The principal of my synagogue’s Hebrew School announced he was quitting after 16 years to take a position elsewhere. It’s devastating to me since we left our old synagogue with an inept principal for this new one with a principal who was able to teach my kids more in two years than what they learned in the previous 5 years.
Clearly, by his email and my discussions with him, it was clear that he left after 16 years over a salary dispute. As someone who is no longer involved with synagogue management (a whole chapter is dedicated in my last book), I was just amazed that the synagogue would let such a great principal leave over money. While no one is irreplaceable, it’s going to be very difficult to find someone with that kind of experience.
It’s the same with the retirement plan industry, there are many employees out there, but not great employees. Losing someone who is so well accomplished and experiences for a few bucks is a hard pill to swallow because finding such great people in this business is hard to do. You should never pay a king’s ransom for an employee that you can’t afford, but you also need to ponder the hidden cost of having to find employees with a similar background and experience and the cost of hiring them.
There is a hidden cost with having to replace members of your staff, especially if they are experts at what they do. So you need to figure out that hidden cost when you ponder on whether the incumbent employee is deserving of that raise.
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 isusually 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.
My latest article for JDSupra.com can be found here.
My latest article for JDSupra.com can be found here.
I have written many articles on the fiduciary warranty and how that is a deceptive practice in my mind because plan sponsors assume that this warranty protects them a lot more than in the very limited circumstances that it actually does.
When I first wrote an article about it in 2011, someone I know who worked for one of these fiduciary warranty pushing providers didn’t take too kindly to my article and asked me to take his name off of my newsletter subscriber lists. He also indicated that in the past, he referred a lot of work to ERISA attorneys. I got the picture and of course, in the years that I knew him, I never got any legal work from that relationship. Regardless, when you are outspoken as I am about fee disclosure and some of the abuses in the retirement plan business, this is the price you have to pay for being outspoken. Most of the time, my outspokenness gets me more business like the time I was hired by a West Coast registered investment advisor because the competition (the top ERISA attorney in the country, in my opinion) was returning the client’s phone calls from a meeting with a bundled provider client that was known for its poor product and high fees. The client knew that they didn’t want to hire an ERISA attorney who represented providers like that. In the end, you can’t be everything for everybody.
As a plan provider, you have to develop your niche and market yourself to the marketplace you want to work with. A financial advisor, who only wants to work with $100 million plans, isn’t going to join a small business networking group. A third party administrator (TPA) that only handles small, balance forward retirement plans isn’t going to handle a $75 million, participant-directed 401(k) plan.
Plan providers need to their strengths and weaknesses. I worked for a provider with an owner who thought we could do everything and when we tried to handle something out of our element, we’d flop. As Dirty Harry said in Magnum Force: “A good man always knows his limitations.” Plan providers need to market their strengths and not try to be a provider for every type of plan coming down the pike.
The fact is that the retirement plan business is large enough for providers of all different sizes and shapes. There is enough area for the bundled provider and unbundled provider, as well as brokers and registered investment advisors. To me, it’s all about fit. For some plans, bundled providers may be the solution and there are times when they are the completely wrong answer. Plan sponsors need to find the right team, the team with the background to handle a plan of their size and shape.
Plan providers need to understand they can’t be everything for everybody. Just like I won’t be representing any companies pushing those fiduciary warranties.
I’m very proud to announce that The 401(k) Conference will emanate from the friendly confines from Wrigley Field on Thursday, September 13th. If you’re a 401(k) financial advisor, you get 4 hours of content, lunch, a Wrigley Field Stadium Tour and a meet and greet with Hall of Fame member Andre Dawson for $100. In addition, we’re having a Cubs game outing the night before on Wednesday, September 12th as the Cubs take on the Brewers. Tickets for the game are $100 and are going quickly. Tickets for the game and conference can be found at http://that401ksite.com/that-401k-conference/
My friends at PCS have decided to join in the fun as they will be having their 401(k) advisor event, The Advisor Lab on Wednesday, September 12th. It’s a half-day of great 401(k) content, followed by a Happy Hour before that Cubs game we have. So if you’re an advisor in Chicago or points elsewhere, this is a great way to spend 2 days in the Windy City. Sign up for The Advisor Lab at http://events.r20.constantcontact.com/register/event?oeidk=a07efhhvvlib2e1fd65&llr=kbebigzab
Chicago this September 12th and 13th is the place to be if you’re a 401(k) advisor.
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.
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 an 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.
When picking a retirement plan provider whether it’s a third party administrator (TPA) or financial advisor, don’t pick a provider just because they’re the biggest provider out there. Bigger doesn’t mean better. As you see in high school, being popular also doesn’t mean better either.
You should pick a TPA that is competent at what they do and that charges a reasonable fee. The number of plans under management or/administration may mean the provider is very good at generating business, but it doesn’t mean they’re good at what they do.
When someone says their TPA is better because all the plans they administer, all I point out is that Bud Light is the best selling beer in the United States. Does that make it the best beer? Of course not. Case closed.
My newsletter for retirement plan professionals can be found here.
As a plan sponsor, it should be obvious that you need to keep all beneficiary forms on file and make sure they’re updated. However, surprisingly, I have found many plan sponsors that are deficient when it comes to this form of recordkeeping.
As we all know with life, things change and family situations change. So that’s why you should always keep the forms on file and make sure they get updated when circumstances change for the participants or just ask whether there needs to be a change at an enrollment meeting. Life can be a soap opera at times, but not having beneficiary forms on file or updated forms will create a soap opera when it comes time to pay out a deceased participant’s benefit.