July 2016

Inside this issue:


On June 24, 2016 we received the unprecedented news that the United Kingdom (U.K.) voted to leave the European Union (EU), which had led to significant volatility in the global markets. The United Kingdom (the U.K., comprised of England, Scotland, Northern Ireland, and Wales) undertook an all-country referendum about whether the U.K. should stay in or exit the EU, which it has been a member of since 1975. This vote, referred to as the “Brexit” vote, is done by allowing all citizens to cast their ballot on whether to “remain” or “leave.” In a very close vote, “leave” brought in 51.9%.

In the days immediately before the vote—although it was expected to be close—the polls suggested a slight tilt that the U.K. would remain; financial markets reacted positively, with stocks around the globe rising in value, along with most foreign currencies. Early Friday morning overseas, as it became clear that, in fact, the U.K. had voted to leave, these recent gains were reversed and there have been sharp declines in global equity markets, particularly in Europe and Japan. European currencies have also weakened relative to the dollar. Essentially, the markets were expecting a “remain,” were surprised by a “leave,” and thus are reacting negatively.

Though the questions surrounding exactly how and when the U.K. extrication from the EU will happen has caused near-term financial turmoil, the actual “leave” vote does not create an immediate change in the day-to-day functioning of the markets. Rather, it’s the beginning of a process that may take two years or more to fully execute. However, in the short term, there is some additional uncertainty politically: U.K. Prime Minister David Cameron has already announced his intention to resign. There are also upcoming elections in other European countries, including Spain, this weekend. All of these just raise more questions than the markets typically like to see, which is causing this near-term turmoil.

However, as the market gets over the Brexit shock and answers start to come on other fronts, this turmoil should settle some. The global economic system is better prepared to deal with financial panics than it has been historically. Most global banks are in much better shape than they were leading up to the financial crisis in 2008, and central banks are prepared to extend credit to institutions and countries to help them manage short-term liquidity problems if they arise.

The United States is insulated, though not immune, from events overseas. The U.S. economy and the U.S. stock market are built on a foundation of domestic consumption of goods and services. Our economy is impacted by events globally, but it is not dependent on them.

In times of financial market stress, we must remember our investments are for the long term. This is a time for caution, but not panic or overreaction. Although our emotions might be telling us to act, we must resist this urge and strive to maintain a patient, long-term focus on the future. Some volatility may persist in the short term, and although we do not know for certain what lies ahead for the markets, the best course of action is to face it with a steadfast commitment to let reason, not emotion, drive our investment plan.


Previously, this newsletter provided a brief commentary on the potential impact on plan sponsors of the new fiduciary rule. In this month’s newsletter, we explore the subject in more detail as follows:

After years of proposed regulation issuance, comment periods, drafting and anticipation, the Department of Labor (DOL) finally published new final guidance regarding the definition of “fiduciary” on April 8, 2016. It is important for plan sponsors to understand the reasoning behind, and the scope, of the final rules. The following Q&A is meant to assist you in understanding the regulations and how they pertain to you, your plan and your participants.


Why did the DOL issue these new rules?

A1: The definition of “fiduciary” for purposes of providing investment advice dates back decades, predating the advent of 401(k) and other defined contribution plans. Prevalent thought within the retirement industry was that the definition was due for an update to reflect the evolution of the retirement plan landscape and to bring more parties under the scope of ERISA’s standard of care for fiduciaries.

Who are the primary targets of the new rules?

A2: The primary targets of the new rules are providers of retirement plan services and products. Advisors, consultants, recordkeepers, third party administrators, etc., are those most impacted by the new rules. The primary objective of the regulations is to sweep into the definition of “fiduciary” more individuals and organizations who may influence plans, plan sponsor fiduciaries and participants in regards to investing-related activities. In so doing, these individuals/organizations will be held to the highest standard of care in providing investment advice and recommendations under the terms of ERISA.

In a nutshell, what do the new rules say?

A3: Essentially the new rules provide that an individual/organization will be a fiduciary under ERISA if they make a recommendation to a plan, plan sponsor fiduciary (e.g., a plan committee) or plan participant (or beneficiary) regarding investment products/services, distributions or rollovers . . . and they receive a fee for doing so. “Recommendation” is defined as a communication that can reasonably be viewed as a suggestion that the recipient of the information take (or refrain from taking) some course of action.

In the past I recall hearing that certain providers could not be a fiduciary, does that remain true?


In the past, service providers that received uneven, or “conflicted” compensation, would not agree to serve in a fiduciary capacity because they could affect, or influence, their compensation which would have resulted in a prohibited transaction. Under the new rules, a Best Interest Contract Exemption (the “BIC Exemption”) has been created to account for such scenarios. Additionally, under the new rules, all individuals/organizations meeting the definition of fiduciary are going to be treated as fiduciaries, regardless of the design of their compensation.

In order to avoid a prohibited transaction, fiduciaries receiving conflicted compensation (such as commissions) can continue such compensation design as long as they meet certain requirements, one of which is to commit to providing recommendations that are in the best interests of the recipient of services/recommendations.


Does our plan fall under the new rules?

A5: All ERISA-covered plans that have an investment element will be covered. 401(k), 403(b), profit sharing, money purchase pension and defined benefit plans will all be covered. Interestingly, recommendations for taking a distribution or rolling over to an IRA will also be covered. And an unexpected surprise for most plan sponsors is that health savings accounts (HSAs) are also covered.

The proposed rules seemed to have a heavy impact on participant education. Did that carryover to the final rules?


The new rules explicitly state that plan sponsors and service providers may provide general plan information, general financial, investment and retirement information, notional asset allocation models and interactive investment tools without becoming a fiduciary. The proposed rules were going to prohibit use of specific investments in plans being used in models or interactive tools if the provider wished to avoid fiduciary status. The new final rules allow for identification of specific investments if the following conditions are met:

  • The models/tools only identify designated investment alternatives (DIAs) in the plan that are monitored by fiduciaries that are independent from the individual/organization that developed/marketed the investment alternative;
  • Other DIAs, with similar risk/return characteristics, that are not used in the model/tool are identified;
  • A statement that those other DIAs are similar; and
  • Identification of where participants/beneficiaries can get additional information regarding those similar DIAs.

Are my employees (employees of the plan sponsor) going to be considered fiduciaries under these rules?


Typically, no. If the employees aren’t receiving a fee (not considering their wages) for providing either of the below-listed recommendations, they will not be considered a fiduciary under the rules.

  1. Work in Human Resources or Finance department and provide recommendations to the plan committee; or
  2. Communicate information regarding the plan and/or distribution options to participants.

When can I (plan sponsor) expect a plan’s service provider to be considered a fiduciary under the new rules?


The new rules will sweep quite a few additional individuals and organizations within the definition of fiduciary due to the types of activities that will now be considered recommendations leading to “investment advice.” Under the new rules, even many sales and marketing actions will be considered fiduciary in nature. That said, there are a few common instances where communication between the sponsor and the service provider will not be fiduciary in nature. These include (but are not limited to):

  • Requests for Proposals (RFPs) – Service providers may provide investment lineups if they are responding to an RFP for services. This is common with RFPs for recordkeeping services, and occasionally with RFPs for advisory services. The proposed investment lineup may be based on plan size, or the plan’s current investment menu. However, for this type of communication to avoid straying into the fiduciary realm the service provider must disclose any financial interest it may have (if any) in any of the investments. This would be common if the recordkeeper is also a fund company that offers proprietary offerings.
  • Independent Plan Fiduciaries – Service provider recommendations that are made to plan fiduciaries, independent of the advisor, may also not give rise to fiduciary status. In this instance, the independent fiduciary must possess “financial expertise” which is considered present if they are a registered investment advisor, or holds/manages/controls (in the aggregate) at least $50 million in assets. In these instances, the advisor needs to have made a number of determinations regarding the independent fiduciary, in addition to the fact that they possess financial expertise.
  • Marketing – As long as a service provider does not market an investment platform as meeting individualized needs of a plan, and the provider states that it is not providing impartial advice/acting in a fiduciary capacity, the marketing of the platform is not a fiduciary action.

Will the new rules impact my (plan sponsor) relationship with my plan’s service providers?


The answer depends upon the service providers’ current engagements with the plan and plan sponsor. For service providers presently serving in a fiduciary capacity role, little may change. It is possible that they move from a broker-dealer engagement to a registered investment advisory relationship to make the engagement cleaner and more transparent. But that likely will not impact the services, compensation or fiduciary nature of the engagement.

Service providers receiving “conflicted,” or uneven compensation will have to decide if they wish to continue under that design, and meet the BIC Exemption rules, in which case you will receive a great deal more disclosure and the advisor will have to meet more arduous requirements (duties of prudence and loyalty, disclose their conflict of interest policies, etc.) than those to which they are accustomed. Or they may alter their engagement to a fee-level or RIA engagement. Either way, they will most likely have to live up to ERISA’s high fiduciary standard of care moving forward.


I’ve heard about co-fiduciary status. Am I responsible for all these new co-fiduciaries on the plan?


Recently representatives of the DOL at an industry conference made informal comments that they believed that co-fiduciary responsibilities would likely extend to individuals/organizations that become fiduciaries by way of tripping the new rules. One such statement intimated that a plan sponsor may even have to monitor service provider participant calls in order to best meet their fiduciary responsibilities. The full implementation of the new rules is still in its infancy and these were informal comments, so it bears watching to see just how far plan sponsor co-fiduciary responsibility will extend.

In Conclusion
The retirement landscape has evolved greatly over past decades. Plan type, services offered, investments made available, and fiduciary concerns have shifted considerably since the inception of ERISA in 1974. The new rules issued by the DOL have been expected, reviewed and debated for well over five years. In fact, in June Congress passed resolutions to nullify the rules (with Presidential veto expected) and nine organizations filed suit against the DOL and the Secretary of the DOL arguing the rules are overbroad and unconstitutional. The rules will become effective in stages (April of 2017 and January of 2018), and it bears watching to see how additional guidance from the DOL will impact the responsibilities of plan sponsors. Regardless, these rules will have a profound impact on plan fiduciaries, plans and participants. They are intended to, and should, result in a higher level of responsibility being placed on those individuals and organizations positioned to impact or influence participants’ abilities to save for their retirement. As a result, your mission is to keep abreast of any additional guidance and developments. If you have further questions, please contact your plan consultant.


We know a majority of U.S. workers (58%) are saving for retirement in a defined contribution-type account. But what, specifically, determines their wealth at retirement? Is it how they invest? Their income? Their education? Their contribution rates? It turns out all of these affect how much savings DC plan participants accumulate over the course of their careers.

Towers Watson, a leading Employee Benefits consulting firm, looked at patterns in American workers’ asset allocations at three-year intervals (2004, 2007, 2010 and 2013) and determined that investment behaviors in DC plans were influenced by age, net worth, income, risk tolerance, education and financial planning horizon. Plan design is also a key factor.

All In or All Out on Equities
In most American households, DC allocations fall at both ends of the spectrum — 15% of investors have zero allocation to equities, while approximately 22% have 100% of their savings in the asset class. However, it seems retirement portfolio diversification has improved over time, as the instance of these extremes declined from 2004 to 2013. Although the financial crisis of 2008 prompted panic selling and equity aversion, it appears DC plans’ increased use of qualified default investment alternatives (QDIAs) has lured more participants back into equities.

There are perils to both extremes. Completely avoiding equities causes investors to miss opportunities for higher returns, and it may significantly impede the growth of retirement wealth. Conversely, investing 100% in equities is generally considered unwise, given the risk for large losses, which could be especially detrimental to workers relying solely on DC accounts to save for retirement. Experts generally suggest an asset allocation that reflects risk tolerance, economic situation, retirement plan provisions, and other demographics, according to Towers Watson.

Other Factors Impact Asset Allocation
Age plays a role, too. Equity allocations are lower among older workers. Just 26% of 65-to-74-year-olds allocate 75% or more of their retirement savings to equities, compared to 37% for 25-to-34-year-olds. This trend is consistent with life-cycle financial advice, which encourages investors to reduce equity allocations as they age. It’s also in line with target date funds’ (TDFs’) increasing popularity as QDIAs in recent years. The number of DC plans offering TDFs as the default option rose from 64% to 86% in 2014. TDFs automatically reduce equity exposure as investors near retirement. Please keep in mind that different investment managers use different investment strategies. Participants should review holdings as they approach retirement age to make sure the investments remain consistent with their objectives. The principal value of TDF’s are never guaranteed, including at the target date.

Better-educated households and those with longer financial planning horizons are more likely to have heftier equity allocations as well. So are those with higher total net worths. Almost 45% of households with at least a $5 million net worth allocate 75% or more of their retirement savings to equities, compared to 32% of those with net worths less than $50,000. Higher-income households are more apt to invest in equities, too.

Participants who are aware of their plan’s investment options and are able to select their own funds also allocate more to equities. Conversely, 33% of households with no discretion over their investment choices have no equity allocation. However, plans that don’t give participants the ability to select their investments may offer more conservative options, preventing them from creating overly risky allocations.

See more of Towers Watson’s analysis at http://tinyurl.com/TowerWatsonAllocationPatterns.

© 2016 Kmotion, Inc.

No strategy assures a profit or protect against loss.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

For Plan Sponsor use only – Not for use with Participants or the General Public.This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. 

Montgomery Retirement Plan Advisors does not warrant and is not responsible for errors or omissions in the content of this newsletter.

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