The Next Big Thing After The Fiduciary Rule? I have some guesses

With the fiduciary rule coming down the pike in April, people ask me what the next big thing to shake up the retirement plan industry will be. I’m no soothsayer, but I think there will be a couple of areas that the Department of Labor (DOL) will probably take a look at.

I think one area that the DOL is going to factor on is trying to get plan participants who direct their own investments in a 401(k) plan more education and/or investment advice to help them make informed investment decisions. With the new fiduciary rule, I expect that investment advice will be easier for plan sponsors to provide.

The second area is multiple employer plans (MEPs). I believe that the DOL will correct their error from 2012 and make it easier for Open MEPs to function because it would be easier to cover employees in 401(k) plans by making it easier for employers to offer them 401(k) plans without all of the liability that goes with it.

I’m sure that people will say that the Trump presidency will put a kibosh on any type of retirement plan reform, but the fact is that positive change in the retirement plan industry has happened under both Republican and Democrat administrations.

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Yes, a Fiduciary was held personally liable

In my practice, I always talk about how plan fiduciaries can be held personally liable for any issues regarding their retirement plan. Many plan sponsors just don’t pay any attention to that threat until they see it happen to themselves.

However, personal liability does happen and it just happened in a case involving an Employer Stock Ownership Plan (ESOP).

In Mississippi, in the case of Perez v. Bruister, Herbert C. Bruister, owner of a DirecTV installation company accused of mismanaging an ESOP, must turn over three vehicles (which includes two Lexuses) as part of a $6.5 million judgment (plus $3 million in attorneys’ fees). Bruister was held to have caused the ESOP to purchase his company stock at an inflated price.

Bruister has to also cooperate with participants and the Department of Labor in selling his multimillion-dollar life insurance policies, which he offered as security pending an appeal.

The case has been dragging on for years, so the Court refused to take Mr. Bruister’s pleas of poverty or lack of a car to reduce the award against him.

So I often talk about how plan fiduciaries can be held personally liable, well here is proof that it can happen.

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As A 401(k) Sponsor, A Class Action Lawsuit Is The Least Of Your Legal Worries

My latest article for can be found here.

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Fiduciary Rule will clear out the Alphabet Soup of Share Classes

When it comes to mutual funds offered under 401(k) plans, I’ve always believed that the multiple share classes was something out of an alphabet soup. I’m not an advisor, so I don’t know how or why there is so many share classes, but it puts a cloud on what should be a transparent proposition: what the investment costs and what the advisor is getting for recommending it.

I believe one of the positive developments you’ll see from the fiduciary rule is the elimination of many share classes from this alphabet soup, which always puts the plan sponsors on the hook for potential liability when a less expensive share class is readily available. The fiduciary rule with the best interest contract exemption will help eliminate share classes that are put in place for the best interest of the advisor and not of the plan sponsors and participants. Brokerage firms and mutual fund companies will come up with the great idea that less is more, so there will be less available share classes for retirement plans and that will end up saving participants money in administration expensive. Tibble v. Edison was a watershed because it put share classes as a atopic that is a big concern for plan sponsors. Requiring all advisors to act in the best interest of clients will end the practice of selecting funds and share classes based on the trails they make for advisors.

You will still have share classes, dealing with the size of the plan, but there will be far less in terms of classes with varying fees for the advisors.

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Plan Sponsors Sued Over Fees on Multiple Plans and Vendors

In a very novel retirement fee lawsuit, a plan sponsor is being sued over the cost of multiple plans and the use of multiple record-keepers.

The class action complaint seeks damages on behalf of nearly 20,000 participants, who argue their nearly $1 billion in combined plan assets should have earned them a better deal on investments and administration. The case in the Federal District Court of Minnesota is Morin et al vs. Essentia Health.

In thus case, participants argue their employer failed to use the combined bargaining power of its two retirement plans—one a traditional defined contribution plan known simply as the Retirement Plan and the other, which is a 403(b) plan.

The Retirement Plan had 16,848 participants with balances and held approximately $982 million in assets at the end of 2014. The 403(b) Plan had 2,836 participants with balances and held approximately $103 million in assets. The plans were combined administratively in 2012, even though they are still separate plan.

The claims for damages look to the period prior to the administrative merger of the plans. According to plaintiffs, defendants kept the plans’ records and operations separately.

Essentia Health used BMO Harris as the record-keeper for the Retirement Plan and Lincoln National Corporation as the record-keeper for the 403(b) plan.

The plaintiffs claim that while the Plans were operated as two separate entities, this should not have diminished their combined bargaining power and should have offered plan providers the ability to service both plans as a way to lower fees.

They claim that Essentia Health was paying $142 per head for administration of the retirement plan, which is pretty high for a plan with nearly a billion in plan assets. Quite honestly, I don’t know if the $100 million from the 403(b) plan would have helped, which is what I think was a bloated amount.

I still think this is a very eye opening case by a lawsuit against an employer with multiple plans and I don’t understand the rationale of an employer to use multiple providers for multiple plans in this day and age of competitive pricing. I also don’t think the 403(b) plan is much of an issue because I think the fees were way over inflated over the nearly billion dollar defined contribution plan.

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Setting the tone

I’ve been involved with so many small organizations both profit and non-profit in one form or another as employee, officer, or client. The one thing that is consistent with each organization is that the leadership sets the tone. The culture of the place is dependent on how the leaders set it as to what kind of organization it is. People learn from the top and they will take their cue from their leaders.

Whether an organization is wonderful or whether the employees will stab in each other in back can trace its steps to the acts of their leaders. So that means that if you’re a plan provider and you’re in charge, you’re the one is essentially going to be the one responsible on what that organization will stand for in the marketplace.

You need to stand for professionalism, respect, and openness for your clients and your employees. Dysfunctional organizations have one thing in common: dysfunctional leadership. One of my favorite sports figures was Al Davis whose Oakland-Los Angeles-Oakland Raiders had the motto: “Commitment to Excellence”. While this is the first time that the Raiders have made the playoffs since 2002, the motto still resonates. You need to make sure that your organization has a commitment to excellence and a dedication and respect for your clients and employees. Anything short of that isn’t good for business.

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Clients criticize; get over it

There is a point where you have to realize that no matter how good you are and no matter how good your service is, there is always going to be a client that isn’t going to be happy with you. Sometimes no matter how hard you work and how much you try, there is always going to be someone out there that you cant please. It kind of reminds me of the managing attorney at my old law firm. Sometimes, people don’t like you and you can’t fathom why. Sometimes you’ll have some clients who will dislike you from day one and you can’t change that.

What can you do? Just accept it and move on and ensure that this type of client is few and far between. You cant be sensitive and try to drown out the criticism by attacking the client. Just accept the fact that there are times that you just can’t satisfy a client.

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Advisors Advantage

My latest newsletter for retirement plan providers can be found here.

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How An RIA Can Profit Off Of The New Fiduciary Rule

My latest article can be found here.

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Survey proves one thing: Participants need education

A new 401(k) survey from Fisher Investments 401(k) Solutions, shows a lack of knowledge among Americans when it comes to their 401(k) plan.

71 percent of respondents to the survey failed Fisher’s 401(k) IQ in the Workplace Quiz, missing at least three of the nine basic questions.

Only 24 percent of respondents could define a mutual fund and only 43 percent knew the percentage of their salary they should save for a comfortable retirement.

A majority (66%) of respondents are not confident in choosing 401(k) investment options. 25% of respondents claim they were not involved or can’t recall how they picked their plan investments, and over 40 percent are not confident that they will reach their retirement goals.

What does this tell us? No matter how much providers try, there is still a big knowledge gap by plan participants and plan providers need to continue to be vigilant in educating plan participants about their plan and maybe use this survey as a talking point as to whether participants should be offered investment advice.

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