Happy New Year from DIVERSIFIED INVESTMENT SERVICES!
I would like to wish all of you, your loved ones, participants, and those employees who don’t yet know they should be participants, a great year ahead. 2012 was a year of change for the retirement plan world. Information, at both the plan sponsor and participant levels, was the dominant theme. We were excited to help you and your participants understand the flood of new disclosures, and we look forward to continuing our quest to help you create successful retirement plans in 2013. So congratulations for all that you accomplished in 2012. We remain humbly thankful for our continued partnership with you.
Warmest Regards,
Sean L. McCarty, AIF® Larry M. McCarty, CPA AIF®
Financial Advisor Financial Advisor
Diversified Investment Services Year In Review
2012 saw our Retirement Business continue to grow and we added a number of new plans as well as a new member, Alicia Ayers, to the Retirement Team. We fully expect 2013 to be another exciting year of growth at DIS. If you or someone you know is interested in benchmarking your Retirement Plan, please give us a call.
408(b)(2) Disclosures Are Here… Are You Ready?
[This article first appeared in the JUNE 2012 Retirement Report]
For some time now you have either heard from industry professionals, or read in industry publications, that new disclosure rules were imminent. Repeatedly the Department of Labor pushed back the effective date of these disclosure rules.
Recall that there are two new sets of disclosure rules. Regulations issued under ERISA Section 408(b)(2) provide required disclosures that your service providers must make to you, the plan’s fiduciaries. These disclosures should have reached you no later than July 1, 2012. Regulations issued under ERISA Section 404(a)(5) provide required disclosures that you, the plan sponsor, need to make to your employees, the plan participants. These participant disclosures have a later effective date, so this article will focus on the 408(b)(2) rules.
A bit of quick background . . . ERISA Section 406 dictates that certain arrangements between plans and parties of interest are prohibited transactions. Most of your plan’s partnerships fall into this category. Congress provided an exemption to these rules under ERISA Section 408(b)(2). Under 408(b)(2) you, as plan fiduciaries, have to determine whether the agreements and compensation of your service providers are “reasonable.” The new regulations require your service providers to provide you with the information (the required disclosures) to make this determination.
Making this determination, based on the disclosures alone, will be extremely difficult for most plan sponsors who may have little-to-no context for the information they are receiving. Thus, your Plan Consultant takes on even more importance. We are preparing to help you review, and understand, your disclosures. But even more importantly, we will show you how benchmarking your plan (using our B3 Provider Analysis) and using our fiduciary tools (the Fiduciary Fitness Program) can help you make the determination of reasonableness and document the process you took in arriving thereon.
Fiduciary Focus: ERISA 3(21) vs. 3(38)
[This article first appeared in the MAY 2012 Retirement Report]
Recently, there have been articles written regarding the potential benefits of hiring an investment advisor who agrees to act in the capacity of an ERISA section 3(38) investment manager (or “3(38) fiduciary”) as opposed to an ERISA section 3(21) fiduciary for a qualified retirement plan. The information presented in these articles may be confusing and even sometimes misleading.
ERISA section 3(21) provides that a fiduciary is an advisor who renders investment advice for a fee with respect to any monies, investments, or other property of a plan, or has responsibility to do so. Such an advisor serves in a co-fiduciary capacity to the plan and thus shares fiduciary responsibility and liability with other plan fiduciaries (i.e., investment committee members, board members). Hiring an ERISA section 3(21) fiduciary may help to mitigate the potential liability of the other plan co-fiduciaries, as the advisor would provide the necessary investment expertise and process to assist in the required investment decision-making process.
ERISA section 3(38) defines the term “investment manager” as a fiduciary who also is responsible for providing investment advisory services, but with the important distinction of possessing discretionary control over the investment decisions for the plan. In hiring a 3(38) fiduciary adviser, plan fiduciaries (again, investment committees, board members, etc.) remove themselves from the ongoing investment decision-making process. However they cannot eliminate all of their fiduciary responsibility, as some articles would suggest. Procedural prudence remains necessary for all fiduciary decision making. This includes the process for hiring an ERISA 3(38) advisor (because the fiduciaries are turning over control of all investment decisions to the ERISA 3(38) advisor).
In brief, plan fiduciaries seeking to reduce their liability for investment decisions by hiring an ERISA 3(38) fiduciary advisor must understand that it requires giving up control over plan investments and that some, but not all, fiduciary liability can shifted.
Going the Extra Mile: A deeper look at the RPAG Scorecard
[This article first appeared in the September 2012 Retirement Report]
The RPAG Scorecard is a great tool in monitoring the investment choices available in your retirement plan. There are instances though when you have to take that extra effort to understand the underlying issues of what the Scorecard is telling you.
As a review of the RPAG Scorecard, a fund is acceptable if it scores in the 7 to 10 range. A fund that scores a 5 or 6 is struggling and should be put on a watchlist for continued monitoring and reviewed for signs of improvement. A fund that scores less than a 5 is deemed unacceptable on many fronts and is a candidate for potential removal.
That is the “black and white” of the Scorecard. However, there are often times when the situation is not so clear. Here are two examples where the Scorecard was not followed to the letter. As a side note, the beauty of the Investment Policy Statement, is that it is written to allow this kind of flexibility.
The first example is from a fund that was scoring a consistent 10 for many quarters. The entire investment management team left the fund and was replaced by a new manager. The next quarter the fund scored an 8, losing two points for manager tenure in the qualitative section of the Scorecard. A deeper dive was needed to look at the incoming manager. A review was conducted of the performance of a fund that the new manger had previously managed. Ultimately, there was little confidence in the new manager’s previous track record and it was decided that the fund should be replaced despite the fact that it still scored a relatively strong 8.
The second example came from a struggling fund that was scoring a 4 for a few quarters. The fund was losing two points for manager tenure. However, the deduction was from a manager addition (the fund’s assets were being split between the existing manager and the new manager). This manager addition was actually viewed as a positive change. Additionally, a few of the other statistics were improving and close to passing. It was recommended that the plan keep the fund on watchlist and for review over the course of a few more quarters. The fund is now scoring a 9.
This shows that going the extra mile when it comes to investment due diligence can often lead to uncovering compelling information on the Scorecard.
Sean L. McCarty, AIF® Larry M. McCarty, CPA AIF®
Financial Advisor Financial Advisor
DIVERSIFIED INVESTMENT SERVICES, INC. DIVERSIFIED INVESTMENT SERVICES, INC.
180 North Riverview Dr., Ste 220 180 North Riverview Dr., Ste 220
Anaheim Hills, CA 92808 Anaheim Hills, CA 92808
email: email:
phone: (714) 974-4500 X224 phone: (714) 974-4500 X215
fax: (714) 974-7943 fax: (714) 974-7943
Skype: dis.seanmccarty Skype: dis.larrymccarty
A referral is the greatest compliment I can receive.We recommend that you never send via email any instructions pertaining to a securities transaction, such as buying or selling an investment, or making a deposit or withdrawal from your account. Instead, please telephone our office and speak with someone personally. Due to the limitations of technology, as well as privacy concerns, for your own protection, we cannot accept orders via email or voicemail.
This message is confidential and intended for the private use of the recipient. If you are not the intended recipient, please delete this message and inform me of this transmission error. Larry McCarty (CA Insurance License # 0B16131) and Sean McCarty are Registered Representatives and Investment Adviser Representatives with/and Offer Securities and Advisory Services through Commonwealth Financial Network.