Why an Employer Should Sponsor A 401(k) Plan

My latest article on JDSupra.com can be found here.

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Sometimes Plan Sponsors just want to throw you off their “scent”

When you meet retirement plan sponsors just at different networking events and they find out that you’re a retirement plan provider, they may volunteer that their retirement plan is in perfect shape. As we know as retirement plan providers, they often don’t know if that really is true. However, they volunteer that information because they don’t want to talk about their retirement plan and don’t want to be solicited.

I’m not saying that you should harass them, but I certainly don’t think you should take their word for it. I had an advisor call me up where he approached a company and was told that they had a $1 billion 401(k) plan and everything was fine. Of course, the advisor checked and the plan was about $930 million short of $1 billion. It was also on an expensive bundled platform and had 95 investment options on them.

What’s the advisor likely to do? Take that information and approach the plan sponsor in a delicate manner and how they’re probably paying too much in plan expenses.

The point is that you can have multiple bites at the apple and that just because a plan sponsor is trying to dismiss you, doesn’t mean you shouldn’t check up to see f they’re telling the truth about your plan.

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Read the plan document

Being an ERISA attorney for a couple of third party administration (TPA) firms when I first started helps you develop a sense of humor because there are too many people I was associated with who had absolutely zero training when it came to plan administration.

One of my favorite jokes that I created which is something I stole from Chris Rock was “if you want to hide something from an administrator, hide it in the plan document file.” The joke was because I knew very few TPA administrators that bothered to read the plan document. They would just review what the plan specs were on the system. The problem is that often the specs were posted on the systems that were inconsistent with what the plan document said. That relates to another joke, stolen from Rodney Dangerfield in Back to School: “what if the person who put the plan document specs on the systems was a maniac?”

While I worked for a TPA where it wasn’t a maniac who put the specs on the system, but by someone who had some authority and once started in the file room. It was a great rags to riches story except for the fact that she should have stayed in the file room and would blame anyone else but for ineptness. I can never forget the new client who wanted 1 loan outstanding in their plan document because participants were taking out 8 loans each. So I drafted what they wanted, but Ms. File room put on no loan limit on the system. When the advisor found out the error, Ms. File room blamed me even though the document had the one loan cap.

When it comes to plan specs, the plan document is the last word except if mistakes were made from the previous restatement. That happens for many reasons, but at least you start from there then something on the recordkeeping system that carries no weight. Of course, many use the summary plan description as a resource. It’s a great resource except when it’s inconsistent with the plan document.

In the end, the plan document is an important resource and it always needs to be made sure that the plan is operating according to its terms.

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Why you have nothing to fear about government being in the retirement plan business

As a retirement plan provider, competition is a big thing and the last thing you want is a competitor with unlimited pockets. So you’d be fearing state government being in the auto-IRA business and then eventually, the multiple employer plan business.

I have been saying for quite some time, that plan providers have nothing to fear and a survey just proved my point. While most small-business owners love the idea of offering auto-IRAs to their employees, most oppose the plans being sponsored and administered by the state or federal government. The survey conducted by The Pew Charitable Trusts, a nonpartisan think tank.

The survey questioned 1,639 employers with between 5 and 250 employees, 59% of employers somewhat support and 27% strongly support the concept of an auto-IRA. But 36% strongly oppose, and 20% somewhat oppose, auto-IRAs being sponsored by state governments. When it comes to federal government, 44% strongly oppose and 15% somewhat oppose.

Employers don’t mind auto-IRAs that may they may be mandated to offer, they don’t want government to be in that business because people tend to have a strong libertarian bent when it comes to money issues.

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Ask the TPA about their administrators’ training

If I want to get a new doctor or an attorney, I certainly want to know their background. Same with a financial advisor, I don’t want the next Bernie Madoff. When you hire a professional, you want to know their credentials.

So it’s often surprising that when a plan sponsor hires a third party administration (TPA), they rarely check the credentials of the plan administrator in charge of their plan. Sure, many plan sponsors learn about the TPA through a referral or research, but they never check the credentials of the individual administrator.

Why bother? Simple, since the bulk of the work is usually done by this administrator; you want to make sure you are being handled by someone with the credentials and experience to do the job right.

I often find that the difference between a good TPA and a bad one is the experience of the administrators they have as well as training. Good TPAs tend to have the most experienced administrators with credentials from ASPAA with training for them to achieve that level. Bad TPAs have administrators with little or no experience, as well as limited training and oversight.

I remember moving a law firm from one TPA to another. The administrator at what we call the bad TPA had the administrator butcher a top-heavy test, namely the administrator failed to label partners of the firm and their spouses as key employees. This administrator had 15 years of experience, but clearly with no oversight to check her testing. The good TPA (which was less expensive by 30% because they actually used revenue sharing to reduce administrative expenses) had an administrator who discovered this error upon conversion. This administrator had all the credentials from ASPAA as well as 28 years experience and she once owned her TPA. This TPA had compliance specialists to assist this administrator with the testing, so there clearly was a check and balance to ensure correct results.

The difference between a good and bad administrator isn’t years of experience, its training and oversight. Just one thing most plan sponsors don’t ask of the TPA and I think they should.

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It’s Time For 401(k) Plan Sponsors To Get A Grip

My latest article for JDSupra.com can be found here.

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As a plan provider, make sure there are security processes in place

As a retirement plan provider, you have something to do with the retirement plan assets and may have some access to it as a third party administrator (TPA) or financial advisor.

If you have access to the retirement plan assets of participants, you need to make sure that there are processes in place to safeguard those assets. I will never forget hearing the story of a TPA where one of their administrators was almost able to procure a rollover to his own individual retirement account of assets belonging to participants of a plan he was working on. The only reason it didn’t work out was because the administrator got the account number wrong on his rollover. Clearly, this TPA didn’t have a process in place to ensure that the assets of the plans they were handling were guarded against such theft.

You need to make sure there are processes in place to protect the theft of retirement plan assets because if your employees are stealing your client’s money, you’ll bear the brunt of it with lost business.

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Education is an important part of the fiduciary process

Advisors ask me all the time of the role of education in participant directed 401(k) plans. Participant directed 401(k) plans that are governed under ERISA §404(c) offer the plan sponsors liability protection based on a participant’s gains or losses on their account when they direct their own investment.

There have been so many misconceptions that plan sponsors and advisors have had concerning ERISA §404(c) plans. They had this belief that if they just give a mutual fund lineup and some Morningstar profiles to plan participants that they are exempt from liability. ERISA §404(c) protection is about following a process and Morningstar profiles are just not enough education to give to plan participants. On the flipside, education to participants doesn’t have to amount to an MBA education.

I think an effective education component to ERISA §404(c) plans should include enrollment meetings where the characteristics of the plan are discussed, as well as the investment options, and offering the building blocks of financial education to assist participants to get a better understanding on how to choose investments.

Advisors that may have issues in offering education should always consider using some of the online resources out there such as rj20.com and smart401k.com.
In addition, written materials such as plan highlights and some Morningstar profiles should always be distributed.

Also while many advisors dislike, one on one meetings to participants should always be offered. While most participants will probably shun such meetings, they should always be offered to those that want them because as we know, every participant has a different financial goal and need. One on one meetings offer participant individualized attention on asset allocation and fund choices; it can be an effective means of educating plan participants more than what a general enrollment meeting can offer. It can help participants understand how retirement plan assets relate to their other assets as part of a comprehensive financial plan.

Advisors should always look at education as liability protection, because offering participant education helps a plan sponsor minimize their liability under ERISA §404(c). While I always stress education as important part of the fiduciary process, it’s not about achieving a specific result from participants directing their own investments. Offering participants educations is like the old proverb, “You can lead a horse to water, but you can’t make him drink.” So no matter how great the education component is, there is no guarantee that it will help plan participants achieve a better financial result because like they say, there is no guarantee in life, except maybe death and taxes. The participant who put all his money into a mid-cap fund because he considers it the “average of the market” may still do so even after getting education at the enrollment meeting and through one on one meeting. As with most things with retirement plans, it’s about following a process and not guaranteeing a result.

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The Problem With Loans

When I draft a new 401(k) plan for a client, I’ll recommend a loan provision even though it can be an administrative headache. The reason that I add it because I think participants need to have access to money if in their account if they need it.

However, there are some things that I put in place to take away some of the headaches. I always require a $1,000 minimum for loans, there is no reason a participant should take out a loan for $250 especially when the loan fee charged to their account is going to be $50 or $75. In general, you want it for people who need money and de minimis amounts aren’t going to meet that need.

I also like to have one loan outstanding at a time. I’ve seen plans where participants have 8-9 loans outstanding and it can be an administrative headache to make sure all of them are paid on time.

Even with these provisions, they often become a headache especially when payroll mistakes fail to pay off a loan and you may have a prohibited transaction on the books if quarterly payments weren’t made on the loan. There is nothing worse than to hand a participant a 1099 because you failed to make sure payroll pay off their outstanding loan.

They’re also a headache in the sense that most errors dealing with loans only get discovered on a government audit or when there is a change of third party administrator. That means errors are discovered years after they take place, creating a migraine of a headache if you’re the plan sponsor that has to fix it.

So while you may want loans in your plan, be cautious in its operation.

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How a 401(k) Plan Sponsor Minimize Their Liability In 8 Easy Steps

My latest article on JDSupra.com can be found here.

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