My latest JDSupra.com article can be found here.
The fixation and discussion about plan expenses usually flares up when the stock market isn’t doing well. Two major corrections within a 10-year period (2000-2010) made fee disclosure regulations inevitable. With the way the market is going in 2016, we maybe headed toward another correction.
While the discussion about fees has had a positive effect on the retirement plan industry, it’s still not the greatest issue that has been left unresolved. While fees have gone down since the regulations have been implemented and plan sponsors have become cognizant of their need to pay only reasonable plan expenses, the biggest issue is still not talked about.
The issue? The fact that most participants in a participant directed 401(k) plan don’t have the requisite knowledge and background in order to make informed investment decisions. Too many 401(k) plans don’t offer plan participants enough investment education to make informed decisions and only a small amount of plans offer investment advice.
Giving plan participants the choice of investments to make and having an investment policy statement with a regular review of investment options is only half the battle to limit liability under ERISA §404(c).
Financial advisors along with plan sponsors need to make sure that plan participants have the right tools to make informed decisions. With apologies to my old law firm’s h.r. director, handing out a bunch of Moriningstar profiles isn’t going to do it. Plan participants at the very least, need some investment education that talks about the general rules of investing. The ideal approach is to make sure plan participants get investment advice, whether provided by the financial advisor (by abiding with the investment advice regulations) or provided by a third party (such as rj20.com).
While this industry had done a decent job with lowering and disclosing plan expenses, it needs to do more to make sure that plan participants get enough information to make informed investment decisions.
Multiple employer plans (MEPs) are a topic that many plan providers talk about, but don’t really know what’s allowed and what’s not.
A multiple employer plan is a plan where unrelated employers adopt a plan and it should be treated as one plan for purposes of filing a Form 5500.
There was something called an open MEP where the employers were unrelated to each other. Then there was something called a closed MEP, where there was a connection or nexus between all of the adopting employers, such as members of a trade group.
In 2012, an Open MEP unwisely sought guidance from the DOL on whether their MEP qualified as a single plan for purposes of Form 5500. The DOL said it did not because there was no connection between adopting employers and the Open MEP plan sponsor wasn’t an employer, it was just a company created by the financial advisor to sponsor a MEP. The DOL stated that all of the adopting employers needed to file a Form 5500, which defeated one of the most important features of a MEP.
People thought this was the death of Open MEPs. It was in the sense that there is no more Open and Closed MEPs, there are just MEPs that will qualify as a single plan and MEPs that won’t. Most importantly, the DOL never provided any further guidance on MEPs which means that the advisory opinion issued in that Open MEP case was only applicable to that Open MEP in question. It gave the DOL’s thinking on MEPs and a blueprint for MEP operators to develop a MEP that could be considered a single plan for 5500 purposes.
Three years later, there is still no guidance and there are plan providers who are spreading stories about MEPs on what qualifies as a single plan and what does not. In the end, it’s just opinion without real DOL guidance.
Congress and the White House support the idea of MEPs. Thanks to some cajoling from President Obama, the DOL is considering allowing individual states to operate MEPs and prepare guidance that will allow them to operate MEPs that will likely be considered a single plan for purposes of a Form 5500. What does this all mean? While states may or may not want to be in the MEP business, I believe that this will actually allow Open MEPs again to be considered a single plan again. Why? I don’t think court scrutiny would allow the DOL to allow what is essentially an Open MEP operated by states and not allow Open MEPs by plan providers with the experience in knowing how these plans run. Maybe I’m off base, but I think the DOL will have no choice but to allow Open MEPs to breathe again if they are allowing states the same opportunity in running them because having adopting employers all from the state isn’t a sufficient connection/nexus as outline in that 3-year-old advisory opinion. What’s good for the state should be good for plan providers. That’s just my opinion, but you heard it here first.
Add Great West under their Empower Retirement brand name as the latest bundled provider being sued. Great West is being sued for revenue sharing fees from mutual funds as part of their program.
Great West is being sued by a participant from the TPS Parking Management LLC 401(k) plan and the suit seeks class action status. Why class action? Well it seems TPS Marketing has $7 million in assets and Empower covers 32,000 plans, 7 million participants, and administers more than $416 billion in assets. Even if you learned common core math, you can figure it out.
I love the term “kickback” being thrown around in the complaint to describe revenue sharing because I often labeled revenue sharing payment as a “kickback”, “pay to play”, or “payola” years before it became popular.
While I don’t care for revenue sharing and it inadvertently exposes plan sponsors to liability, I think this lawsuit is going to get tossed because I think it’s going to be hard to treat Great West as a fiduciary unless they did something overt to make them a fiduciary. Great West is only going to be on the hook if they are treated as a fiduciary and Great West has a smart team of lawyers that try to make sure that Great West’s contracts and policies avoid them becoming fiduciaries.
While we often hear about the headlines of some of these big settlement ERISA cases, I’m sure many of you don’t realize that providers like Principal, American United Life, and John Hancock heave beaten back lawsuits that have tried to place them on the hook for investment selection because they were not considered fiduciaries.
The lesson here is that even if Great West wins their case like the others, litigation is costly and that’s the cost of using revenue sharing whether you win the case or lose. So is using revenue sharing funds worth the headache? I think revenue sharing is a dying practice and we’ll shake our heads within 10 years and remember that this silly practice once existed.
As I have stated before, I am loath to hire employees because I was an employee once too. That pretty much means that I never met an employee whoever thought they were overpaid. For that matter, I never met an employer who thought that they pay their employees too little.
Despite what my former colleagues at union side law firms, employers typically don’t have a treasure chest of jewels they are keeping away from their employees, it’s just the dynamic of a relationship where an employee wants to make as much as they can and an employer wants to pay as little as possible. It’s not evil, just human nature.
For those that never ran a business, they don’t understand how costs of payroll and benefits must be tied to revenue because an employer’s pocketbook is not limitless.
Thanks to medical costs and taxes, it’s expensive to have employees. Employers are taking away benefits and not putting benefits out there that are really enticing to current and prospective employees. As an employee, regardless of where I worked, the health plan got worse and worse because medical costs are spiraling out of control and the employer had to rein in costs.
While employers may feel free to cut back on the benefits they offer, the one benefit that they can’t afford to neglect is a retirement plan. An employer can certainly cut back on the contributions they make to their retirement plan(s), but they can’t just cut back on the services to their plan by sticking the plan with a cheap provider (if they are the ones paying for administration, rather than the plan) if it’s going to negatively affect the plan’s administration and compliance.
The reason is because employers as plan sponsors are also plan fiduciaries too. So employers still may want to cut back on benefits, they need to make sure that they don’t do something that could negatively impact their role as plan fiduciaries.
Any change of plan provider or even in a change in benefits should be done in consultation with your plan providers and/or ERISA attorney to make sure that any cutbacks in benefits you must make won’t increase your plan fiduciary liability exposure.
The Anthem class action lawsuit concerning the use of Vanguard index funds has caused a hullabaloo in the industry. IT even got a writer to pen an article suggested that the lawsuit may trigger a return to the use of actively managed mutual funds in 401(k) plans.
My response: that is utter and complete nonsense.
The Anthem case has absolutely nothing to do with the age old index fund vs. actively managed fund debate. The case is about the duty of prudence and paying reasonable plan expenses. Bottom line, Anthem is accused of using more expensive retail share classes when available cheaper institutional shares of the same funds were offered. So it doesn’t matter that the funds offered in the plan were index or active, what mattered is that according to the complaint, the plan sponsor violated their duty of prudence by not seeking cheaper share classes, which were available for this $5 billion plan.
The other concern is that Vanguard was the bundled provider for the plan and they were charging somewhere between $42-94 per participant for recordkeeping services where the complaint said $30 was reasonable. I think that you will see more and more class action lawsuits regarding bundled providers and the use of their own proprietary mutual funds offered under 401(k) plans. Just my prediction.