened up my daily NewsDash email from Plan Sponsor and found an article telling me that employers that sponsor retirement plans (almost all employers of more than a few people do) are looking to curb risks and cut costs. While it's nice to know that a survey confirms prevailing opinion, this is not exactly a revelation.
As disclosures have become more comprehensive, two elements of retirement plans that have gotten particular scrutiny from outside observers are unnecessary risks and unnecessary costs. Interestingly, if a company chooses to make a generous retirement program part of its overall broad-based rewards program, outside observers generally have no problem with this.
Risk in this case is usually measured in terms of volatility. However, just plain old volatility should not be a concern. What should be a concern is volatility in plan costs as it relates to some useful metric or metrics.
Consider a hypothetical company (HC) with free cash flow of $100 million. Suppose the volatility that they are looking at is in pension contributions and that HC is expecting (baseline deterministic scenario) to have to make a contribution in 2015 of $500,000. In looking at forecasts provided by its actuary, HC notices that the 95th percentile of required pension contributions is $2 million. While that is a big increase in relative terms, it may not be enough to have any meaningful effects on the way HC runs its business (it may, depending on circumstances, but in this hypothetical situation, it does not). Depending upon HC's tolerance for risk, this may be a situation where no action needs to be taken.
On the other hand, Failing Business (FB) has a legacy frozen pension plan with expected 2016 required pension contributions of $50 million. FB has significant debt and if it contributes the full $50 million, it will just barely be able to run its operations and service its debt. If that number hits $52 million, FB will default on its largest loan.
What should FB do?
There are several schools of thought here. One is to mitigate pension contribution risk to the extent possible thereby ensuring that the ominous $52 million pension contribution number will not be reached. But, is that really a good strategy? Or is it just part of a spiral to a lingering death? The other school of thought says that FB is an ideal candidate to take on risk for potential reward. If the risk turns out to produce bad results, FB may go out of business, but it looks like whether that happens or not is only a matter of time. On the other hand, if taking the risk generates a big upside, FB will be in a much better position to revive its business.
FB is purely hypothetical and we don't know all the facts here. But, my point is that just because the trend says to do something doesn't mean its right for your company.
On the defined contribution (DC) side, the analysis is a bit different. Today, most companies (I don't have a percentage for you) offer 401(k) plans with some level of employer matching contributions. In this scenario, many companies have thought about the costs, but few have thought about the financial risks.
What are the costs that companies are thinking about? Here are a few:
As disclosures have become more comprehensive, two elements of retirement plans that have gotten particular scrutiny from outside observers are unnecessary risks and unnecessary costs. Interestingly, if a company chooses to make a generous retirement program part of its overall broad-based rewards program, outside observers generally have no problem with this.
Risk in this case is usually measured in terms of volatility. However, just plain old volatility should not be a concern. What should be a concern is volatility in plan costs as it relates to some useful metric or metrics.
Consider a hypothetical company (HC) with free cash flow of $100 million. Suppose the volatility that they are looking at is in pension contributions and that HC is expecting (baseline deterministic scenario) to have to make a contribution in 2015 of $500,000. In looking at forecasts provided by its actuary, HC notices that the 95th percentile of required pension contributions is $2 million. While that is a big increase in relative terms, it may not be enough to have any meaningful effects on the way HC runs its business (it may, depending on circumstances, but in this hypothetical situation, it does not). Depending upon HC's tolerance for risk, this may be a situation where no action needs to be taken.
On the other hand, Failing Business (FB) has a legacy frozen pension plan with expected 2016 required pension contributions of $50 million. FB has significant debt and if it contributes the full $50 million, it will just barely be able to run its operations and service its debt. If that number hits $52 million, FB will default on its largest loan.
What should FB do?
There are several schools of thought here. One is to mitigate pension contribution risk to the extent possible thereby ensuring that the ominous $52 million pension contribution number will not be reached. But, is that really a good strategy? Or is it just part of a spiral to a lingering death? The other school of thought says that FB is an ideal candidate to take on risk for potential reward. If the risk turns out to produce bad results, FB may go out of business, but it looks like whether that happens or not is only a matter of time. On the other hand, if taking the risk generates a big upside, FB will be in a much better position to revive its business.
FB is purely hypothetical and we don't know all the facts here. But, my point is that just because the trend says to do something doesn't mean its right for your company.
On the defined contribution (DC) side, the analysis is a bit different. Today, most companies (I don't have a percentage for you) offer 401(k) plans with some level of employer matching contributions. In this scenario, many companies have thought about the costs, but few have thought about the financial risks.
What are the costs that companies are thinking about? Here are a few:
- The cost of plan administration (recordkeeper, custodial, legal, accounting)
- The fund management fees
- Institutional class versus retail class
- Passive versus active management
- Open architecture versus proprietary
Generally, these are costs that a plan sponsor can control by careful selection of vendors and evaluation of options. Take a look. It may be that your current providers have let their fees to you creep up while their service to you has gone down.
Then, there's the risk.
One of the other concerns in the DC industry is that employees are not saving enough money. So, many employers are taking steps to encourage their employees to defer more. However, if they defer more, the cost of matching contributions will increase. In my experience, almost no companies actually consider this risk, but I have seen a few CFOs who have been really upset when those matching contributions got big enough that they affected the company's financials.
There are plan designs that can help to control this. Perhaps you should consider one.
Wednesday, February 11, 2015
Custom Design Your Target Date Funds
Target date funds or TDFs have been around for a while. They've carried a bunch of different names, but at their most basic level, they are intended to allow a defined contribution (DC) participant, usually in a 401(k) plan, to have their assets properly invested based upon the participant's approximate assumed retirement date (for example, a person who is 50 today and plans to retire at age 65 would likely be instructed to invest in a 2030 fund).
TDFs became really popular after the passage of the Pension Protection Act of 2006 (PPA). PPA introduced the concept of the Qualified Default Investment Alternative (QDIA), the fund into which a participant's assets default if the participant does not make an election otherwise. Regulations issued by the Department of Labor (DOL) specifically sanctioned TDFs as QDIAs and they took off.
So, what's the problem? TDFs are professionally managed, the glide path (asset mix that changes and becomes more conservative over time) is developed by people expected to have expertise (specifically refusing to designate them experts), and the asset mix is rebalanced periodically (often quarterly) to ensure that a participant's asset mix stays near to the targets established in the glide path.
That's all good stuff.
I will tell you where it breaks down, but first we digress for a break for some lexicon. In the TDF marketplace, there are generally two types of funds, "to funds" and "through funds" -- to funds assume that a participant will take his money out at retirement while through funds assume that a participant will leave her money in through retirement only gradually drawing it down. Salespeople for the larger recordkeeper/money managers will tell you the benefits of their philosophies of to or through which ultimately have a significant effect on your glide path.
Just as TDFs are to or through, the underlying funds used to help effect the glide path are either actively managed or passively managed (often index funds). Actively managed funds charge more for their investment services. Salespeople will tell you how their managers absolutely obliterate their benchmarks. Most of those managers don't.
Finally, wouldn't you expect a really good TDF to be composed of the best funds in each asset class? They're usually not. Usually, they are composed of proprietary funds of the TDF asset manager. And, it's not unusual that they use proprietary funds that are not even the best of their own for that asset class.
Said differently, TDFs are huge moneymakers for the recordkeepers/money managers. They may not be moneymakers for the participants and, in fact, they are likely not even designed for the participants.
In a better world, participants could build their own TDFs. I wrote about this to some extent way back in 2011. And, now that I have flogged the existing proprietary TDFs into oblivion, it's time to discuss them again.
In 2015, we have tools, lots of tools. We have them on our computers, on our phones, on our tablets and phablets, and some of us even have them in our watches and glasses. The fact is that technology changes virtually daily and almost all of us have access.
Suppose we had a tool into which participants could enter their own data and build their own TDF structure based on that data. The tool would ask about things such as your savings outside of that DC plan, the age at which you actually expect to retire, whether you have any defined benefit (DB) annuities coming your way (they are, in effect, fixed income investments), how long you expect to live based on what you know about your health and your family history, major expenses that are coming up, the large inheritance that you expect, and other similar relevant data. From that and some additional questions, our handy dandy tool (I think I'll call it HAL since that name worked for a computer way back in 1968 (think movies if you are confused)) will develop glide path and portfolio specifically designed for you.
In fact, HAL will even rebalance to keep you on your glide path, and HAL will be smart enough to take risk for you if you are falling short of your targets and diminish risk for you if you are ahead of your goals. But, HAL cannot exist for a proprietary TDF. HAL does not like to fill up his TDFs with proprietary funds of the recordkeeper who sells you its TDFs.
HAL says, "Go custom!"
Let us know, we can help.
TDFs became really popular after the passage of the Pension Protection Act of 2006 (PPA). PPA introduced the concept of the Qualified Default Investment Alternative (QDIA), the fund into which a participant's assets default if the participant does not make an election otherwise. Regulations issued by the Department of Labor (DOL) specifically sanctioned TDFs as QDIAs and they took off.
So, what's the problem? TDFs are professionally managed, the glide path (asset mix that changes and becomes more conservative over time) is developed by people expected to have expertise (specifically refusing to designate them experts), and the asset mix is rebalanced periodically (often quarterly) to ensure that a participant's asset mix stays near to the targets established in the glide path.
That's all good stuff.
I will tell you where it breaks down, but first we digress for a break for some lexicon. In the TDF marketplace, there are generally two types of funds, "to funds" and "through funds" -- to funds assume that a participant will take his money out at retirement while through funds assume that a participant will leave her money in through retirement only gradually drawing it down. Salespeople for the larger recordkeeper/money managers will tell you the benefits of their philosophies of to or through which ultimately have a significant effect on your glide path.
Just as TDFs are to or through, the underlying funds used to help effect the glide path are either actively managed or passively managed (often index funds). Actively managed funds charge more for their investment services. Salespeople will tell you how their managers absolutely obliterate their benchmarks. Most of those managers don't.
Finally, wouldn't you expect a really good TDF to be composed of the best funds in each asset class? They're usually not. Usually, they are composed of proprietary funds of the TDF asset manager. And, it's not unusual that they use proprietary funds that are not even the best of their own for that asset class.
Said differently, TDFs are huge moneymakers for the recordkeepers/money managers. They may not be moneymakers for the participants and, in fact, they are likely not even designed for the participants.
In a better world, participants could build their own TDFs. I wrote about this to some extent way back in 2011. And, now that I have flogged the existing proprietary TDFs into oblivion, it's time to discuss them again.
In 2015, we have tools, lots of tools. We have them on our computers, on our phones, on our tablets and phablets, and some of us even have them in our watches and glasses. The fact is that technology changes virtually daily and almost all of us have access.
Suppose we had a tool into which participants could enter their own data and build their own TDF structure based on that data. The tool would ask about things such as your savings outside of that DC plan, the age at which you actually expect to retire, whether you have any defined benefit (DB) annuities coming your way (they are, in effect, fixed income investments), how long you expect to live based on what you know about your health and your family history, major expenses that are coming up, the large inheritance that you expect, and other similar relevant data. From that and some additional questions, our handy dandy tool (I think I'll call it HAL since that name worked for a computer way back in 1968 (think movies if you are confused)) will develop glide path and portfolio specifically designed for you.
In fact, HAL will even rebalance to keep you on your glide path, and HAL will be smart enough to take risk for you if you are falling short of your targets and diminish risk for you if you are ahead of your goals. But, HAL cannot exist for a proprietary TDF. HAL does not like to fill up his TDFs with proprietary funds of the recordkeeper who sells you its TDFs.
HAL says, "Go custom!"
Let us know, we can help.
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