1.            Since the March 2009 market low, U.S. stocks (S&P 500) have fully recovered and made new highs with a cumulative return of +133%.  Emerging Markets (MSCI Emerging Markets Index) have rallied similarly with a cumulative return of +130.85%.  The rally in Developed Markets (MSCI EAFE) has not been as strong with a cumulative return of +93.84%.

2.            Despite the Dow’s 118% gain since the March 2009 low, stocks aren’t pricey by historical standards.  The market (S&P 500) is trading at less than 15 times last year’s earnings.  At the last market peak in 2007, the market was trading around 17 times earnings.  Stocks were more richly priced in 2000 when the P/E Ratio topped 28.

3.            The stock market has gone 519 calendar days without a 10% decline, the 10th longest period without a correction, according to Bespoke Investment Group.

4.            “The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell.” – John Templeton

5.            “Mr. Market is a manic depressive with huge mood swings, and you should bet against him, not with him, particularly when he is raving. – Barton Biggs

 

April 2013: Capital Markets & U.S. Economic Update

Asset Strategies Portfolio Services, Inc. is a Registered Investment Advisor with the U.S. Securities and Exchange Commission under the Investment Advisor Act of 1940, and amendments thereto.  Our only line of business is to provide independent, investment advice and consulting services to institutional investors.  We do not sell investment products.  We are not affiliated with any broker-dealer firm.  For a copy of our Form ADV, please contact our office:

 

Asset Strategies Portfolio Services, Inc.

2635 Lapeer Road, Auburn Hills, Michigan 48326-1926

Telephone:  248-373-9900

Email:  info@assetsrategie.com

March 2013: Capital Markets & U.S. Economic Update

Asset Strategies Portfolio Services, Inc. is a Registered Investment Advisor with the U.S. Securities and Exchange Commission under the Investment Advisor Act of 1940, and amendments thereto.  Our only line of business is to provide independent, investment advice and consulting services to institutional investors.  We do not sell investment products.  We are not affiliated with any broker-dealer firm.  For a copy of our Form ADV, please contact our office:

 

Asset Strategies Portfolio Services, Inc.

2635 Lapeer Road, Auburn Hills, Michigan 48326-1926

Telephone:  248-373-9900

Email:  info@assetsrategie.com

Bears ‘n Bulls: 

When to Invest, When to Beware,

A Common Sense Approach

The historical closing peak of the S&P 500 Index on March 28 has many wondering whether to ‘buy’ or ‘beware’.  Taking a common sense approach to looking at the capital markets, let’s take a look at arguments for both; then let the investor beware.

 

The Bullish Call:  BUY	The Bearish Call; Beware
1)  This Bull has gas left in tank The bull market, which began in March 2009, is just entering its fourth and final stage.  Dubbed the ‘exuberance’ stage, historically has been a wildly profitable one, with average gains of 38.7% in bulls since 1962.  The first stage is “reluctance” (average gains of 49.4%), followed by “consolidation” (+6.4%), “acceptance” (+18.8%) and finally exuberance.	1)  The Bull is getting up in years Only five of the past 11 bulls have lived to celebrate their fifth birthday, S&P Capital IQ says.  The average bull market since 1932 has lasted roughly 4 ½ years, according to the S&P Dow Jones Indices.
2)  Data suggests no recession ahead Economic contractions are often the cause of stocks heading lower, but the incoming economic data is not pointing to an imminent recession.	2)  Market milestone?  Could spell trouble Stock market records and big round numbers such as Dow 14,000 and Nasdaq, which peaked at 5048.62 in March 2000, closed above 5000 only twice before crashing.
3)  Cash stockpiles are ample Capital is the fuel that powers bull markets.  Right now, there’s no shortage of cash on the sidelines.  At the end of 2012 there was $10 trillion parked in money market funds, bank accounts and certificates of deposit, according to Federal Reserve data.  There’s also $1 trillion that has been funneled into bond funds in the past five years Investment Company Institute.	3)  Budget battles loom Sure, we all breathed a big sigh of relief when the fiscal cliff was avoided.  However, we all know that budget battles in Washington still loom that may affect capital market valuations.
4)  Shift from Bonds to Stocks underway The low interest rate environment, combined with attractive dividend yield, is pushing investors toward stocks.	4)  Popularity Kills Bulls Popularity can kill the broader market when sentiment gets too upbeat, as it did in 2007.
5)  Market still priced right Despite the Dow’s 118% gain since the March 2009 low, stocks aren’t pricey by historical standards.  The market, as measured by the S&P 500, is trading at less than 15 times last year’s earnings.  At the last market peak in 2007, the market was trading around 17 times earnings.  Stocks were more richly priced in 2000 when the P-E topped 28.	5)  Calls for correction grow louder The stock market has gone 519 calendar days without a 10% decline, the 10th longest period without a correction, according to Bespoke Investment Group.

 

Asset Strategies Portfolio Services, Inc. is a Registered Investment Advisor with the U.S. Securities and Exchange Commission under the Investment Advisor Act of 1940, and amendments thereto.  Our only line of business is to provide independent, investment advice and consulting services to institutional investors.  We do not sell investment products.  We are not affiliated with any broker-dealer firm.  For a copy of our Form ADV, please contact our office:

 

 

Asset Strategies Portfolio Services, Inc.

2635 Lapeer Road, Auburn Hills, Michigan 48326-1926

Telephone:  248-373-9900

Email:  info@assetstrategie.com

 

February 2013: Capital Markets & U.S. Economic Update

Asset Strategies Portfolio Services, Inc. is a Registered Investment Advisor with the U.S. Securities and Exchange Commission under the Investment Advisor Act of 1940, and amendments thereto.  Our only line of business is to provide independent, investment advice and consulting services to institutional investors.  We do not sell investment products.  We are not affiliated with any broker-dealer firm.  For a copy of our Form ADV, please contact our office:

 

Asset Strategies Portfolio Services, Inc.

2635 Lapeer Road, Auburn Hills, Michigan 48326-1926

Telephone:  248-373-9900

Email:  info@assetsrategie.com

By:        Katherine T. Ghannam, CPA

Recent and ongoing legislative changes are affecting the $4.5 trillion Deferred Contribution (DC) Plan market.[i]   In recent years media attention has heightened as a series of lawsuits filed against large employers of savings plans, alleging they violated their fiduciary duty by allowing plan participants to be charged excessive, undisclosed fees in their retirement savings plans.  In addition, Congressional pressure[ii], including a recent General Accountability Office (GAO) study has spurred consumer and investor groups to press for new regulations.  The Department of Labor (DOL), after many delays, has responded.  The results are two new regulations.  The first requires service providers to disclose their fees to employers.  The second requires disclosure of plan fees and expenses to plan participants.

ERISA 408(b) (2) – Provider Fee Disclosure – Effective July 1, 2012
ERISA 404(a) (5) – Plan Sponsor disclosure to participants – Effective August 30, 2012

The new DOL regulations apply to ERISA (Employees Retirement Income Security Act) plans, or private company plans.  [iii]  While ERISA governs the private-sector retirement plans, it is still expected that most public employee plan will embrace the regulations and choose to follow the same “best in class” practices.  According to the National Association of Government Defined Contribution Administrators’ (NAGDCA) 2011 DC Survey, 94.2% of public plans intend to comply with the disclosure regulations as best practice.[iv]  Public funds are bound by the same duties of “prudence”, “loyalty, and the “exclusive purpose” rule pursuant to the Uniform Management of Public Employees Retirement Act (MPERS).  The importance of establishing standards and more consistent best practice with respect to investment plan design will grow as employers of both private and public programs look to offer their participants attractive savings plans and fulfill their fiduciary responsibilities.  Plan participants will benefit from improved plan design features and increasingly competitive fees.

 

What are the new Regulations?

408(b) (2) Provider Fee Disclosure

Effective July 1, 2012 the new amended ERISA 408(b)(2) fee disclosure regulation for employer sponsored participant-directed retirement plans 401(k) plans went into effect.  The purpose of the new regulation is to provide employers and trustees with all the information they need to determine if the total fee structure of their plan is reasonable for the services provider.  The information provided and outcomes include the following:

►   A written detailed description of services provided by the provider

►   Detailed description of all direct and indirect compensation received by the service provider clearly discloses fees for investment management, record keeping administration and other services.  This will serve to clarifying service provider relationships to determine if the provider is independent or has a potential conflict of interest

►   Information on whether the services provided for the plan by the service provider are done in a fiduciary capacity.  This information is very important and has been highlighted in recent court cases in determining where to direct fiduciary breaches.

The regulations require the employer to take responsibility for the following:

• Receiving the fee disclosure document from all third party providers.
• Terminating the service provider if they do not comply.
• Evaluating the service provider and determine whether the fees they are paying are reasonable for the service received.

 404(a)(5) Participant Fee Disclosure Regulation – effective August 30, 2012 (requiring both quarterly and annual disclosures to plan participants)

The new rule requires employers, as a new fiduciary requirement, to distribute to all participants, comprehensive fee and investment disclosures about their savings plans.

ü Fee disclosure includes all fees and expenses, direct and indirect, charged against a participant’s savings plan.

ü The investment disclosure includes fund performance, and appropriate benchmarking of performance.

The goal of the participant disclosure regulation is to provide the necessary information to assist participants to make better investment decisions.  Fee and investment performance disclosure will provide relevant information to the participants enabling them to review fees and evaluate investment performance of investment options relative to appropriate benchmarks.  Better investment decisions should improve participants’ chances of achieving their financial savings goals.

Why are these regulations so important?

The new fee disclosure regulation is focused on the following areas of concern:

►    A growing emphasis on plan performance and sponsor satisfaction

►    A focus on fiduciary responsibilities

►    An intense scrutiny of fees

These are concerns that all employers and participants of savings plan share.

 

What can employers do to improve the success and value of their savings plans?  

The DOL has estimated the benefit at $14.9 billion in lower fees and expenses, in addition to $2 billion cost of complying.  The total cost to the service provider industry, based on the DOL projections, is $16.9 billion in lost revenue and added expenses.  That is an additional $14.9 billion that should be available for retired workers to live on.  The DOL hopes to achieve the savings goal by crafting the regulation to incite participants to challenge the fees they pay.

Background:

Understanding the evolution of these regulations will help you appreciate the importance of why following the fee disclosures regulations is “best practice” for all public and private employers.

A study by the GAO, suggested performance in DC plans has lagged and fees are substantially higher than those of Defined Benefit (DB) plans.  The study revealed a statistical association between inadequate disclosure and lower investment returns for ongoing plans, suggesting the possible adverse financial effect of such nondisclosure.  In addition, the study cited that conflicts of interest cost DC plans 1.2%-1.3% annually, per participant.

In the past, it was not uncommon for plan sponsors to be told they were charged nothing by third party providers for the plan’s administration.  In fact, a recent GAO survey found that half of employers did not know if they or their plan participants paid investment management fees, or they wrongly believed the fees were waived.  The GAO report indicated that total plan fees can be as high as 1.9% but average about 1.3% for plans with fewer than 100 members, which accounts for 88% of plans.

Under the new fee disclosure regulations, employers have come to realize that their service providers were overcharging them with wrap fees where they took ordinary mutual funds and added layers of expenses to compensate them for both investment and administration.

 So how is this new?

Plan sponsors and trustees have always been obligated to document and monitor all the fees being charged to their DC plan and make a formal determination if these fees are reasonable relative to the services being delivered.  This is the same fiduciary standard that all plan sponsors, both private and public, are required to follow.  The failure of an employer to properly discharge and document these duties, let alone allow their plan to incur higher than reasonable fees will result in a Prohibited Transaction for ERISA plans and a fiduciary breach for all trustees (both private and public plans).

This fiduciary duty has been largely unenforced and overlooked.  This was due, in part, to the fact that while employers and trustees were obligated to document and monitor plan fees, the companies providing and servicing their plans were not obligated to disclose their fees or compensation.  This allowed service providers to create less than transparent and needlessly complex fee structures, with some even going as far as to claim that their fees and revenue sharing arrangements were confidential.

Why are fees so important?

A relatively small annual fee of say 1% over a period of time can seriously erode participants’ retirement savings.  An example cited in an October 2010, DOL Article[v]  is referenced below:

Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000.  If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account.  If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000.  The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.

The table below considers the effects of fees on returns for various time periods.

			Annual Fee Rate
Time Horizon	0.10%	0.25%	0.50%	1.00%	2.00%	3.00%
3 years	-0.30%	-7.00%	-1.50%	-2.90%	-5.80%	-8.50%
5 years	-0.50%	-1.20%	-2.50%	-4.90%	-9.40%	-13.70%
10 years	-1.00%	-2.50%	-4.90%	-9.50%	-18.00%	-25.60%
20 years	-2.00%	-4.90%	-9.50%	-18.00%	-32.70%	-44.60%
30 years	-3.00%	-7.20%	-13.90%	-25.80%	-44.80%	-58.80%
40 years	-3.90%	-9.50%	-18.10%	-32.80%	-54.70%	-69.30%

How big a shock?  Nearly three-quarters (71%) of plan participants do not think they pay any fees, according to an American Association of Retirement Persons (AARP) survey released last year.  Disclosure of fees to participants who are unaware of the fees is likely to engage a sufficient number of participants to apply downward pressure on plan fees and expenses.

“Transparency is a good thing,” said Charlie Jeszeck, an economist at the GAO.  “And we can’t afford to keep participants coddled or ignorant about fees, because it can have a negative impact on their retirement.  Financial literacy is a big deal, and we need to educate them in how to invest and what can eat away at their futures.”[vi]

In October 2012, Phyllis Borzi, a Labor Department Official, spoke for a second consecutive year at the annual conference for NAGDCA, even though her office doesn’t oversee public plans.  Her message to public plan sponsors is to adopt all the same disclosure requirements required of private plans.  Ms. Borzi, emphasizing that she was speaking for herself is quoted as saying “benefit plans are under siege, which I consider to be tragic”.  Her message to plan participants, “open the envelopes”.  She told them that paying 1% more in fees results in a 28% reduction in their accounts.[vii]

 

Court Cases

Too many sponsors believe they are not liable for a participant’s losses in their retirement plan account if the participant directs their investments.  This is not the case.  Many also believe that their plan providers are fiduciaries.  In most cases, this is not true.  The employer is ultimately responsible for the plan and the plan service providers they hire.

The U.S. Supreme Court unanimously ruled on February 20, 2008, in LaRue v. DeWolff, Boberg[viii] &Associates, that an individual participant may sue for fiduciary breaches under the Employee Retirement Income Security Act (ERISA) to recover losses in an individual defined contribution account.

In a recent 2012 court case, Tussey v. ABB, Inc.,[ix]  the court addressed specific fiduciary breaches by the employer including the failure to monitor fees.  While many employers pays the cost of administration and recordkeeping services for their plan, many service providers are paid through revenue sharing arrangements, which show up as reduced investment returns for participants.  The Court found that revenue sharing is commonly used in the industry and was not a fiduciary violation by itself.  However, the Court made it clear that if an employer adopts revenue sharing as its method of paying for recordkeeping and administrative services, it must also develop a prudent process for determining that the revenue sharing arrangement is reasonable and solely for the benefit of plan participants.  If they haven’t been performing the proper due-diligence, employers will not know if they are overpaying for services.

Many plan sponsors are not aware of the wide disparity among the cost of fiduciary services in the market.  While many third party providers market themselves as fiduciary “experts”, the ultimate fiduciary responsibility is on the employer and the trustees.

In almost all cases filed, the mutual fund company or insurance company will vigorously deny any fiduciary status.[x]   They will insist the ultimate responsibility is the employers’.  In Haddock v Nationwide 401 (k) case[xi], Nationwide claimed that the plan trustee was negligent in hiring Nationwide in the first place.  Nationwide sought to have the trustee pay for Nationwide’s fiduciary breaches since in theory the trustees are responsible for managing the plan and hired Nationwide.  In a similar case, Charter v John Hancock[xii], John Hancock countersued their client, Charter, for breach of fiduciary duty, in hiring John Hancock in the first place.  John Hancock also claimed not to be a fiduciary.

In Tussey v. ABB, Inc. [xiii],  the Court  found the employer’s retirement committee and Chief Financial Officer were liable for almost all of the $36.9 million in damages to plan participants, due to improper Fidelity fund selection and vendor monitoring.

►    $13.4 million against ABB for failure to monitor record keeping costs and fees

►    $21.8 million against ABB for removing one fund and replacing investment options without prudent deliberation

►    $1.7 million against Fidelity for lost float income

Fidelity argued and won stating that the claim filed against them should be dismissed because Fidelity was a “directed trustee” with only a recording-keeping function under the plan.  The fact that they consistently pushed Fidelity funds was not their problem.  The Judge agreed, citing “By the plain language of the Trust Agreement, Fidelity Trust has no responsibility for reviewing the merits of fund choices made by the Pension Review Committee.”

The Federal Court found that ABB, the employer, and other fiduciaries:[xiv]

►    Failed to follow the plan’s Investment Policy Statement

►    Failed to monitor recordkeeping costs paid through revenue sharing and hard dollars, and to negotiate rebates for the plan;

►    Failed to prudently deliberate prior to removing and replacing investment options in the 401(k) line-up.

►    Selected more expensive share classes for the plan’s investments when less expensive share classes were available.

In Tussey v. ABB, the Court found that classes of investments with higher expenses were selected by the plan and that Fidelity was paid for plan services at higher than market rates in order to subsidize ABB’s other corporate services, thus violating the duty of loyalty.

So why is this case so important and what can employers and trustees of savings plans learn from the outcome?  In this case, the employer and the trustees failed to follow their fiduciary responsibilities as defined by ERISA.  They failed to follow a prudent process, and failed to follow plan documents.

The responsibilities of fiduciaries have been described as “the highest known to the law”[xv].  Trustees need to understand the implications of their responsibilities and their duties under the law.  These duties under ERISA [xvi]include the following:

•  Act prudently as a “prudent expert”.  The fiduciary, under ERISA, must act as an expert for a fiduciary to do his/her best with respect to the plan.  If the fiduciary is not an expert, it requires them to hire or work with an expert.
•  Act with loyalty to and for the “exclusive benefit” of plan participants and their beneficiaries.  Further, it provides that a fiduciary use plan assets for the exclusive purpose of (1) providing benefits to participants and beneficiaries, and (2) defraying the reasonable expenses of administering the plan.
•  Diversify plan assets, under ERISA the duty is to  “diversify plan investments so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so”;
•  Carry out plan duties in accordance with plan documents.

 

Conclusion

Employers and trustees have the ultimate responsibility to oversee the retirement savings plan they provide for participants, including oversight and selection of third party service providers.  The DOL through new regulations has imposed additional regulations requiring additional disclosures to employers from service providers and from employers to plan participants.  Most public plans as a matter of “best practice”, intend to comply with these new Fee Disclosure Rules.

While many service providers intend to comply with the new regulations for both private and public plans, some service providers will tell you that the new rules apply to only private, or ERISA plans.  As mentioned in the introduction, private and public plans employers and trustees are bound by the same duties and fiduciary responsibilities.  As a fiduciary of a public DC plan, you should expect your service provider to provide the same disclosures to you and your plan participants.

As demonstrated in the cited court cases, it is important to understand your fiduciary responsibilities.  In order to mitigate legal liability, it is imperative to follow a prudent process and document the process and procedures followed.  The law makes it very clear, if you are not an expert, you must hire an expert to assist you in fulfilling your responsibilities.

In conclusion, please consider the following:

• ü An annual check-up and review of the plan and the plan providers should be included as “best practice” for all plan fiduciaries.
• ü Review fees and expenses paid to service providers at the start of a relationship and on an ongoing basis.
• ü Consider hiring an attorney or an independent plan consultant to review your plan, processes and procedures.
• ü For those plans that have never conducted a review of their third party provider, an RFP, and total plan review may be in order, including a review of the fund line-up.

4Q12 Periodic Table of Investment Returns

 

Janaury 2013: Capital Markets & U.S. Economic Update

Asset Strategies Portfolio Services, Inc. is a Registered Investment Advisor with the U.S. Securities and Exchange Commission under the Investment Advisor Act of 1940, and amendments thereto.  Our only line of business is to provide independent, investment advice and consulting services to institutional investors.  We do not sell investment products.  We are not affiliated with any broker-dealer firm.  For a copy of our Form ADV, please contact our office:

 

Asset Strategies Portfolio Services, Inc.

2635 Lapeer Road, Auburn Hills, Michigan 48326-1926

Telephone:  248-373-9900

Email:  info@assetsrategie.com

 

U.S. economic growth firmed up a bit heading into the fourth quarter as revised third quarter GDP exceeded expectations at 3.1%.  Inflation continues to be mild with the CPI declining .78% in the fourth quarter, and full year 2012 CPI at 1.74%. This compares to a 2.96% rise in 2011. The Fed indicated its new, primary focus is full employment and intends to hold short-term interest rates near zero until unemployment falls to 6.5% or inflation expectations surpass 2.5%.

U.S. equities struggled right up to the very last trading day of the year, as investors weighed the potential economic effect from super storm Sandy, U.S. election results, additional Fed stimulus and the potential impact of  “going over a fiscal cliff”.  Value stocks outperformed growth stocks across all market capitalizations. Small Cap stocks were the top performers followed by Mid Cap.  Financial (+4.87) was the best performing sector for the quarter, while the Information Technology (-4.89%) and Telecom Services (-5.79) sectors became the worst performing.

Investors continued to demand higher yield, buying riskier assets in the fixed income space: high yield bonds (Barclays High Yield, +3.29%) was the best performing sector for the quarter. Short-term bonds (Barclays U.S. Treasury 1-3 Years, +.06%) outperformed longer-term bonds (Barclays U.S. Treasury Long, -.77%).  Investment grade bonds (Barclays U.S. Aggregate, +.21%) outperformed Treasuries (Barclays U.S. Treasury, -.09%).

Global markets rallied strongly during the quarter (MSCI ACWI ex-U.S., +5.85%).  European stocks (MSCI Europe, net, +7.01%) performed very strongly as the euro received additional support from the European Central Bank.  The Asia-Pacific region (MSCI Pacific, net, +5.90%) posted strong gains and the 2012 total return led all global stock indices.  Emerging Markets (MSCI Emerging Markets, net, +5.58%) slightly trailed Developed Markets (MSCI EAFE, net, +6.57%).

 

Asset Strategies Portfolio Services, Inc. is a Registered Investment Advisor with the U.S. Securities and Exchange Commission under the Investment Advisor Act of 1940, and amendments thereto.  Our only line of business is to provide independent, investment advice and consulting services to institutional investors.  We do not sell investment products.  We are not affiliated with any broker-dealer firm.  For a copy of our Form ADV, please contact our office:

Asset Strategies Portfolio Services, Inc.

2635 Lapeer Road, Auburn Hills, Michigan 48326-1926

Telephone:  248-373-9900

Email:  info@assetsrategie.com

• The S&P 500 return of 1.7% on the last trading day of 2012 was its best gain on the final trading day of a year since 1974. It was also the fifth best in history. – Bespoke Investment Group
• At its 2012 high the Dow Jones Industrial Average was within 555 points of its all time high. – Wall Street Journal
• In August 2012, Apple set a record as the most valuable company of all time with a market capitalization of $623 billion. – Wall Street Journal
•  According to the Government Accountability Office, replacing the dollar bill with a dollar coin would save the government $5.5 billion over 30 years because coins last longer. – Chicago Tribune
•  In 1790, brokers met in Philadelphia where they bought and sold the first major issues of publicly-traded securities: $80 million of bonds issued by the government to pay off debt from the Revolutionary War. – PBS.org