You Can’t Afford To Neglect These Parts Of Your 401(k) Plan

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

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Need to differentiate yourself among the big boys and girls

A report by Cerulli on the future of the retirement plan business had a startling number. The report showed estimates that the 10 largest recordkeepers will represent more than 75% of record kept 401(k) assets by year-end 2019. That’s a startling number if you happen to be a recordkeeper or TPA. The gist of the report is that recordkeepers and TPAs need to get big or get smart.

Unless you’re in a position to start buying smaller competitors, you’re going to need to get smart by advancements in technology, marketing, and thoughts outside the box to remain competitive in the business. You don’t have to compete with the big boys and girls in numbers to remain competitive, you need differ5entiuators in your approach that will allow you to stand out. Otherwise, you’ll be the next local hardware store or Rickel’s or Channel when Home Depot started expanding.

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The problem with insurance with 401(k) plans

I have life insurance and it’s an important financial tool to protect your loved ones. I’ve never been a fan of maintaining a life insurance policy within a qualified plan and that bias against it is because of the compliance errors I’ve seen with these plans.

I’m not going to stress the defined benefit plan issues when the formula and required contribution is used solely to pay for life insurance premiums (which becomes a huge problem when the plan sponsor has to freeze the plan while experiencing economic stress). I’m going to stress the problems I see with life insurance on a 401(k) plan.

Too many 401(k) plans have a benefit, rights, and features discrimination problem when they only allow that insurance window for owners of the company. In addition, another problem is with the titling of the insurance policy, especially when its totally in the name of the insured. That’s a problem because the transaction may be labeled as a prohibited transaction if there is nothing that specifies that the policy is part of the plan. Unless you’re developing a 401(k)m insurance program with someone with the experience in the subject area, you’re going to have issues that threaten the qualification of the plan.

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Per head charges are eye popping in MEP case

National Rural Electric Cooperative Association (NRECA) is a national service organization that represents more than 1,000 rural electric cooperatives around the United States. NRECA sponsors a 401(k) multiple employer plan (MEP) and is a target of a class-action lawsuit.

The court made a big decision and expectations should be high for a settlement. U.S. District Judge Liam O’Grady of the Eastern District of Virginia has found that the complaint alleging prohibited transactions against fiduciaries of the plan “contains sufficient well-pleaded facts to survive a motion to dismiss.”

I read the complaint and I find it troubling. The whole purpose of a MEP is low cost. The plan has almost 70,000 participants and $10 billion in assets. The complaint alleges that the plan’s administrative costs have increased each year since 2013, and the 2017 rate of $404 per participant is a 50% surge from the 2013 rate. That is eye-popping and a review of the Form 5500 shows a lot of providers involved for one single plan.

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SECURE Act makes those late 5500s more costly

One aspect of the SECURE Act that many commentators failure to note is that it’s mor expensive to file a late Form 5500.

The Internal Revenue Service (IRS) penalty before the SECURE Act was $25 a day, up to a maximum penalty of $15,000 per plan year. The SECURE Act has increased the IRS penalty to$250 a day, up to a maximum penalty of $150,000 per plan year.

The Department of Labor’s (DOL) fees are even higher with the penalty for a late filer being $2,194 per day (adjusted for inflation for penalties assessed after January 23, 2019), with no maximum.

To be eligible to reduce these potential penalties through the DOL’s Delinquent Filer Voluntary Compliance Program (DFVCP), you will have to file the application as a plan sponsor. If the plan is under IRS or DOL audit, you are going to find yourself no longer eligible for the DFVCP.

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Delaware hammers a 403(b) Provider

The non-ERISA §403(b) space is the last bastion of high, hidden costs in retirement plans. That’s the problem when a plan isn’t covered under ERISA and the fee disclosure regulations. So when it comes to 403(b) plans for teachers, the action is left to the states and until recently, the states have been limp in any enforcement action.

Delaware’s Attorney General reached a settlement with 403(b) provider Horace Mann, which involves $500,000 in fines and the reimbursement of costs including annuity fees to as many as 157 educators. This is in addition to the Securities and Exchange Commission and New York state regulators starting to take a look at 403(b) plan providers.

The attorney general’s office started looking at Horace Mann and a former registered representative in 2016, shortly after Delaware’s  403(b) plan switched from using 13 companies to administer accounts to Voya.

A Horace Mann representative advised many of his 403(b) clients to stop contributing to the 403(b) program after the switch to Voya, and instead purchase Horace Mann annuities in individual retirement accounts. Horace Mann admits Hofmann failed to provide key disclosures and it’s clear he no longer works at Horace Mann.

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Organization For 401(k) Plan Sponsors To Limit Their Liability

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

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When you focus only on fees, you lose sight of everything else

For the past 7 years, fee disclosure has certainly helped you as a plan sponsor to finally understand the true cost of plan administration. That’s important because you have a fiduciary duty to only pay reasonable plan expense.

The problem is that fees are only one part of the picture. You only have to pay reasonable plan expenses and not the lowest. You need to weigh the cost vs. service. Just hiring a plan provider that is cheap is an absolutely bad idea. Nothing wrong with picking up the same product on discount at Target than Macy’s, but retirement plan services don’t work that way because plan providers don’t offer the same exact service. Provider A charging $25 a head might is probably offering a lower level of service than Provide B that charge $50. It’s your job to compare the pricing and services between Providers A and B.

As a plan sponsor, you can’t just shop on price. Price is important, but it’s just one factor in considering hiring a plan provider.

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The Legend of The Flintstones Tie

I was a first-year law student participating in moot court, just because all second-year students participated even when I knew I had zero interest in ever being a litigator. In those days, my mother would buy me these cheap character ties at Marshalls, as well as these really nice Nicole Miller ties (it was the 1990s).

The second-year students were in charge of the moot court and one of the judges in my case was a highly opinionated student government official. After I presented, he criticized my Flintstones tie as being inappropriate. I don’t judge people by the look of their tie, but a lot of people do. While I like to wear Mitchell and Ness jerseys, I don’t wear them to important meetings with potential clients and if I do dress that way with other providers, I warn them ahead of time that I’m doing it. The point is that while you should never judge a book by its cover, people still do and you shouldn’t lose a potential opportunity just because of the way you dressed.

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There are no sure things, there are opportunities

Every time I’ve spoken to other plan providers about sure things they are working on, all I later see are missed opportunities. There are no sure things in this business, there are opportunities.

Even when you have a signed contract with certain retirement plan projects such as starting a new multiple employer plan, it’s still not a sure thing because you still got to bring assets over to make a go of it. The sales process is long, tedious, and at certain points, not fun. It’s a marathon with enough twists and turns because selling retirement plans isn’t the same as selling products that are impulse purchases like candy at the supermarket checkout line.

I’ve seen many opportunities fall by the wayside that was supposed. to be sure things because of the cockiness of the provider and them counting their eggs before they’re hatched.

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