From the July 2008 issue of Investment Advisor • Subscribe!

NEWS & PRODUCTS, JULY 2008

The Department of labor (DOL) will continue to scrutinize the indirect compensation that advisors acting as pension consultants receive, warned Alan Lebowitz, a DOL official, at the "DOL Speaks" conference in Washington on May 21. "This will be an ongoing enforcement area for us," he said. DOL began its own examination of advisors who act as pension consultants after the SEC conducted its sweep examination of these arrangements. Some of the DOL cases against these advisors "are coming to action," he said, with more new cases being opened. The SEC conducted its sweep because of concerns that pension consultants could steer clients to hire certain money managers and other vendors based on the pension consultant's (or an affiliate's) other business relationships and receipt of fees from these firms, rather than because the money manager is best suited to the clients' needs, therefore compromising the advisor's fiduciary duty.

Meanwhile, DOL's proposed rule 408(b) 2, which would require fee disclosure to plan fiduciaries (brokers, advisors), will be completed this year as well as DOL's investment advice regulation, noted Brad Campbell, assistant secretary of DOL's Employee Benefits Security Administration, at the "DOL Speaks" event. Another proposed rule that would be released in a matter of weeks, Campbell noted, would require service providers to disclose fees to participants. DOL's improved fee disclosure changes to Form 5500--the primary disclosure document plans must file noting their financial condition, investments, and operations--were completed last year.

New research on Health Savings Accounts (HSAs) conducted by the Government Accountability Office (GAO) found that individuals participating in HSA-eligible high-deductible health plans jumped significantly since 2004, from about 438,000 in September 2004 to an estimated 6.1 million in January 2008. However, the research notes that many HSA-eligible plan enrollees did not open an HSA. From 2005 to 2007, 42% to 49% of HSA-eligible plan enrollees reported they hadn't opened an HSA, and 20% to 24% said they did not plan to open an HSA, citing an inability to afford one or a belief they didn't need an HSA. The GAO research also found that tax filers reporting HSA activity and enrollees in certain HSA plans had higher incomes than other tax filers. For instance, among filers between the ages of 19 and 64, the average adjusted gross income for those reporting HSA activity in 2005 was about $139,00, compared with $57,000 for other filers.

Recent research by Russell Investments shows that investment returns generated by 401(k) savings during an individual's retirement play a critical role in providing retirement income. "This challenges the conventional belief that retirement income is derived predominantly from savings and returns accumulated during a participant's working years," Russell notes in a release announcing the research's findings. Dubbed the 10/30/60 Rule by authors Matt Smith, managing director, retirement services and Bob Collie, director, investment strategy, Russell says this new research continues its "efforts to leverage its decades of pension expertise for the benefit of the individual investor." The findings show that in a defined contribution (DC) context, the plan benefits that a participant receives in retirement can be broken out as: 10% of each retirement income dollar consists of contributions made to the DC plan while working; 30% is made up of investment returns generated prior to retirement; and 60% is made up of investment returns generated after retirement. The basic 10/30/60 pattern proved to be stable even with a range of assumptions, Russell notes. As part of its research, Russell altered several input assumptions--such as the retirement age, the age when saving begins, and age of death--and found that only lowering the expected post-retirement return would significantly change the 10/30/60 rule.

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