ERISA Legal Services From The Rosenbaum Law Firm

An email newsletter offering our services to TPAs and financial advisors can be found here.

Posted in Retirement Plans | Leave a comment

Plan Providers Should Embrace Automatic Enrollment

T. Rowe Price just released a study that show that 401(k) plans with an automatic enrollment feature have a 40% increase of participation by participants in salary deferrals than those plans that don’t offer automatic enrollment. Thanks to T. Rowe Price for stating the obvious, plan participants are likely to participate more when they are kind of pushed to participate (by requiring them to affirmatively decline to avoid automatic enrollment).

If you’re a plan provider and your pay is dictated on plan assets, I think automatic enrollment is a no brainer because it will essentially grow your business because it will grow the assets of your 401(k) plans under management. More than 50% of 401(k) plans now offer automatic enrollment.

Aside from just increasing assets, I believe automatic enrollment is an effective tool in order to sway plan participants that are automatically enrolled to eventually decide to defer on their own. If you have good marketing materials and can appeal through education to get participants to voluntarily contribute, you’ve done your job.

Not only will you get rewarded through automatic enrollment, an effective program in getting those automatically enrolled to defer on their own is all the evidence you need to show clients and potential clients how well you serve in your role as a plan provider.

Posted in Retirement Plans | Leave a comment

The Problem With Choice in 401(k) Plans

In life, giving people a wide variety of choices is a good thing. However, when it comes to daily valued 401(k) plans, too many choices isn’t a good thing. It sounds counter-intuitive, but too many choices offered to plan participants is usually a mistake.

Offering participants the right to self direct their own 401(k) account sounds like a great idea because plan sponsors are giving a plan participant a choice in shaping their retirement. The problem with these choices is that plan participants get paralyzed by being offered too many choices; they tend to get overwhelmed. For example, people assume offering so many different mutual funds on a plan’s investment menu is the way to goo. However, studies have shown that the more investment options offered under the plan, it tends to actually depress the deferral rate of plan participants. Offering 57 mutual funds on a lineup sounds like a good idea on paper, but it overwhelms plan participants to the point that they don’t want to participate and defer their income.

The same can be said by offering participants a self-directed brokerage account. Allowing plan participants the right to a brokerage window within the 401(k) plan allows them to purchase stocks and other investments apart from the typical mutual fund menu offered under a 401(k) plan. Again, a study has shown that plan participants who use a brokerage window tend to have a worse rate of return on their 401(k) account than those participants who stick to the core fund lineup.

Offering 25+ versions of Tide detergent probably has done well in selling detergent, offering too many choices within a 401(k) plan isn’t a great thing.

Posted in Retirement Plans | Leave a comment

401(k) Providers and their Plans

I love Clint Eastwood movies and one favorite is “In The Line of Fire’.  John Malkovich is playing a wannabe Presidential assassin named Leary and Clint is playing  Frank Horrigan, the Secret Service agent who is trying to catch him. For me, my favorite scene is when Clint and John Malkovich are on the phone and John calls Clint’s character a friend.

Frank Horrigan: I know who you are – Leary.

Mitch Leary: I’m glad, Frank. Friends should be able to call each other by name.

Frank Horrigan: We’re not friends.

Mitch Leary: Sure we are.

Frank Horrigan: I’ve seen what you do to friends.

Mitch Leary: What’s that supposed to mean?

Frank Horrigan: You slit your friend’s throat.

While not the same thing is slitting a friend’s throat, it is amazing to me how large 401(k) providers handle the 401(k) plans of their employees. I can attest that as someone who worked for a third party administrator once, I can tell you that our 401(k) plan wasn’t very good. It’s kind of like the old adage about the cobbler’s children having no shoes.

Mass Mutual just settled a class action lawsuit on their own 401(k) plan.  Mass Mutual is forking over $30.9 million as well. In addition to the payment, MassMutual also agreed to keep the plan’s annual record-keeping fees no higher than $35 per participant for the next four years. The agreement includes a four-year ban on calculating record-keeping fees as a percentage of plan assets.

If Mass Mutual overcharges their own employees, does that mean they do it for their “real” clients? That’s not for me to say, that’s for an independent review to find out.

Posted in Retirement Plans | Leave a comment

Don’t Use Your Payroll Provider As Your 401(k) TPA

My latest JDSupra.com article can be found here.

Posted in Retirement Plans | Leave a comment

Don’t get stuck in 1986

I was a volunteer and officer for an organization where I stated that the leadership (not including me) was stuck in 1986.

What it meant was that this leadership couldn’t adjust to the current age when it came to recruiting new members and raising contributions. What worked well 30 years ago doesn’t mean it will work today.

I worked for a law firm that acted as if time stood still. I tried to use social media to generate discussions that would help me net clients, but the Managing Attorney didn’t get it even though her husband was doing the very same thing for his own law practice.

The point here is that the retirement plan business continues to evolve. Retirement plan rules change; the attitudes of plan sponsors change. The opportunity to get new clients changes. You need to be open to what’s new out there and determine what will work and what still works.

By the way, the best thing to happen in 1986 was the New York Mets. Thank you.

Posted in Retirement Plans | Leave a comment

Plan Sponsors are Seeking ERISA Fiduciary Services

When I was in law school at American University and we moved into a new building (20 years later, they are now in another new building) a few blocks away from the main campus. The computer sync site at the new building had a number of Apple Macs and the former law school Dean didn’t understand why we would spend money on what he called the Betamax of computers and in 1995, Apple was on its last legs. Thanks to the return of Steve Jobs, Apple made one of the greatest comebacks in business history. However, it took some time for Apple to get its mojo back and it probably could be traced to the Introduction of the ITunes Store in 2000 and the IPod in 2001. Apple didn’t become one of the most successful companies again, overnight.

When the proliferation of financial advisors that started offering §3(38), I heard a lot of their competitors claim that plan sponsors weren’t really asking for it. I heard the same thing when plan providers (including yours truly) started offering §3(16) administration services. Over time, I have heard more and more plan sponsors asking for these services.  I know firsthand because I have had a lot more opportunities and meetings with plan sponsors wanting to delegate their duty as plan administrator.

Cable TV, VCRs, Wi-Fi Internet, smart phones, and tablets. These are just some products out there that took time to get popular. Any new product or service needs time to develop and get enough traction that consumers become aware of it. It takes time and interest, but products and services that offer a value proposition will gain traction if people know about it.

So the lesson here is that plan sponsors will further educate themselves on these ERISA fiduciary solutions and they will start demanding them. It just takes time and information.

Posted in Retirement Plans | Leave a comment

You’re Always Going Against The Tide

I always get the call from my third party administrator (TPA) and financial advisory clients concerning the same topic. The topic is how it’s still difficult to get across with potential plan sponsor clients on the urgency to monitor their retirement plans and hire these excellent providers.

Despite fee disclosure regulation and the increased litigation against plan sponsors, you’re always going to be going against the tide by contacting plan sponsors. Plan sponsors are active businesses who either don’t have the time and/or interest to work on their retirement plans.

There will always be a business for doctors because people get sick and they want to get treated to get better. The problem with being a retirement plan provider is that you’re trying to sell services to plan sponsors who don’t know they need your help and don’t understand that there maybe something going wrong with their retirement plan.

It’s hard to articulate to plan sponsors that their plan’s inefficiencies may increase their potential liability and that the current provider may not be doing the right thing in providing services. Plan sponsors don’t understand that they are always on the hook for liability and may pay a heavy price for their plan providers that are incompetent.

So no matter the positive changes with retirement plan in terms of disclosure and litigation that is spurring the end of some unsavory plan practices, it’s always going against the tide in getting plan sponsors to hire you. It’s not you; it’s the plan sponsor.

Posted in Retirement Plans | Leave a comment

ERISA Fiduciaries: What The Numbers Really Mean

My latest JDSupra.com article can be found here.

Posted in Retirement Plans | Leave a comment

MEPs primed for a comeback?

My mother would always tell me that fashion is cyclical and that what was popular once will fall out of disfavor and will become popular again. I was a child in the late 1970s and 35+ years later, ruffled dress shirts, velvet tuxedos, and leisure suits have not come back into style and likely never will.

One thing that was popular a few years back is primed for a comeback and that are multiple employer plans (MEPs).  A MEP is a plan where there is one plan sponsor and many employers who have decided to adopt the plan. It essentially becomes a cooperative as small employers would join a MEP to achieve cost savings since daily 401(k) administration pricing favors larger plans A MEP was considered one plan for Form 5500 purposes and many providers were promoting it because it provided liability protection and cost savings to small employers.

MEPs were popular until 2012 when the Department of Labor (DOL) in its lack of wisdom decreed in an advisory opinion that open MEPs (where there was no relationship or commonality between the adopting employers) were not considered a single plan for Form 5500 purposes. That meant in a situation where there was no relationship between the parties, a Form 5500 was required for each adopting employer. That killed one of the great advantages of these open MEPs.

So MEPs are still around, whether they use the old definition of closed or open or not. Thanks to the fee disclosure regulation and other concerns of retirement plan coverage, individual states have explored starting MEPs for small employers in their state. The state of Washington actually has gone through the trouble of starting a plan. The DOL seems to be very receptive of these type of MEPs especially after President Obama threw his support for MEPs.

What really has held back MEPs is this advisory opinion from 2012 that was actually issued to one that belonged to a financial advisory firm.  I always thought that MEP seeking an advisory opinion from the DOL was a bad idea because to quote political activist Morton Blackwell: “never give a bureaucrat a chance to say no.” It also doesn’t help that the DOL has not issued any applicable guidance that give or subtract weight to an advisory opinion that only holds for that specific client (while letting all of us know their thinking).

With states getting in the MEP action, it’s time for the DOL that would allow states and other interested parties in starting a MEP that will lower costs for small employers and help them limit their exposure as fiduciaries.

Posted in Retirement Plans | Leave a comment