The Working Retired

One day retirement wealth will be important – at least to those of us still kicking. The sources that determine our success include Social Security, IRAs, pensions, inheritance, personal savings, retirement savings plans like 401(k) and now, unfortunately, working in retirement. In this KnowRisk commentary we look at the current state of workers preparing for retirement and ‘best practices’ that businesses can implement to establish effective retirement platforms that offer owners and their employees the best chance for retirement success. Unfortunately, most small businesses are expert in their fields, but lack the resources and staff to deliver prudent expertise for the many types of retirement plans like 401(k), 403(b), profit sharing, pension, and cash balance. The pension consultants at Equitas are assisting businesses by providing the needed fiduciary expertise in an effort intended to deliver excellence in retirement design and services.

Retirement Uncertainty

The path to retirement is in transition. The U.S. labor force is moving from a dependence on company provided retirement income, to self-reliance. The trend is from Social Security, to self-security. As recently as 1998, 90 percent of Fortune 100 companies offered defined benefit plans, according to a study by consulting firm Towers Watson & Company. As of June 2012, that number had declined to 30 percent. These numbers are significantly smaller for the majority of workers employed by small businesses. In contrast, the number of Fortune 100 companies that offered only a 401(k) plan has grown from 10 percent in 1998 to 70 percent today. The implications are important for the U.S. labor force. Today’s responsibility for retirement falls squarely on the shoulders of the individual with minimal assistance from the corporate employer often offering only a match or profit sharing contribution.

This transition has made the current state of retirement quite uncertain. According to a recent report released by the Employee Benefit Research Institute 57% of U.S. workers surveyed have less than $25,000 in total household savings (Figure 1), and a record 49% are not too confident or have no confidence that they will be able to comfortably retire (Figure 2).

Another report released by Financial Finesse shows only 39% of those surveyed have even determined a retirement goal. In general, employees are ill informed and ill prepared to succeed in retirement.

This has led to a trend to continue to work beyond retirement. According to the 2013 EBRI Retirement Confidence Survey, 22% have extended their expected retirement age with 75%expecting employment to play a major (21%) or minor (54%) role in their retirement income (Figure 3).

How can businesses and organizations help reverse this trend? In yesterday’s world, offering a retirement plan may have sufficed. In today’s world it is not enough. The defined contribution
plan has elevated in importance and the responsibilities to assist workers in building a retirement nest-egg have never been greater.
What are the duties for corporate America in the new world of retirement and how can they best
help their employees? In this edition of ‘KnowRisk’ we first look at some of the legal
responsibilities as defined by the Employee Retirement Income Securities Act (ERISA) as well as several practices that we believe will add to the success of building retirement wealth for our workers.


In general, companies that offer a 401(k) must serve as fiduciaries to their plan. This means, once they determine the initial structure of their plan, they must put the interest of their participants first. ERISA imposes a heightened standard of prudence known as the ‘Prudent Expert’ rule. The rule states that plan fiduciaries must make decisions “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”

The key phrase is ‘and familiar with such matters’ meaning fiduciaries should act as an ‘expert’ would in making plan decisions. For large companies with human resource departments, this task is manageable. For smaller businesses and professional organizations, this responsibility is much more difficult. Small businesses often lack the resources and staff to deliver prudent expertise for retirement plans. In this case plan sponsors should bring in specialists to assist the plan in making decisions. In fact in Katsaros v. Cody, 744 F.2d 279 (2d Cir.), (1984) it was found that “Where a trustee does not possess the education, experience and skill required to make a decision concerning the investment of a plan’s assets, he has an affirmative duty to seek independent counsel in making the decision.”

Outside Fiduciaries- ERISA Section 3(21) and 3(38)

There are two types of investment experts a plan sponsor may bring in to help them manage their fiduciary duties. Under ERISA they are defined as Section 3(21) and Section 3(38) fiduciaries.

Any individual can be a fiduciary under Section 3(21) if he or she exercises any authority or control over the management of the plan or the management or disposition of its assets; if he or she renders investment advice for a fee (or has any authority or responsibility to do so); if he or she has any discretionary responsibility in the administration of the plan, or is named in the plan documents.

A Section 3(38) fiduciary is an “investment manager” and by definition is a fiduciary because they take discretion, authority, and control of the plan’s assets. ERISA provides that a plan sponsor can delegate the significant responsibility (and significant liability) of selecting, monitoring and replacing of investments to the 3(38) investment manager fiduciary.

A 3(21) investment manager could be thought of as someone in the rear seat of a vehicle providing directions to the driver (plan sponsor) where as a 3(38) would actually take the wheel and the responsibility for getting the passengers (participants) to their destination.

Let’s apply that definition to advisors. An individual who simply makes recommendations under suitability requirements to and for the plan for which it has no discretionary authority or responsibility is not a “fiduciary” and therefore has no legal liability under ERISA as a fiduciary. In that case, even when the plan sponsor adopts the advisor’s recommendations, the plan sponsor retains all of the fiduciary responsibility and liability of the decisions. If the advisor is only giving recommendations and the plan sponsor has the discretion to take or disregard the advice, then the advisor is probably not acting as a fiduciary and offers no practical protection from liability for the plan sponsor. That is significantly different than a 3(38) investment advisor who is presumed by definition to have actual discretion and control over the plan’s assets and management.

The advantage of a properly named 3(38) is that once the plan sponsor effectively hands over authority to the 3(38) fiduciary to make investment decisions. Then the 3(38) fiduciary assumes legal responsibility and liability for the decisions it makes, which enables the plan sponsor to better manage and mitigate their fiduciary risk.

However, a point that is often overlooked is that the plan sponsor cannot completely eliminate its fiduciary liability. The plan sponsor is still responsible for the prudent selection of the 3(38) advisor and must monitor and benchmark that 3(38) advisor. Also, if the plan sponsor overrides the decisions of the 3(38) advisor, the plan sponsor assumes the responsibility and liability.

One more point to be made regarding some advisors. In today’s world many advisors are not acting per the fiduciary standard, which would require that the advisor:

  • Act solely in the best interest of the plan sponsor, participants, and beneficiaries of the plan
  • Avoid conflicts of interest or fairly manage them in the client’s favor
  • Disclose all forms of compensation both direct and indirect


Employer Best Practices

Participant Education

As indicated in the statistics mentioned earlier in this report, the vast majority of employees are neither saving enough, nor have they even determined how much they need to save to be ready for retirement. While it is unrealistic to turn participants into investment and retirement experts, it is prudent to educate and inform them. Fiduciaries should provide information needed by employees to identify retirement solutions. Participants must know their future is as important as any current creditors and they are responsible for setting aside a portion of their income today to provide for their retirement. They should be offered solutions as to how much to save either through retirement calculators or encouraged to save at a reasonable rate, i.e. 10%. They should understand the tax benefits associated with pre-tax savings and the power of tax deferred growth.

Plan sponsors have the fiduciary duty to make sure participants are given adequate information to make informed decisions and they have the tools to track their progress and determine their saving’s effectiveness. This can be accomplished through tools such as ‘gap analysis’ which measures current savings against projected needs to determine if there is a ‘gap’ in the savings pattern or if a participant is saving at an adequate pace. In general, when employees become more confident in their decision making ability, they become more active plan participants.

Plan Investments

Plan investments represent the tools of the retirement process and ideally, the better the tools the better the end result. Even minimum performance improvements can have significant long-term benefits when compounded over several years. This is one of the most difficult of fiduciary duties because most plan sponsors are not investment experts, and many plan providers require the use of certain investment vehicles that may or may not be in the best interest of the participants. Often these same providers contractually require the plan sponsor to assume the fiduciary responsibility for the selection of the funds the provider requires the plan to use. This can create conflicts-of-interest between the employer and the provider.

Best practices suggest that investment selection be completely free of conflicts. While most plan
sponsors may not possess the ‘prudent expert’ skills to select plan investments, these fiduciary duties can be assigned to third parties that will serve as 3(38) fiduciaries for the plan and make independent and conflict-free investment selections. Then the fiduciary duty of the plan sponsor is to assure that care was exercised in the appointment of the investment fiduciary.

In addition to the selection of individual funds, there is an important growing trend to offer professionally managed portfolios and other ‘portfolio’ investments such as target date funds. Most fiduciaries realize that participants cannot become investment experts in an hour enrollment meeting. Providing professional investment solutions can enhance a participant’s chances of retirement success.

Plan Expenses

Fiduciaries are required to understand plan charges, but prior to 2012 plan providers were not required to disclose fees. Without this requirement, it was difficult for plan sponsors to understand the expenses they were paying since many providers used investment products that made fee disclosure extremely difficult. In 2012 the Department of Labor (DOL) finally established fee disclosure rules for the retirement industry. Although interpretation of the rules is somewhat broad, today plan fiduciaries have better tools to determine the expenses they are paying.

Retirement plans require eight special services including plan design, recordkeeping, administration, regulatory testing, 5500 filings, asset custody, participant education, and investment advisory services. Expenses should be reasonable and based on services rendered. As
in most professional services, ‘cheap’ is not necessarily best, but excessive fees can hinder
performance. Most 401(k) plans use mutual funds or exchange traded funds and internal expenses should be a consideration. However, the investment world is filled with higher cost, better performing funds so expenses are only one of the factors in determining the best investment selection for a plan. Using a 3(38) investment fiduciary to select the investments for a plan is a solid choice for plan sponsors unfamiliar with the intricacies of the investment world.

Benchmarking Plan Effectiveness

Measuring a plan’s effectiveness and communicating that information to employees demonstrates a sincere interest in a participant’s retirement future. Topics for review should include participation levels and savings rates as well as fund performance, asset classes and expenses. Having a plan is the first step. Making sure the plan is achieving desired results is the goal in delivering enhanced fiduciary accountability and improving long-term retirement success for employees.


Corporate retirement is in transition. Plans are changing from employer driven defined benefit plans, to employee driven defined contribution plans. The trend is from Social Security, to self-security. Employers are facing a learning curve as well and, especially for the small business, it is a difficult challenge to satisfy the fiduciary duties imposed by ERISA and provide a solid retirement solution for employees. Help is available for many companies through a new breed of 3(38) investment fiduciary that can remove some of the burdens and provide ERISA level fiduciary services for small and large business. Talk to the consultants at Equitas for professional assistance in the development and support of delivering quality, conflict-free, retirement solutions.

In 2002, Equitas Capital Advisors, LLC was established as a unique company that blends the resources of a large global corporation with the flexibility of a small boutique firm. The registered service mark of Equitas Capital Advisors is Engineering Financial Solutions® and the purpose of Equitas is to design, build, and deliver investment solutions to meet the goals and objectives of our investors. Equitas Capital Advisors, LLC located in New Orleans, has over 200 years of combined investment management consulting experience providing professional investment management services to investors such as foundations, endowments, insurance companies, oil companies, universities, corporate retirement plans, and high net worth family offices.

Disclosures and Disclaimers:
Above information is for illustrative purposes only and has been obtained from reliable sources but no guarantee is made with regard to accuracy or completeness. It is not an offer to sell or solicitation to buy any security. The specific securities used are for illustrative purposes only and not a recommendation or solicitation to purchase or sell any individual security.

Equitas Capital Advisors, LLC is registered as an investment advisor with the U.S. Securities and Exchange Commission (“SEC”) and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability.

Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author on the date of publication and are subject to change. This publication does not involve the rendering of personalized investment advice.

Charts and references to returns do not represent the performance achieved by Equitas Capital Advisors, LLC, or any of its clients.

Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses.

All investment strategies have the potential for profit or loss. There can be no assurances that an investor’s portfolio will match or outperform any particular benchmark. Past performance does not guarantee future investment success.