The Rosenbaum Law Firm P.C. Blog

I was at the enrollment meeting on Tuesday morning for the very first participating employer for my multiple employer plan (MEP) (yes, cheap plug here).

The enrollment meeting was a little refreshing because it was an employer where the human resources staff understood their role in how to manage their responsibilities and it’s not about joining my MEP. The reason why it was refreshing because the HR staff understood that if you take care of the small things in managing your plan, you could avoid the larger harm later.

The enrollment meetings were made with mandatory attendance by the participants. After the last meeting was concluded, as the MEP plan sponsor, I asked for a copy of the attendance sheets as well as the education materials so I would have a record of them. The HR one upped me by saying she was already going to make a copy because she attended one of my previous seminars about fiduciary responsibility (so I’m glad one person is listening to me).

What I’m trying to get across is that if a plan sponsor takes care of the small things, it can avoid a great deal of trouble later. So that means keeping the attendance sheets from the enrollment meetings and keeping copies of the education materials. That means keeping good records of any trustee meetings and any meetings with the plan’s financial advisor. That means making sure having an investment policy statement (IPS) and having the funds checked against the IPS every six months or so.

Taking care of the little things of a plan sponsor is like brushing your teeth and flossing. It’s preventative care to avoid decay later. Good fiduciary practices can be tedious at times, but being deposed during litigation brought by an aggrieved participant or getting heat from the IRS or the Department of Labor is far more work.

Even if the plan sponsor isn’t keen on doing the little things, then they should hire an ERISA §3(38) fiduciary or a §3(16) administrator to handle some of that role. So the difficult part really for a plan fiduciary is not doing the job, it’s actually knowing you have to do the job.

I am not much of a gambler, but I used to watch poker on TV during its recent boom. Only then, did I understand that a straight couldn’t beat a flush or a full house.

When it comes to retirement plans these days, plan sponsors may know a straight from a flush, but they are confused between a 3(16) administrator, a limited scope 3(21) fiduciary, a full scope 3(21) fiduciary, and a 3(38) fiduciary.

While the proliferation of these fiduciary services is welcome to an industry where many plan sponsors aren’t doing a good job of handling their fiduciary responsibility, the problem is that the numbers are confusing the people that it’s supposed to help, the plan sponsors.

The problem is that the 3(38) investment manager does offer the plan sponsors the most protection in the fiduciary process, but the confusing jargon may make the plan sponsor think a 3(21) fiduciary offers the same protection, which it doesn’t. In addition, people are being tricky with labels, where now I hear that some people are trying to advertise a limited scope 3(38) fiduciary, which really doesn’t exist because the 3(38) fiduciary has nothing that limits its scope in handling the fiduciary process.

So anyone in the field of ERISA fiduciaries need to explain the difference between the different levels of ERISA fiduciaries so a plan sponsor understand what type of fiduciary service they are buying. Well, that will be next week’s article.

For my latest JDSupra.com article, please click here.

The old joke is that they once found a cure for apathy, except no one has shown the slightest interest in it.

When it comes to the retirement plan industry, apathy comes on many different levels: the plan sponsor level and plan participant level. The plan sponsor apathy in maintaining their retirement plans has been curtailed slightly because of the rises cases of litigation brought against plan sponsors and the move to fee disclosure in 2012.

Participant apathy is a much tougher nut to crack. Thanks to a lost decade of investing, a hurting economy, and a poor way of providing assistance to plan participants, there has been a lack of interest in plan participants in utilizing their 401(k) plan.

CFO Research Services, on behalf of Schwab, surveyed more than 200 senior finance and human resources executives about their perceptions of 401(k) plans in the workplace. Key findings show more than half (54%) of employers report that employees participating in plans are not taking full advantage of the investment options, features and services offered in connection with their 401(k) plan. In order to better engage employees, the majority of employers plan to make as much or more extensive use of traditional outreach methods, including interactive planning tools (93%), printed educational materials (93%), and in-person workshops (81%). Only 16 percent of employers plan provide investment advice through a third-party adviser, despite evidence that it does increase a participant’s rate of return. To my surprise, automatic enrollment is growing at a strong clip. The survey showed that growing number of employers are using or considering the use of automatic solutions. In total, 45 percent are currently auto-enrolling employees and another 25 percent are very or somewhat likely to do so.

A separate survey of 401(k) participants clearly shows the participant apathy. Koski Research, on behalf of Schwab, surveyed more than 1,000 workers enrolled in 401(k) plans across the country and found that: more than half (52%) say they don’t have the time, interest or knowledge to properly manage their 401(k) portfolio and a majority of plan participants (56%) do not review plan-related education materials they receive.

Let’s face facts, participant apathy is a fact of life and plan sponsors should do what they can to decrease it. While plan sponsors should focus on handling their fiduciary role and mitigate their liability risk through good practices, plan sponsors should do their best to decrease apathy. The cure? Your guess is as good as mine, but whatever the size, participant apathy will always exist. So while it will always be there, there is no reason a plan sponsor should raise their hand sup and do nothing.

I think plan sponsors and their advisers should think outside the box and consider ideas that could help spur participant interest in deferring under the 401(k) plan. Is it offering advice through a third party like rj20 or Smart 401(k)? Is it offering a $20 gift card raffle at a plan participant education meeting? I don’t know, but I always feel like plan sponsors and their providers could make an enrollment/education meeting more interesting and less frightening than a dental exam.

Why should plan sponsors spur participant interest even if they are managing the fiduciary process well? Increased participation equals more interest which increases assets which decreases plan administration expenses as a percentage of fees. In addition, a 401(k) plan is an employee benefit that is supposed to be a reward for employees and a recruitment tool for potential employees.

Like Gary Hart said in his 1984 presidential campaign, we need new ideas. So I am always interested in new ideas in decreasing participant apathy. If you got an idea, I am interested in hearing about it

My latest newsletter can be found here.

My latest JDSupra.com article can be found here.

When it comes to the administration of retirement plans, there are so many legal requirements to meet that errors do happen. There are small errors and large errors. Errors that can be self corrected and errors that need the approval of the Internal Revenue Service. There are errors that cost nothing to fix and there are errors that cost tens of thousands of dollars to fix. So when I look at big errors, especially one that can be avoided is the failure of a plan to file a required plan audit with their Form 5500

All plans that are subject to ERISA are required to Form 5500. Plans that are considered large plans must have the 5500 form attached with an audit prepared by a qualified independent public accountant. A large Plan is an ERISA based (profit sharing, Plan that has over 100 participants at the beginning of the Plan year. A participant is defined as follows:

• Active participants – those individuals currently employed with the plan sponsor and who are covered under the plan. An active participant would include those employees who have elected to participate in the Plan as well as those who are eligible to participate but have elected not to do so (i.e., not deferring in a 401(k) plan)
• Retired or separated participants – those individuals who are no longer employed by the employer but who are receiving benefits      or are entitled to receive benefits under the Plan.
• Deceased participants – those individuals who are deceased and have one or more beneficiaries receiving or entitled to receive benefits.

There are two exceptions to this audit requirement, a plan where the Plan Year for that year is 7 months or less or when the plan goes from 80 participants in one year to less 120 the next year (the 80/120 rule).

So for those scoring at home, if a 401(k) plan has 3,000 people who have met the eligibility requirements (including being employed on the plan’s entry date), but only 3 people have account balances because the plan only allows employee salary deferrals, it must be audited while the plan with 99 people who have met the eligibility requirements and all have account balances, does not. That isn’t fair, but neither is life.

One would think that the audit rule is pretty easy to comply with, but there have been quite a few times where I’ve seen the plan sponsor fail to comply with this requirement. Why is it easy to flub? It happens when you have a third party administrator (TPA) who is sleeping at the wheel because not only is the audit required to be attached to the Form 5500, the auditor’s information also pops up on Schedule H so a TPA can’t say they didn’t know whether the plan sponsor got an auditor and at the very least, the TPA should at least get a copy of the audit for their files. Sure the plan sponsor is ultimately on the hook for failing to get an audit, but plan sponsors need to understand the requirement for an audit and who better to let them know about it than their TPA.

Not filing an audit with the Form 5500 isn’t the same as forgetting to send in a check for your electric bill. Failing to file an audit with your Form 5500 is the same as not filing a Form 5500 at all. Failing to file a Form 5500 could subject the plan sponsor to tens of thousands of dollars of penalties. In addition, the failure to file a required tax return has no statute of limitations so the Department of Labor could sock the plan sponsor from the beginning of time or the beginning of when the plan sponsor was required to file an audit.

So this lesson has been brought to you by the numbers 5500 (for Form 5500) and 100 (the number of participants under a plan that requires a plan audit except plans that fall under the 80/120 rule).

My latest JDSupra.com article can be found here.

Advertising is a great medium and it’s a medium that could often be confusing to the consumer. So when it comes to the retirement plan business, you have providers providing fiduciary services whether that’s 3(16), 3(21), 3(38), co-fiduciary, or the generic fiduciary services.  Of course, let’s not forget that fiduciary warranty, that is neither a fiduciary nor a wide ranging warranty.

So while providers are advertising these level of services, most plan sponsors are really unaware of hat all of this means and I’m sure that there may be providers that may advertise a specific service like a 3(38) without the specific 3(38) discretionary role that comes with it. So while people concentrate on numbers and names, plan sponsors should focus more on what these providers are promising in their contracts. Kosher style isn’t kosher and a 3(16), 3(21), or 3(38) service without the requisite duties and liabilities that come with it isn’t the service they claim. So a plan sponsor should review what types of service are being promised by actually reading the contracts. If they can’t make heads or tails, then hire an ERISA attorney who can.

There is nothing worse in buying a service that really isn’t what it says it is.

You always see the scene in the movies, people who are broke currying for cash and trying to hock everything they can to the pawnbroker.  Remember Dan Ackroyd as Louis Winthorpe III with the legendary Bo Diddley as the pawnbroker in the scene from Trading Places?

Pawnbroker: I’ll give you 50 bucks for it.
Louis Winthorpe III: Fifty bucks? No, no, no. This is a Rouchefoucauld. The thinnest water-resistant watch in the world. Singularly unique, sculptured in design, hand-crafted in Switzerland, and water resistant to three atmospheres. This is *the* sports watch of the ’80s. Six thousand, nine hundred and fifty five dollars retail!
Pawnbroker: You got a receipt?
Louis Winthorpe III: Look, it tells time simultaneously in Monte Carlo, Beverly Hills, London, Paris, Rome, and Gstaad.
Pawnbroker: In Philadelphia, it’s worth 50 bucks.
Louis Winthorpe III: Just give me the money.

In a scene reminiscent of Trading Places, our government is trying to curry for cash for all the spending over the last 5 years and they are trying to hock anything of value to pay off these debts. Now trying to raise revenue, Congress is now looking at tinkering with the 401(k) plan.

These proposals may include:

• Capping retirement-plan contributions at $20,000 a year or 20% of compensation, whichever is less—including employer contributions. Currently, the limits are 100% of compensation or $50,000 a year.

• Replacing deductions for retirement savings with an 18% tax credit, deposited directly into an individual’s retirement savings account.

• Accelerating “automatic enrollment” of workers in retirement-savings plans, along with their default savings rate, and automatically increasing workers’ savings rates each year.

• Simplifying the paperwork involved for small employers’ adopting existing types of plans, with the goal of increasing access for more workers.

Before we start writing the obituary for the retirement plan industry, these are just proposals and I’m sure the retirement plan industry will spread some cash to influence the decision makers to kill it.  A proposal earlier this year to take away a big tax advantage for inherited IRAs was ditched after the outcry.

Regardless of my political persuasion, I think these are awful proposals that will certainly gut our retirement savings and only increase the retirement crisis we are currently facing thanks to the funding or lack thereof, of Social Security. Eliminating the tax deduction for salary deferrals will certainly cause plan participants to either eliminate or curtail their contributions, studies have shown that this will most likely be the effect.

The proposals are a shortsighted gimmick that raises revenue initially but cuts back on potential revenue later because while retirement savings are tax deferred, they are ultimately taxed unlike the mortgage deduction where the money is deducted and never taxed again. So taxing the money upfront and eliminating retirement savings because of the lowered limits and eliminated deductions will eliminate revenue later because there will be less tax collected because of less retirement savings.