Clues That There are Problems With A 401(k) Plan Provider

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

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The Retirement Advantage buys a TPA as he business further consolidates

As discussed with purchases by Ascensus, there is further consolidation in the third party administration (TPA) business. The Retirement Advantage, Inc. (TRA), purchased Retirement Planning, Inc. (RPI), a Grand Rapids, Michigan TPA.

The business is heading towards consolidation because of narrowing margins in the business as fees are more competitive and TPA owners have tried to learn how to do more work for less money. It’s a hard proposition, so that’s why many are bailing out so that they could be bought out by a bigger firm who has more flexibility with narrowing margins.

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Inject life in enrollment meetings

When it comes to oral or written communications, it’s important that you play to your audience. Any communication that is above or below the audience’s comprehension is going to be a missed opportunity to communicate your message.

When it comes to 401(k) plan meetings with plan participants for enrollment or reenrollment, the fact is that most of them suck.

The greatest education I ever received wasn’t at law school and it wasn’t working as an ERISA attorney for 9 ½ years working for third party administration firms. My greatest education was being involved in student politics and journalism at the State University of New York at Stony Brook (which is now called Stony Brook University).

One of the simplest lessons I learned was from Ron Nehring, who has been a friend of mine for over 25 years and he basically told me that the goal of any organization in recruiting new members is getting them involved. I joined Ron’s political organization because they got me interested, got me involved, and kept on contacting me about other events. The Jewish students organization that I was going to be heavily involved had a barbecue the weekend before freshman year started. I arrived 15 minutes late and there wasn’t anymore food available. I was offered a bagel and people who certainly weren’t Jewish were enjoying a nice Kosher hot dog or hamburger. Needless to say, I didn’t get involved much there.

The point is that most 401(k) plan meetings suck because they really aren’t geared towards plan participants. The advisor conducting the meeting is giving the basics of investments and plan features that isn’t interesting or inspiring. The meetings tend to be really dry when they don’t have to be. I’ve been at funerals that have been more livelier than enrollment meetings.

How would I liven up an enrollment meeting?

1) Raffle off a $25 gift card at every enrollment meeting. People like free stuff and if they know then can win something by attending, they will. Of course, have the raffle at the end of the meeting, so it ends on a good note.

2) Presentations need to be clear and crisp. Less is more. Powerpoint presentations and slide handouts shouldn’t be overloaded on details. Illustrate the important points.

3) Add humor and cultural references. With apologies to my former managing attorney who wouldn’t know good marketing if it was standing behind her, adding humor and cultural references goes a long way. My articles aren’t widely read because of my rugged good looks or lack thereof. They are widely read because the humor and cultural references engage the reader into reading what should be a dry topic, i.e, the ins and outs of retirement plan sponsorship.

4) Break it down. Again, my writings are written in easy to understand English, not what I call ERISAese. The easier for plan participants to understand what you’re saying, the more likely they will remember what you’re saying.

5) Keep it short. Spend more than a half hour or hour, you will lose your audience. Again, less is more.

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The easiest mistake most 401(k) plan sponsors make

The road to hell is paved with good intentions and that’s how I feel when it comes sometimes to what a 401(k) plan sponsor does. Yet, there is an error that too many 401(k) plan sponsors do that the Department of Labor (DOL) has been quite vigilant for the last 10 years or so.

The DOL has guidelines on how long an employer can hold participant elective deferrals before depositing them into the plan. The general rule requires that contributions and loan repayments be deposited into the plan as soon as it is reasonably possible to segregate them from the company’s assets, but no later than the 15th business day of the month following the month amounts are withheld from pay. That was and still is the guideline, but the DOL added clarification over that 15th day rule. The 15th business day rule isn’t a safe harbor and never really was. The DOL says that the “real” deadline is the earliest date on which contributions can be segregated and may look to prior payrolls to determine what is possible. So the real rule is deferrals should be in by the next payroll unless there are some extenuating circumstances.

I’ve seen so many employers flout those rules, usually by a day or so or a week. The problem is that while’s it usually doing harmlessly, this has been one of the linchpins that the DOL has factored on especially in their audits. However, they have a correction program that is easy to fix those delinquent deferrals. Of course, most plan sponsors only know they broke the deferral rule once they’re caught on audit and it’s too late for a voluntary correction program.

So as a plan sponsor, be vigilant about those deferrals because it’s an easy and avoidable mistake to make. The DOL isn’t always easy to deal with.

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Mistakes An Employer Should Avoid Starting A 401(k) Plan

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

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They can’t see it, since they caused it

A few years back, I had the worst call with a prospective client in the 19 years I have been an ERISA attorney.

This 401(k) plan sponsor was like many prospective clients, poor participation and paying too much in fees. The plan sponsor was using a reputable provider, but a provider that would be a better fit for plans 10 times their size. Client was paying $100 or so a head plus what looked like an additional 3% in an asset based fee. Clearly, this wass a plan that was paying way too much.

Why the call was such a disaster was because the person on the call was the one who designed the program with this expensive provider and he basically stated that he had absolutely no interest in changing providers.

Funny, the call with the interested advisor who was also on the line was not concerned with changing the third party administrator at the time because you can always have the discussion with the current provider about reducing fees.

I am provider neutral, heck if the current third party administrator is charging a decent fee and doing a good job, I have no issue with that.

So why was this underling in the human resources office so serious? Well, if he designed the program and we had issues with its cost or poor fund lineup or poor participation, he was obviously going to take any criticism as an attack. While plan fiduciaries don’t necessarily have to change their providers, they certainly have a fiduciary duty to check whether the fees being charged are reasonable or not.

I know what I know in life, but if I made a technology decision or a financial decision that an expert may question or offer suggestions for it, I’m not going to take offense. But then again, I’m my own boss.

So if we are a plan provider or a plan sponsor’s decision maker, we should understand that sometimes people are so resistant to change or just considering so constructive criticism, because they get defensive as if there job depends on it and maybe it does. That is why we should always consider who we contact about looking at their plan and doing a review.

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Goodbye Lois

I treat people the way I want to be treated and I carry a grudge against the select few who didn’t treat me that well. For 7 years now, I’ve made the Managing Attorney of my old law firm as a punching bag of sorts. Sorry, Lois.

I use Lois as a punching bag because I can’t recall anyone who clearly had a disdain for me from the first day we met. Usually, I give people a good reason not to like me but she is the only person I ever met that I got the vibe that I disgusted her from day one. I have an Al Czervik /Rodney Dangerfield costume from Caddyshack and Lois was like Elihu Smails. Lois might have thought like Judge Smails that some people like me just didn’t belong.

Lois recently stepped down, as Managing Attorney after 15 years and 15 years would have been too long if she was a competent leader. When I started at that Firm, I was in awe of her and that awe ended at the same time we had a meeting with a Firm client that had ERISA needs. We were at the office of the client and their General Counsel/Chief Operating Officer was a former co-worker at some well known law firm in Manhattan. They hadn’t seen each other for quite some time and the General Counsel was talking about the hockey exploits of his son in high school. After the meeting was over, Lois told me that she really could have cared less about hearing about her former co-worker’s son and I was just shocked that anyone would talk about a client like that especially someone she worked with. I never looked at her the same way again.

Any successful business needs a leader and Lois wasn’t much of a leader. While she spoke as a leader, she had no vision and no strategy how to further develop a leading Long island law firm that withered under her indecisiveness. She placed the day-to-day administration of the Firm to a non-lawyer who only wanted to market his role as a law firm manager.

She set up a bureaucracy that didn’t allow me to develop a national ERISA practice because it made it impossible for me to cross-sell to firm clients and market myself nationally to non-clients. So when I didn’t bring in the business I could have, I was a failure in her eyes but I failed because I wasn’t given the tools I needed to succeed and the blame lays with the captain of the ship. When I talked about using social media, she dismissed it as something her attorney husband did like it was something beneath the Firm.

I like to be right, it’s one of my personality deficiencies and I was right about how I can actually market myself and I was right that Lois has no vision and leadership especially when I’ve met partners at Long Island law firms that have eclipsed Lois’ firm who have little respect for her firm. I won’t be surprised if that Firm is absorbed into another in the next 5 years. Sorry Lois.

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Consider how an advisor uses other plan providers

What makes a good retirement plan financial advisor? Well it takes an attention to detail, an understanding of what the role entails, and a dedication to the plan sponsor 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 party 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.

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.

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Connecticut gets it right for Non-ERISA 403(b) plans

One of the things that most people forget about fee disclosure as it pertains to retirement plans is that it’s only applicable to ERISA based retirement plans. So non-ERISA 403(b) plans have no fee disclosure requirements and it’s sad when you consider that the non-ERISA 403(b) space is dominated by expensive insurance based providers. Teachers, who are always revered and loved are the ones most affected because school district 403(b) plans fall under that non-ERISA 403(b) label.

Teachers suffer an undue burden since most school districts offer multiple providers, so that competition actually increases cost because the providers have to compete assets.

Steve Schullo a former Los Angeles teacher is one of the leading advocates for teachers and the high fees they pay in their 403(b) plan. His work with the Los Angeles Unified School District was ahead of its time. Speaking about being ahead of its time, Connecticut made some welcome news that is cutting edge.

A new Connecticut law will increase transparency on fees and potential conflicts of interests covering non-ERISA 403(b) plans, putting them close to the same requirements that ERISA plans have to meet.

The law (proposed by State Representative Matthew Lesser) requires that a “political subdivision” — such as a school district that offers a 403(b) plan must disclose the fee ratio and return, net of fees, for each investment to each participant.

The law also requires that plans disclose “fees paid to any person who, for compensation, engages in the business of providing investment advice to participants in the retirement plan either directly or indirectly through publications or writings.” All disclosures must be made to participants annually and when they initially enroll in the plan.

Hopefully, more states will follow in providing protection to those enrolled in non-403(b) plans.

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The real reason why bad funds are in 401(k) plans

Researchers once looked at some data to try to figure out why many poor 401(k) investment choices linger on fund lineups. The researchers identified one fairly clear explanation: a sub-par fund is much more likely to stay on the menu if it’s managed by the mutual-fund company that’s helping administering the plan.

While it’s very easy to point to the Fidelitys and American Funds of the world for blame, the fact is that regardless of whether you are dealing with a bundled or unbundled product, poor investment options are dependent on the work or lack thereof of the financial advisors and/or the plan fiduciaries you hired as a plan sponsor.

My old law firm was using an open architecture platform where they had a fund lineup that hadn’t changed for 10 years. The culprit? The fact that they never bothered to hire a financial advisor until I told them it was a good idea. The fact that they didn’t hire any of the ones I recommended, that’s another story.

There are too many plan sponsors who don’t have a financial advisor and there are too many financial advisors who don’t do enough of a credible job to merit the fee they are getting.

Perhaps plans on mutual fund company platforms are more likely to have stinky fund lineups, but it’s still dependent on a plan sponsor and/or financial advisor not doing their job.

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