Five Trends to Watch in 2005
Over the past couple of weeks the chief question I've been asked goes something like, "What trends do you see in 2005 related to 401k plans?" My usual off-handed response is "More of the same." Still, I do think there are some important trends to consider. Here are "five in '05" for you to ponder.
Trend #1: A continued focus on revenue sharing and the issue of fees being "hidden" from the plan sponsor. Expect to see some attempt by the SEC and DOL to move towards more disclosure, but don't expect them to make any radical changes like the elimination of 12(b)1 fees.
An indirect result of any strong fee disclosure requirements will be collapsing margins for many plan vendors, particularly those who rely exclusively on 12(b)1 and revenue sharing for compensation. This will lead to more consolidation among providers in the middle and large plan market not big or efficient enough to compete on price. Consolidation has already started as you can see from the 401k Provider Consolidation List put together by 401kexchange.com, but expect more in 2005.
To get a feeling on the direction such fee disclosure is likely go, see the following two ERISA Advisory Council reports:
Trend #2: Rise of the "Independent Fee-only" pension consultant as a major player on the consulting side of the industry. By fee only, I mean a person or firm that has no broker-dealer affiliation and has no other compensation other than invoiced fees to the plan sponsor, i.e., doesn't accept or participate in any form of revenue sharing. They will be proactive in helping plan sponsors to: (1) understand all fees paid to providers; (2) implement formalized organizational/structural approaches that provide a framework for improved fiduciary decision making; and (3) embrace their roles as plan fiduciaries. These consultants will take on the role of co-fiduciary in most cases.
They are also beginning to form their own associations to increase their influence in the market place. Two such groups that formed in 2004 are the Revere Coalition and the ERISA Fiduciary Guild.
The Revere Coalition is a consortium of independent, retirement plan consulting firms that provide conflict free, objective counsel to plan sponsors. Each member pledges that the fees they receive from clients are their only form of compensation. The Coalition also provides a forum for members to exchange ideas and information that define the "best practices" in the profession, setting the highest standards of expertise, service and professionalism. It also plans on being a staunch advocate of reform to the retirement system that encourages adequate retirement savings.
The ERISA Fiduciary Guild is non-profit organization whose membership is a society of professional independent pension fiduciaries. Members of the Guild are independent decision makers, who are appointed for the sole purpose of relieving a corporate officer/executive of the day-to-day decisions and responsibility they would otherwise bear, and also to ensure there are no conflicts of interest between a plan, its sponsor and the fiduciaries who are charged with protecting the interests of the participants and beneficiaries.
Trend #3: A continued increase in the number of class action lawsuits against plan sponsors over company stock in retirement plans. Here is an example of what we are seeing:
On Friday, December 17, 2004, Pfizer's made a surprise announcement of possible health risks connected with its Celebrex drug. Their stock price immediately dropped causing investment losses to the holders of the stock including those in Pfizer's own 401k retirement plan. Within hours, four national law firms had announced "investigations" (which invariability lead to a class action lawsuit) into whether the Pfizer 401k retirement plans had prudently invested in Pfizer stock.
These lawsuits generally focus on whether a company breached their ERISA-mandated fiduciary duties of loyalty and prudence by (1) failing to prudently and loyally manage plan assets by investing a significant amount of the plan's assets in company stock when it no longer was a prudent investment for participant's retirement savings; (2) failing to monitor and provide fiduciary appointees with information that the appointing fiduciaries knew or should have known that the monitored fiduciaries needed in order to prudently manage plan assets; (3) failing to provide complete and accurate information to participants and beneficiaries regarding the company's business prospects and financial performance; and (4) breaching their duty to avoid conflicts of interest.
These same law firms are also actively looking for other potential fiduciary breaches that can be successfully litigated.
Trend #4: More Congressional action on some pension issues other than Social Security. On the DC side, expect President Bush to again push for new retirement savings accounts (i.e., RSA and LSA) and consolidation of existing qualified plans (i.e., ERSA). This is all part of his "ownership society" concept. RSA and LSA have a good chance of getting adopted this year in my opinion, but ERSA is less likely.
Trend #5: The agonizingly slow move towards the adoption of automatic plan features like annual contribution increase programs and automatic enrollment is likely to gain momentum in 2005. Studies, articles and press coverage on what has become known as the "Autopilot 401k" proliferated in 2004, but plan sponsors have been sluggish to adopt any automatic plan features. This appears to be changing as reflected in a recent Hewitt survey of nearly 200 large companies. The survey revealed that 47 percent of the companies say they are likely to automate certain features in their 401k plan as a way to increase participation and quality of participation.
A good background piece on the "Autopilot 401k" was produced by Vanguard. Click here to read this PDF file.
Rick Meigs, President, 401khelpcenter.com, LLC