Missing plan participants is one of the major issues when people leave employment and the plan sponsor has lost touch with them. After their last day of service, some plan participants fall off the face of the earth. The problem is that as a plan sponsor, they are a fiduciary to the plan and are responsible for the assets belonging to those folks who fall off the face of the earth. It becomes a bigger issue when you factor in the required notices and disclosures that all plan participants are supposed to receive.
In the old days, plan sponsors would have guidance from the Department of Labor (DOL) that said that when it came time to locating missing participants, the plan sponsor could use the Internal Revenue Service letter-forwarding program (since discontinued) that would send mail to these missing participants or use a locating service. Many third party administrators advised clients that they could simply liquidate a missing participant’s account and forward that balance to the Federal government as a100% tax withheld payment.
Guidance 10 years ago eliminated that 100% withholding option especially when the guidance as pushing for the use of Individual Retirement Accounts for these missing participants that a plan sponsor could use to park the missing participants’ money.
Thanks to technology, it’s much easier to find people. Heck, I’ve found so many former classmates on Facebook. So it’s no surprise that the DOL issued more guidance regarding locating participants and one of the suggestions is to Google missing participants.
Some of the suggestions that the DOL had in locating missing participants in Field Assistance Bulletin 2014-01
- Use certified mail
- Check related plan and employer records
- Check with the designated beneficiary that the participant listed on their beneficiary form.
- Find them online. The DOL says the plan sponsor should use free Internet search tools, such as Google, public records, obituaries, and social media (Facebook, Twitter, etc).
We are a nation of over abundance and we should be grateful for that. The problem is that over abundance can lead to a life of excess. We are often told that more is more and the problem is that there are many times where less is more.
When it comes to participant directed 401(k) plans, one of the greatest examples of over excess is a fund lineup. There are thousands and thousands of mutual funds out there, so many financial advisors and plan sponsors think they should contain as many funds as they can. You often find plans with 20+ mutual funds in the lineup and I once came across one plan with 53 different investment options. Why so serious about this issue? It’s pretty simple.
Studies have shown that too many funds on a plan’s investment lineup actually lowers the rate at which participants defer their salary in a 401(k) plan. Why? Too many funds, especially in one asset class have the ability to confuse and overwhelm plan participants and overwhelmed plan participants are less likely to defer than those that aren’t.
The solution? Start pruning a plan’s fund lineup. I think 12 are more than enough funds in a lineup, maybe 15 at tops. No need for 25 or 53, there is any reason for three large cap growth funds in any lineup. Plan sponsors need to have their employees defer in a 401(k) plan for a wide variety of reasons, so why get in the way with too many funds on the investment lineup?
My latest JDSupra.com article can be found here.
What makes a good retirement plan financial advisor? Well it takes an attention to detail, an understanding of what the role to entails, and a dedication to the client. In addition, what I find is the way a good financial advisor handles other retirement plan providers.
A good financial advisor will use other retirement plan providers to act as part of their team to offer the best overall retirement solution to their client. They will lean on the third arty administrator (TPA), ERISA attorney, or auditor to assist with their clients and use them as a resource for any questions they may have, as well as a sales resource for potential clients. When I was working for a New York TPA as well as in my practice today, I have helped advisors with potential clients. It’s a feather in an advisor’s cap as it shows a potential client that they offer white glove treatment if they can get a TPA and/or ERISA attorney to offer assistance without being retained first.
The not so good financial advisor sees themselves as an island, they are very possessive of their clients and are very wary of any provider encroaching on that client. They also have no use for any other retirement provider because they don’t value what they bring to the table. They only see other retirement plan providers as referral sources which they are not because most of the referrals that these providers receive are from other financial advisors and in the rare case that they get a direct referral from a plan sponsor, they are only going to refer that client to financial advisors that they have a longstanding relationship with.
Financial advisors should target a few TPAs that they can work with and rely on with any proposals or any questions for potential clients and to assist current clients. They should also seek out an ERISA attorney who has an eye in developing relationships with the hope of getting business later, rather trying to charge for every phone call and every consultation. See them as part of your team to help augment your sales team, but they likely won’t be your sales team.
Any type of item that keeps you in health is a good thing as long as you use it. So the floss I bought after my last checkup and the exercise equipment that I bought my wife a few years ago that is collecting dust are meaningless if they are not being used.
The same can be said about an educational policy statement that many retirement plan financial advisors are trying to draft for their clients or use as a way to solicit business.
In a nutshell, it’s a gimmick. Not a rip-off like the fiduciary warranty, but it’s not magic because any advisor could help plan sponsors draft one.
An educational policy statement (EPS) mimicked of course after the investment policy statement is really cute marketing, but absolutely of no use if the plan sponsor isn’t going to abide by it. I like the idea behind the EPS, it’s always a great idea to memorialize fiduciary decisions with paperwork. I just worry that plan sponsors won’t actually provide the investment education that plan participants need in a participant directed 401(k) plan. An EPS is a nice idea on paper, but only effective if it’s not just on paper and being used to offer education.
My latest JDSupra.com article can be found here.
I would say that if that if you ask a retirement plan expert for their opinion, 3,000 experts will yield 5,000 opinions. It’s great to be opinionated, but for the plan sponsor, it can be a bit confusing.
The problem in the industry is when opinion is masqueraded as fact in a study that a retirement plan provider has commissioned. For example, one of the largest payroll providers has just offered plan sponsors a study why it’s a great way to integrate payroll with 401(k) administration, namely hiring this payroll provider to handle 401(k) plan administration. Does one honestly believe that this payroll provider commissioned a study that’s going to say having your payroll provider handle 401(k) administration is a bad idea? Of course not, especially when my articles on the matter are available for free J
Another study was commissioned by a Chamber of Commerce that will not reveal its members that said that changing the fiduciary rule change is going to have 30% of retirement plan sponsors terminate their plan because the rule change will increase regulatory costs and liability. Nonsense. Of course, a brokers association supported the results of the study.
Opinions are important, but understand the role of the person giving it. Is it really impartial or are they really trying to steer you to a certain service or fee arrangement?
Ever since I graduated school, I have gone to the same car mechanic for the past 16 years. Maybe Ralph is a couple of dollars more than someone else, but he’s always honest. He’s the type of businessman who shows that trust and good work is its own reward when you have such loyal customers such as myself. I’m not going to use a car mechanic who is 5 dollars less because my loyalty and faith that I’m not going to get ripped off is worse more than 5 dollars.
Yet I’m surprised when plan sponsors replace a good plan provider for something as little as 5 basis points. The work of a good retirement plan provider is certainly worth 5 basis points more or whatever is that negligible amount that the plan sponsor is going to save by using the plan provider across the street.
Again, plan sponsors must pay reasonable plan expenses. That means they don’t have to pay the lowest plan expenses. Plan sponsors who make a change of plan providers for something as little as 5 basis points end up costing themselves more than 5 basis points when the new plan provider isn’t as competent as the old plan provider.
My latest newsletter geared towards financial advisors can be found here.
My latest article on JDSupra.com can be found here.