CEO Report: Third Quarter

Jeff Petersen CEO Report - Petersen Hastings

Technology and Company Retirement Plans

Technology can be a double-edged sword. Being able to conduct “face to face” meetings with participating parties spread out across the country or globe may result in a positive impact on productivity. On the other hand, the impact on productivity can turn negative when participants attempt to multi-task with “smart technology” during meetings. Also, there have been concerns about declining attention spans due to always being “plugged in” to technology. 

After over three decades of educating participants in retirement plans, I have observed technology being both positive and negative. The positives include being able to monitor account values on a daily basis and being able to make changes to your allocation with the push of just a few buttons. In addition, technology has allowed employers to provide ever increasing choices for participants when creating their initial and ongoing investment allocations. Each of these positives are also negatives when provided to participants unconstrained. Let me explain. Defined benefit plans used to be the standard type of retirement plan benefit for employees. This type of plan provides a monthly benefit at retirement for participants based upon a set formula determined upon factors such as years of service, age and average compensation. The employer is responsible for investment decisions that impact funding for the plan in order to meet the obligations promised to employees at their retirement. The employer normally outsources the investment management to a professional to achieve the desired results. Defined benefit plans have lost their favor over the past several decades due to the high cost of funding the plans. The result has been the increasing popularity of 401(k) type plans, of which are a subset of defined contribution plans. While employers typically will contribute to these types of plans, they also transfer the responsibility of investment management from the employer to the employee. While the responsibility of investment management has transferred to the employee, the fiduciary liability may or may not have been transferred. This is why the plan sponsor (employer) needs to be aware of the unique fiduciary risks of this structure and then take steps to minimize these risks.  

First, daily information and the ease of making allocation changes not only allows the participant to stay abreast of the impact of the financial markets on their accounts, it unfortunately also makes it easy to act on emotional decisions (market timing) based upon fear or greed. 24/7 financial news may get an investor worked up to the point they attempt to time the market by buying on greed or selling on fear. With defined benefit plans, the professional was responsible for making fiduciary driven decisions on behalf of the employer. If the employer was rattled by market volatility, they would normally contact their investment manager who would “talk them off the cliff.” With 401(k) type plans, the participant is thrown into the role of the professional normally without the experience and credentials. Yes, the participant may have “access” to a professional, but it is still up to the participant to listen and act on the professional’s advice. Technology makes it easy to offer 20-30 investment options to participants. One of my favorite sayings is, “just because you can doesn’t mean you should!” Imagine how confusing it can be for a non-professional to make investment decisions with only a handful of options, let alone 20-30 investment choices! In this case, the “tail may be wagging the dog.” The employers sometimes tell us that employees like having all of these choices. These are typically employers that are new to Petersen Hastings or are considering our services. We remind employers that they have an ongoing fiduciary duty to oversee each and every investment choice as part of their role as plan sponsor. Employees are responsible for their investment decisions among these overseen investments… maybe. Employers still need to meet their obligation to ensure that participants are adequately educated, which is where Petersen Hastings steps in. That education is much more impactful if investment choices are kept to a manageable number which varies depending upon the demographics of the employer. Since the challenge is significant for participants thrown into a role of being a professional investment manager, Petersen Hastings provides ongoing investment advice and specific investment recommendations for participants taking advantage of this employer provided benefit. We offer ongoing advice by phone and on-site with both group and one-on-one participant meetings based upon the goals of the plan trustees. 

Employers make a critical choice that impacts their legal responsibility for their plan when they hire an investment manager. Do I hire an investment manager that shares fiduciary responsibility, or do I want to shoulder that burden alone? It is important for employers to understand the difference between a DOL Section 3(21) and DOL Section 3(38) investment manager. Think of a 3(21) investment advisor as “fiduciary light” whereas a 3(38) investment manager assumes much of the plan fiduciary duties and responsibilities. Petersen Hastings provides employers the maximum protection by acting in both capacities for the plans it oversees. We welcome your follow-up questions regarding best practices and how Petersen Hastings acts as your fiduciary.

Book Review

I am known to be a voracious reader, and sometimes a book really stands out as being exceptionally informative and timely, along with providing surprises along the way. I was particularly interested to read the new book by General Jim Mattis, Call Sign Chaos. I expected to learn about his life growing up in our hometown area, his rise to become our United States Secretary of Defense and maybe a little about his resignation. I was pleasantly surprised to also learn about how he developed a successful troop level decision-making process to react to the enemy quicker resulting in a multitude of successes and fewer ultimate sacrifices and Gold Star families. His appetite for reading makes me look like a non-reader given the reading list contained in his book. He believes that it is his obligation and job to research all past battles, going back several centuries, to best prepare himself and his troops for the uncertainty of the battlefield. As part of leading and training his troops, he provides a reading list that he believes will help provide a battlefield advantage.

The last point from General Mattis’ book is that he provides examples where political decisions impact our relationships with our allies and what the impact might be in the future. The points made in this book, combined with decisions impacting Turkey, Syria, and the Middle East in general, help to understand the changing geopolitical landscape that is dominating headlines today. If you have the time and inclination to read this book, you will not be disappointed!

Thank you for allowing Petersen Hastings to partner with you on your life-long journey!