Compensation Plans Should Be As Strategic As They Are Attractive

strategy-10-30-18.pngHuman capital is likely the most expensive resource a bank has, and we all know our people are important in a customer-facing business, so why not be strategic with it? Almost every business has a written strategic plan that states profitability goals, growth goals, three-year plans, etc. However, when it comes to compensation, fewer than four in 10 banks (38 percent of the 103 banks surveyed in our 2016 Compensation Trends Survey) have a formal, written compensation philosophy.

The Compensation Philosophy
Most organizations start the strategic compensation discussion with the development of a compensation philosophy. This document, often only a page or two, primarily identifies a few key items, including what the bank is trying to accomplish with its compensation programs; what compensation programs does the bank have available to our employees; who qualifies for these programs and why; and where does the bank want to position ourselves versus market? The compensation philosophy statement should be a living document that is reviewed annually and is adjusted as necessary to support business strategy changes.

Strategic Salary Planning
Banks that are strategic with compensation will also generally have a clearly defined salary grade structure, accurate and up-to-date job descriptions, utilize external market data for position benchmarking, and a salary increase matrix for annual adjustments. The annual salary increase process should be strategic, based on individual performance, foster internal equity, and fit within the overall budget of the organization. Many banks utilize a salary increase matrix to assist with determining annual raises. The matrix focuses on providing the largest increases to employees who are exceeding expectations and are positioned low in their salary grade. The days of giving everyone the same percent of salary raise are gone.

Performance-Based Incentives
Once you have the salary component figured out, the next step is incentive-based pay. This can take the form of annual cash incentives and/or equity-based incentives. The type of incentive a bank utilizes will often vary depending on the company structure—like whether it is public or private—and position level. As an example, executives may be eligible for a cash and equity incentive plan, but staff may only be eligible for cash incentives. The key to using strategic compensation is to make sure your incentive plans are based on performance and are motivating and rewarding key positions.

In today’s banking world, there is a lot of talk about incentive plans being “risky” and maybe even “evil” (example: Wells Fargo retail incentives). We disagree with this sentiment. Banks are still in the business of being profitable, and incentive plans have their place to help drive behaviors and reward performance. The key is to have a balanced approach between profitability and strategic goals.

Benefits and Perquisites
Benefits and perquisites are total compensation components that often apply primarily to executives. The broad-based benefit programs like 401(k) plans and health insurance programs have not experienced unique banking-focused changes in recent years. However, executive benefits such as salary continuation plans, change-in-control/severance plans, employment agreements and perquisites (auto allowances, country clubs, etc.) have seen reductions. These programs are still prevalent but there has been an increased focus on the business reasoning and validation behind such programs.

Executive benefits can provide some of the best retention vehicles in compensation if you have an executive leadership team you want to keep in place long-term. It is critical to ensure the benefit or perquisite is serving an appropriate business purpose.

The most successful banks are those who can appropriately balance their profitability needs with good culture, communication, and strategic compensation programs. Banks need to be financially successful to help the communities they serve. Ensuring that your compensation programs are strategically supporting the overall goals of your organization and linked to performance is essential. Make sure you are getting your “bang for the buck” with your compensation dollars being spent.

What You Should Know About Recent Trends in 401(k) Fee Litigation

litigation-6-25-18.pngParticipation in 401(k) plans has grown astronomically since they came into existence almost 30 years ago. Today, tens of millions of employees participate in 401(k) plans, and total assets under management exceed $7 trillion. It is little wonder that 401(k) plans have increasingly become targets for litigation over the last decade. In 2017 alone, dozens of new cases were filed against 401(k) plans, with settlements collectively exceeding $145 million. Litigation has also extended to substantively similar 403(b) plans. It is therefore important for plan sponsors and administrators to be aware of recent litigation trends and take appropriate steps to minimize litigation risks.

Basis of 401(k) Fee Litigation
401(k) plans are “employee welfare benefit plans” governed by the Employer Retirement Income Security Act (“ERISA”) and, as such, must be managed exclusively for the benefit of plan participants. Plan sponsors and administrators (collectively “plan fiduciaries”) are accordingly subject to a fiduciary duty—which courts refer to as “the highest duty known to law”—requiring them to act prudently (i.e. with the “care, skill, and prudence” of a prudent person) and loyally (i.e. only for the benefit of plan participants) towards plan participants. Practically, this means that plan fiduciaries must carefully consider the expenses of the plan; and the type and cost of investment options.

Common Allegations in 401(k) Fee Suits
Flowing from the fiduciary duties owed, fee suits commonly allege that plan fiduciaries:

  • Should have offered substantively identical but less expensive investment options;
  • Did not obtain the best possible price from plan service providers; and
  • Failed to adequately monitor the cost of investments and administrative expenses over time.
  • Poor investment performance (though many courts have found that poor performance alone does not indicate that the fiduciary’s decision-making process was flawed); and
  • Prohibited transactions claims, as ERISA prohibits fiduciaries from making payments to “parties in interest” from plan assets (though often, courts have found that exemptions clearly applied to permit payments).

Recent Trends in 401(k) Fee Litigation
Recent trends indicate the plaintiffs’ bar has broadened their sights: increasingly targeting other defendants apart from larger 401(k) plans, and alleging new bases of breach.

Plaintiffs’ Bar Increasing Targets of Litigation
Historically, plaintiffs have targeted larger 401(k) plans. Recent settlement successes against 401(k) plans have buoyed the plaintiffs’ bar, and smaller plans are increasingly targeted. Large universities, which offer 403(b) plans, are also increasingly targeted. In August 2016, a dozen suits were filed against universities. In 2017 and 2018, new suits have continued to be filed with regularity against universities.

Recent Bases of Fiduciary Breach
There has been an uptick of claims targeting investment options. Plaintiffs are challenging proprietary funds (wherein fiduciaries include their own proprietary funds in the 401(k) plan), alleging that those investments benefit the fiduciary at the expense of plan participants. Plaintiffs are also targeting money market funds, claiming that the plans should have offered stable value funds instead; as the latter serves the same purpose but yields highest interest rates.

What Can I Do to Minimize Litigation Risk?
Unfortunately, there is no magic bullet. Plaintiffs’ firms are savvy, and whether plan fiduciaries have discharged their fiduciary duties is often a fact-sensitive inquiry; meaning that early resolution of litigation (i.e. at the motion to dismiss stage), is not always possible.

However, ERISA does not impose a duty on fiduciaries to achieve perfect outcomes. As long as fiduciaries consistently strive to make decisions in the best interests of plan participants, they have a good chance of demonstrating that they have discharged their fiduciary duties when challenged in court. In other words: process, process, process. Brotherston v. Putnam Investments, LLC, 2017 WL 1196648 (D. Mass. Mar. 30, 2017) illustrates this. There, plaintiffs claimed that Putnam’s proprietary products were too expensive and that Putnam lacked a fiduciary process. The court had the opportunity to review Putnam’s processes post-discovery, and found that there was no evidence to show that Putnam had breached its fiduciary duties by placing its interests ahead of participants, or that a reasonable fiduciary “in the shoes of” Putnam would have chosen a different investment lineup.

Thus, while obtaining early judgment may be difficult, establishing a robust process to consistently monitor the plan’s investment selection and plan expenses is key to demonstrating discharge of fiduciary duties and increasing the odds of success on a dispositive motion later in the litigation.

Could Your 401(k) Plan Come Back to Bite You?

401k-4-6-16.pngMost every banking survey I have seen in the last five years includes a question about the ways banks could improve non-interest income fees with the answer of wealth management being the overwhelming number one response. Wealth management is fraught with increased regulation, execution risk, a lack of expertise and culture integration issues. However, it is a wonderful tool to build cross-selling opportunities, customer loyalty and fee income, if done correctly. What is the best direction to begin for a community bank? One of the best ways is to not reinvent the wheel, yet try to do something that differentiates you from others and is easy to implement. How about considering the 401(k) business? But before you decide to market 401(k)s, you might consider reviewing your own 401(k) program.

401(k)s have an inherent risk that many bankers haven’t considered and it is fast becoming a nationwide problem for those worried about Enterprise Risk Management.

  • Did you know there are 38 cases of ongoing lawsuits where employers are being sued by employees for issues related to employer-provided 401(k) programs? Did you know this includes employers such as The Boeing Co., Walmart Stores, Lockheed Martin as well as 401(k) providers like MassMutual Financial Group, which are being sued or have been sued by their own employees over 401(k) programs?
  • Do you know if your provider is or has been sued by its employees or others?
  • Do you know what your fiduciary risk is as a plan sponsor?
  • Do you know if your provider is a fiduciary or whether you, as a sponsor, bear that risk exclusively?

So what’s all the fuss about? 401(k)s have been around for about 40 years. Yet, providers have been more focused on making money and pushing product than providing the best portfolio and overall solutions for employers and their employees.

Most plans contain many issues:

  • Provider companies don’t act as a fiduciary alongside the employer plan sponsor.
  • There is no investment advisor fiduciary to assist the plan sponsor (i.e. the employer).
  • The provider is pushing its own funds, which represents a conflict of interest.
  • High fees look egregious, especially in a market that has a poor outlook for stocks, bonds and cash.
  • There is a lack of disclosure of all fees involved, although recent legislation is improving the level of disclosure.
  • Many plans offer poor structure and poor performance. Recent studies over the past 20 years show the average stock and bond mutual fund investor has under-performed the S&P 500 and the Barclays Aggregate U.S. Bond Index by a whopping 4 percent to 5 percent per year.
  • Even plans with stable value and target-date funds have issues of fees, structure and poor performance.

The recent Supreme Court ruling in May, 2015, requires plan sponsors to “monitor trust investments and remove imprudent ones. This continuing duty exists separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset.”

An independent review of your plan can have the following benefits for you:

  • Reduce enterprise risk management issues
  • Lower fees, improve structure
  • Improve performance
  • Lessen fiduciary risk exposure
  • Lessen other liability risk
  • Improve employee morale
  • Provide a competitive hiring edge
  • Satisfy ongoing monitoring obligations

Despite the risks, 401(k)s are a great way to enter or enhance wealth management divisions and add interest income to the bank. It’s a fairly easy way to compete given the large problems in the industry that are loaded with many poorly structured and under-performing 401(k) plans. We know many banks with large trust departments and wealth management businesses where 401(k) sales are the biggest profit center in that line of business. Designing a great 401(k) can help shape your employees’ future and make a long-lasting impact on their lives. Don’t settle for a mediocre plan. When your employees and your customer’s employees deserve a really great plan that helps them meet their financial goals.

Do you want a chance to impact your employees’ well-being, reduce your enterprise risk, improve performance for employees, the bank and the bank’s customers? Consider learning more about 401(k)s.