A reader comments that he heard from an ERISA attorney on a recent webinar cautioning that all recordkeeping conversions should be halted for the present—ditto fund changes. This week, we asked readers to share what’s going on with regard to pending conversions.
Roughly three-quarters of the respondents to this week’s NAPA-Net Reader Poll have account transitions slated for the second quarter—and a plurality are proceeding per schedule. Asked about the status of those account changes, readers responded:
44%- Yes, and they’re still on schedule.
21%- Yes, but we’ve moved that back.
9%- Yes, but we might have to move that back.
26%- No account transitions are scheduled.
According to this week’s respondents, in roughly half of those situations, the plan sponsor/committee made the call, with nearly as many calling it a joint decision. Only one-in-ten laid it at the feet of the advisor, with 2% citing the recordkeeper.
“We did a full RFP and due to serious administration issues, the conversion has been started,” explained one respondent. “The decision was made the month before COVID lockdown began. From most of the Legal articles we have read, it is important the plan sponsors continue their due diligence process.”
“We were 2 weeks before Go-No Go Date,” shared another. “We convened an Investment Comm meeting, when we heard that the ERISA attorney raised his concern. We showed pluses and minuses for the participants. It came down to the simple question, if you postpone, what is the guarantee of less volatility and choosing another date (need to be clairvoyant). We didn’t postpone and the one day we were out of the market, the market went down 973, so the participants saved money.”
“The decision was made purely from the ability of the committees to allocate time for the providers to come in a do finalist presentations,” explained another. “Once was made due to an impending large level of impending furloughs.”
“Through due process, the decision was made jointly and/or unanimously to move the plan,” noted another. “This decision was made in late January and the process started. We go live on the new platform in the coming days.”
More Comments
“We carried out a normal RFP process and fiduciary review in the best interest of the participants,” said another. “Volatility in the markets are always an unknown. If volatility spikes the actual blackout date can be shifted but this is typically short term.”
“The Committee is struggling with the decision due to recordkeeping errors,” shared another. “They feel the change needs to happen sooner than later, but the blackout period is raising concerns.”
“We have a lumber company who was scheduled to change providers but their employee demographic is not computer literate and really needs the personal hand holding,” said another. “We’ve pushed that one to August.”
“I actually have two conversions,” commented another.“One conversion was halted, not because of the extraordinary volatility in the market BUT because of the potential lack of communication to participants who may have been furloughed or laid off. Communication was the main concern. My second conversion is proceeding because communication with participants was going to be effective. This particular plan already mostly communicates via email and/or Intranet. So, even though participants are working remotely, the communication method has not changed.”
“We discussed it with everyone involved. The Plan Committee, the plan sponsors internal legal counsel, and the Recordkeeper,” explained another reader. “There were two issues. Could we get the losing record keeper to liquidate and wire the same or next day? Could we get the receiving record keeper to reinvest the day the wire was received? We were out of the markets for one day. Everyone was comfortable with that risk because the transition was done to realize a significant improvement—lower cost, better investments, better technology and/or better service.”
“We have pushed the record keeping conversion twice as a result of the investment committee not wanting to miss market days and swings during the liquidation and transition time period,” commented another.
“Enrollment meetings occurred the day the market went up 11%. They did not want to be in blackout during that kind of upward volatility,” another reader shared.
“They wanted to wait until after Q1 to proceed,” explained a reader. “The TPA is staying in place but the recordkeeper will change. The cost savings is so significant.”
“The reasons for making a recordkeeping conversion don’t change because the market goes up or down,” another reader noted. “The only thing we’ve changed here is the holding account if there is a TDF conversion. We’ve changed from a cash equivalent to a balanced fund to keep people at least somewhat invested.”
“We have had a few push back but the vast majority are moving forward as scheduled,” said another.
“The client thought it would be more disruptive to make another change after what was already communicated..”
“Didn’t consider not going through with what was already scheduled. This is a new client who will be receiving better investment management with the transfer.”
Another reader explained: “We are relying on plan sponsors to make this call and so far it is about 50/50 for delaying or moving forward on schedule.”
“A well-planned, well-executed conversion of recordkeeping services or fund changes can be accomplished with no blackout period. If the emphasis is on fund decisions in the midst of extreme market volatility, the plan and advisors should follow their established practices of due diligence (and document, document, document.) Keeping poorly performing funds due to postponing a regularly scheduled fund review likely is most risky than continuing to follow the plan’s review policies.”
Fund Conversions
There were even more fund conversions slated than recordkeeper changes. In fact, nearly two-thirds (63%) not only had those scheduled, but indicated they were still on schedule. Roughly 6% each said they had some scheduled, but they had been moved back, and another 5% said they might have to move it back (the remaining 26% had no fund conversions scheduled for Q2.
Asked how, if at all, recent market volatility might influence that move:
62%- Probably won’t make any difference in our choice(es).
22%- Not sure yet.
10%- Will likely postpone it further.
6%- Will likely consider more conservative options/approach.
“Sometimes the best action is no action,” commented on reader. “With Q1 results in hand, the weight of these returns will likely change the discussion with plan sponsors,” acknowledged another.
“We’re cautious about the hyper volatility of the current market and prefer to let things settle down a bit before planning any fund updates,” noted another.
“We have a very thorough review process and don’t feel it would be in the best interest of participants to continue with failing funds - however, we have very few funds not doing well,” explained a reader.
“Fund changes with proper review are based upon a multitude of criteria in the IPS. Those have to be adhered to unless something significant changes,” another reader pointed out. “With proper application of a good IPS, and most changes happening overnight there is little reason to change process.”
“If a fund has been on watch for several quarters, we would still move forward with the change based on the overall analysis of the manager,” explained another. “Most changes thus far are based on performance through Q4 and even if Q1 had a large impact (as it probably did for many) we would make the change regardless and not try to time the markets.”
“Have reviewed the current performance based on our investment due diligence process and the changes we are advising as 3(21) or implementing as 3(38) are still appropriate,” said one reader. “We are conducting many meetings via Go To Meeting and that is working well. I have reached out to every client and also have been in communication with the TPA administrator or record-keeper to discuss my clients plans and the best way to move forward. This is the time they need the professional advisor the most.
“Investment monitoring is a process that does not include market timing,” commented another. “Stopping a change now would be inserting market timing into the process and would not be prudent. Additionally, if a fund is being replaced, you are not locking in a loss (if any). Rather, you are running the same race, just on a different horse.”
“We had a complete lineup reconstruction for a client that was supposed to occur in the next month,” one reader shared. “As is typical, it was going to be coupled with onsite education. As the announcements on the changes were going to go out around the same time the market was going haywire, we decided to postpone. We are looking into virtual education alternatives now that it looks like we may continue to be in this environment for some time. The changes do offer cost savings, removes some under performing funds and adds in a few asset classes that add additional diversification (that are needed in volatile times) so we will want to get back on track now that the immediate emotional impact of recent events has been removed.”
“Most don’t want to be burdened with any plan changes right now (even though administratively there will be little/no blackout in multiple cases),” noted another. “Others that have a more pressing need to make changes are doing it aggressively. It really depends on how long we’ve had the relationship and how aggressively changes are needed.”
“Our methodology hasn’t changed. But it seems prudent to take a more "wait and see" approach in such an unusual economic climate,” said one reader.
More Comments
“Before the change was made, we confirmed with the Recordkeeper that the fund change was going to be executed on the same day so the participants were not out of the market. Since changes had been communicated to participants and low scoring funds were being replaced, it made sense to move forward.”
“The fiduciary process has to continue despite disruptions. As long as participants are informed.”
“If the fiduciary process and the investment due diligence are sound and justify the fund change, we believe that it should move forward as long as the record keeper can do a same day trade on the default.”
“Additional oversight and conversations with investment committees are vitally important during this time. Additionally, sticking to the IPS during this time is paramount. So if a fund change is triggered we would recommend moving forward.”
“We are typically swapping out like funds due to sustained lack of performance from an IM. I would argue we would be derelict if we didn’t proceed.”
“Crappy funds are still crappy funds. And this might highlight even more the reasons for getting rid of a fund. We still have a fiduciary duty to monitor funds, and if necessary, make changes to the lineup.”
“Still holding quarterly monitoring calls, but taking a more cautious approach in determining whether to make changes at this time.”
“Agree that there could be some impact... but if we are making fund changes because of non-performing funds and doing direct transfers from one fund to another, even though we may be selling low we are also buying low into the new funds.”
“The current market conditions are the same current market conditions for all funds. I follow our processes and a plan’s IPS in good and bad market conditions. The only impact might be in assisting a bit with notice distribution.”
Other Comments on CARES and COVID-19
“Love the flexibility the gov’t gave us, BUT these options will decimate plans in the future... 3 years to pay back? and to any account of the participants choosing? good luck tracking that.”
“Participants have been relatively quiet. Having said that, we’ve been in touch with all sponsors, are facilitating ‘office hours’ for anyone to log in to ask group questions, and have done some writing that we are sharing. Our conservative approach walking into the crises has helped preserve capital and thereby kept the number of CARES distributions to a minimum.”
“It’s ever evolving. I hope it won’t delay or reduce retirement readiness too much - we will have to see. We are getting lots of questions on the PPP and if employers can make additional retirement contributions to count towards the forgiveness - we haven’t been able to find guidance. But this would be a welcome opportunity.”
“it is important to continue to communicate with committees about the impact of CARES Act and the decisions that need to make on the optional provisions (particularly loans). it is equally important to communicate with participants about market volatility.”
“We have been very proactive with our clients in education regarding the CARES Act and assisting them with their choices to amend their documents.”
“Not sure if our clients miss us, are bored or just have nothing else to do while self-contained but I was amazed how quickly we heard from our committees when we sent out our request to set a date for our quarterly due diligence review! Heard from almost all of them within 15 minutes of sending the email request.”
“The good news is that access to CARES Act resources has been exceptional. If anything, both we and our clients are getting a little tired of being inundated with what has become redundant data/information in lieu of all of the sources distributing content on this health crisis.”
“Assuming a prudent process was followed in deciding to make the recordkeeper change, wouldn’t it be imprudent to NOT make the change? Companies generally don’t willingly commit to a plan conversion unless they are feeling some sort of particular pain that can only be solved by changing providers. While I have seen sales opportunities come to a screeching halt this past month, I have not seen conversions already in process being halted. I’d be interested in hearing more about why that attorney thinks that no changes should be made right now.”
“The response has varied across the board. My thought is the CARES Act is very positive for some individuals who need access to immediate capital, but I’m cautioning clients not to widely advertise it to employees because plan leakage is a concern.”
“We have seen less of an uptake in participants taking distributions than we originally anticipated. Not all sponsors want to amend to allow it either. The more parental sponsors who have not laid off employees are not amending. They believe it will do their employees an injustice to have them deplete their retirement, especially when markets are down.”
“We’re getting a lot of questions on the PPP. That seems to be consuming our small and mid size clients the most. CARES Act distributions/loans may pick up the long the economic crisis continues.”
“Although I am glad participants have a way to help themselves economically, I’ve been encouraged with how much sponsors would rather help employees in other ways... Sponsors really want employees to maintain their 401k.”
“Prudently implementing the CARES Act provisions has been a challenge. Every record keeper has their own process, procedures and forms. We believe that each plan sponsor is different and has unique participants needs. Having said that, I haven’t had any plans affirmatively allow the new CVR loan with higher loan limits. Some plans have not allowed any of the new provisions; most have elected CVR distribution provisions and some the delayed loan payment.”
“It’s been exhausting navigating all the different approaches—opt in for all, opt out for all, opt in for some with our clients and record keepers. We have consolidated spreadsheet that we can use as a resource by record keeper.” (Editor’s note: hey, we’ve got one of those—it’s at https://bit.ly/3cEVb99)
“Now is the time to be there for plan sponsors and participants. Bear markets are not easy but they are part of investing and life. We will get through this and now is the time to help!”
“CARES took over, what about SECURE?”
“I have deep concerns that the CARES Act is walking participants into terrible financial choices. Let’s hope we can get on the down slope of the outbreak quickly!”
“No consensus seems to be emerging quickly among recordkeepers, advisors, or plan sponsors about the timeline for implementing COVID relief within plans. Some RK/TPA groups are eager to implement but systems can’t yet accommodate provision changes, while others are reluctant to begin updating systems without additional relief and are pushing back against advisor/sponsor demands for rapid deployment in the absence of adequate guidance. Some sponsors/advisors seem reluctant to add ALL relief provisions unless they face growing demand from participants (out of concerns over excess plan leakage and admin risks). The only common theme is that participant inquiries have been below expectations, and participant actions (transferring to cash, taking loans, applying for hardship withdrawals) have been surprisingly rare. It will be interesting to see whether this reflects an increasing acceptance of (or numbness to) market volatility vs. ‘08-’09 or whether the anecdotes and data simply reflect an information lag.”
“My small business clients are more concerned with keeping their business going and focused more on the types of relief in the act for the businesses. I have to prompt them to look at the decisions they need to make concerning loans and distributions.”
“Recordkeepers who required plan sponsors or TPAs to direct the recordkeeper to opt out of implementation of CARES Act effectively have made a plan design decision, a.k.a.. a fiduciary decision, particularly when the time period for opting out was very short. The recordkeepers have said little about plans that were opted in by default and the plans wish to opt out now.”
Thanks to everyone who participated in this week’s NAPA-Net Reader Poll—and who are keeping things moving for retirement plans!
