2016 regulatory outlook for advisors

7/24/2019 2016 Regulatory Outlook for Advisors

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Manning & NapiersRegulatory Outlookfor Advisors


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Understand how todays

challenging regulatory

landscape impacts your

practice and clients.

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ContentsFIND OPPORTUNITY

IN FIXED INCOME

YOUR FIDUCIARY

RESPONSIBILITY

REGULATORY TRENDS

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6

8

How to position fixed incomein a rising rate environment

Evolving roles & responsibilitiesfor todays financial advisors

Regulatory developments& trends to monitor

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Over the past 30 years, interest rates have

declined. Today, the interest rate outlook

is challenging. Yields are still at very low

absolute levels, and therefore have more

room to go up than down. However, an

increasingly interconnected world means

events from around the globe can influence

U.S. growth and ultimately the direction of

interest rate movements.

Investors of all types are generally unfamiliar

with how interest rate movements affect

traditionally safe bond investments. Using

a bond index fund to gain exposure to the

broad fixed income market has become a

common investor strategy.

Bond portfolios that follow a benchmark may

not deliver the best the market has to offer

in a fluctuating interest rate environment.

Typically, a benchmarks composition is

market-capitalization weighted according

to the total value of debt outstanding in the

market; its not based on the fundamental

characteristics of each bond.

Investors may need assistance from theiradvisors in understanding how a portfolio

can be expected to perform in different

environments. Fiduciaries responsible for

retirement plan assets need to understand

how interest rate movements may affect

plan participants who are nearing retirement

and are more exposed to this traditionally

safe asset class.

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50 YEAR INTEREST RATE TREND(01/01/1965 - 12/31/2015)

4%

1

/66

1

/71

1

/76

1

/81

1

/86

1

/91

1

/96

1

/01

1

/06

1

/11

12

/15

8%

12%

16%

1.47%

2.27%

3.07%

6.57%

8.99%

2.27%

-4.00%

-26.63%

If the 10-year TreasuryYield in one year is

The total returnwill be approximately

THE IMPACT OF RISING TREASURY YIELDSYield as of 12/31/2015*

(50-year low - 07/2012)

(Yield at 12/31/2015)

(10 year average)

(50 year average)

Find Opportunity in Fixed Income

Source: FactSet.

10 Year Treasury Yield

This information is for illustrative purposes only. Past performance does not guarantee futureresults.


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Advisors can provide

valuable perspective and

insight to their clientsregarding how to position

portfolios to navigate

changes within the sector.

Retirement plan advisors

can provide education

to plan sponsors and

fiduciaries about the effect

rising interest rates and

bond market volatility could

have on current menu

options. A review of in-plan fixed income options,

including the role of fixed

income in target date as

well as fixed income only

offerings, should be part

of the investment review

process in 2016.

LOOKING AHEAD

One of the greatest concerns facing investors is the low

level of bond yields today and the risks associated with

a rising yield environment going forward. While volatilityin stock or bond markets can be a source of opportunity

for savers with many years until retirement, bond market

volatility has become a heightened source of risk for those

investors nearing the date that they will need to start living

off their savings. This results from the higher allocation to

fixed income near retirement, which may mean being more

heavily exposed to the most overvalued sectors of the bond

market like U.S. Treasuries at the same time that stability

of retirement balances becomes most important to meet

ongoing living expenses.

The answer is not to simply own more stocks when nearing

retirement, since volatility is inevitable in the stock market.

Active, flexible management of fixed income portfolios with

the ability to adjust maturities and sector exposures to avoid

taking risk, unless well-compensated for those risks in the

form of more attractive yields, is most important for this

group of investors.

WHAT TO EXPECT

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USEFUL TOOL

We understand that explaining the risksof this asset class to clients in the context

of rising rates may be challenging. Oureducational resources can help you talk to

your clients about the hidden risks of fixed income.
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Being an ERISA fiduciary is not easy.

Courts have repeatedly observed that

fiduciaries under ERISA are subject to the

highest standard known to the law. Vital

components of fiduciary status under ERISA

are the duty to act prudently in selecting

and monitoring investments, and removing

investments that become imprudent based

on changing economic environments.

The Department of Labor, through its

proposed definition of fiduciary, will

extend the fiduciary standard embedded

in ERISA to advisors who handle any kind

of retirement account, including IRAs,

in addition to accounts held inside aretirement plan.

An ERISA fiduciary must act with the

care, skill, prudence, and diligence . . .

that a prudent man acting in like capacity

and familiar with such matters would use.

While plan fiduciaries are not required

to be clairvoyant, a fiduciary who can

establish that they followed a prudent

decision-making process, including hiring

experts and consultants and reviewing

relevant information and documentation,

can clear this bar easily. This process

is commonly described as procedural

prudence.

A crucial aspect of procedural prudence

is documenting the reasons why certainchoices were made. Documenting

the investors objectives and how the

selected investment options help meet

those objectives is an essential step

in a procedurally prudent process.

Documentation can be an anchor point

when reviewing performance months or

years later, providing fiduciaries with a

reminder of why they made the choice

they did and giving them a baseline for

evaluating whether the investment optionhas met investor objectives.

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Fiduciaries are

not allowed to

set it and forget it.

Your Fiduciary Responsibility


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LOOKING AHEAD

In 2015, the Supreme Court

reminded plan fiduciaries that

they have an ongoing duty to

monitor investments for prudence.

For ERISA fiduciaries, this is not

a new duty, but is worth revisiting

in light of the changing economic

environment, particularly as

it relates to fixed income. A

fiduciary who is responsiblefor maximizing an investors

likelihood of a secure retirement

could easily be as concerned with

managing risk as with low fees,

and must understand what trade-

offs are involved with the various

options in the marketplace.

In the retirement area, the

growing popularity of target date

funds has led to a proliferationof product options which can be

difficult to evaluate. Especially in

a rising interest rate environment,

fiduciaries need to understand the

managers investment process,

the holdings in the portfolio, how

those holdings will change over

time, and how those changes can

affect the interests of investors

in varying market environments.

A target date manager whooffers a transparent view into the

funds holdings and strategies

will allow fiduciaries to thoroughly

understand the investment and

document their reasons for

making specific choices.

WHAT TO EXPECT

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Understanding an investors objectives and using

expertise to manage risk in changing market

environments are core competencies for financial

advisors. In light of the coming ERISA standard for all

retirement accounts, advisors can review their service

offerings, documentation regimes, and educational

capacities and develop methods for demonstrating the

value they deliver to their clients:

Demonstrating understanding of investor

objectives and the appropriateness of investmentrecommendations for achieving those objectives will

be key to establishing a record of prudence.

Monitoring the economic and regulatory environment

and adjusting recommendations as environments

change, and documenting the reasons for those

recommendations, can help advisors stay on the

right side of ERISA.

USEFUL TOOLSOurQDIA SyncSMtoolcan assist in the selection

of a QDIA and provide documentation for

retirement plan fiduciary file.

Understand holistic investor goals and objectives

with our Retirement Planning Guidebook

which provides participant-level guidance on IRA

rollovers, Social Security, and Medicare.
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States get into the Act

State governments are concerned about

private-sector retirement readiness and

savings rates because they realize that

states would ultimately bear the burden

of providing for indigent seniors. Concern

about whether a state-sponsored plan

would trigger ERISA liability has held states

back from implementing their own savings

incentives. Recent regulatory developments

show that the federal government and the

states are finding common ground on this

issue.

States that choose to harness the power of

inertia by encouraging or mandating payroll-deduction retirement savings will present

new challenges and new opportunities for

employers, employees, and advisors.

Retirement plan leakage

Another area of perennial concern,

leakage refers to early withdrawals

by participants from their retirement

accounts, leading to tax penalties and

loss of retirement savings. Based on an

EBRI study commissioned by the ERISA

Industry Committee (ERIC) in 2014,

two-thirds of the leakage from qualified

accounts occurs when a participant

changes jobs. Participants will commonly

cash out a retirement account with a

relatively small balance rather than roll

it over to their new employers plan or to

an IRA. Other sources of leakage include

hardship distributions and participantloans.

Regulatory Trends

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Source: Employee Benefit Research Institute (EBRI).


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Financial advisors can

monitor developments in the

states where they practiceand evaluate how they are

positioned to service clients

in the evolving environment.

Potential areas to explore

include financial literacy

education and related

services to smaller

employers who adopt a

payroll-deduction IRA and

later want to graduate to a

plan that includes employercontributions.

LOOKING AHEAD

Current proposals to combat leakage include simplifying or

automating the rollover process to encourage individuals

to keep their retirement savings in a tax-qualified account.Proposals to limit hardship distributions and loans are also

being discussed, but eliminating these features, it is feared,

may have the un-intended consequence of discouraging

participation in the first instance.

Other commentary observes that the lack of basic financial

literacy, including an understanding of the importance of

emergency savings, contributes significantly to the leakage

problem. Americans struggle to keep cash available for

emergency situations such as major car or home repairs,

and tap their 401(k) account instead. Education regardingthe importance of a strong personal balance sheet to

retirement security can be expected to gain traction as

state-based programs grow. State regulation in an area

traditionally governed by the federal government will add

to the complexity of the regulatory environment and may

present new opportunities to provide advice to the next

generation of savers and investors.

WHAT TO EXPECT

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10/12

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Manning & Napier is

committed to providing

ongoing resources &expertise to advisors.

Our priority is helping

you manage real-worldrisks and meet the

needs of your clients.


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To learn more about these topics and to stay up-to-

date, we invite you to check out these resources that

are available to you.

Regulatory FAQsSubscribe to our Regulatory FAQs series to getanswers to your regulatory questions and to stay up-to-date on regulatory issues.

ConvergeSubscribe to Converge for a unique perspective on the

current retirement landscape and to stay up-to-date onregulatory changes.

Investment InsightsLeverage our research and economic analysis through

timely articles & whitepapers, and subscribe to ourMarkets & Economy blog and in-depth Vantageeconomic commentary.

Resources

Access our useful tools & resources and more at

www.manning-napier.com/financialprofessionals
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