The Problems And Perils In Changing Your 401(k) TPA

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Pick what’s good, not what’s popular

I’m not very popular, never have been and never will be. It’s probably my personality or just not wanting to go with the flow, but I’m not a popular guy. Ask my family, ask my former bosses. While I won’t win popularity contests, I’ll make it up by doing quality work and doing my best in my relationships with my clients and my referral sources. But popularity isn’t everything.

You should never associate popularity with quality because many times, they are mutually exclusive. Even though Apple computers are far superior to Windows-based PCs, look who sells a lot more. Some of the most popular food establishments, movies, products, and services may be popular, but not be the best of the best.

So when a plan sponsor chooses a mutual fund, a financial advisor, a third-party administrator, or an ERISA attorney, avoid just picking a provider because they are popular or have so many plans or assets under management. Look for quality over quantity. Look for the best, not the most popular. A lot of things popular in this retirement plan business isn’t very good.

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Potential Conflicts shouldn’t be just dismissed

As a retirement plan provider, you need to understand where there is a conflict of interest if someone you know hires you. Whether it’s a family member, golf club, church, or bank where you serve as an advisory board member, you need to identify any potential conflicts of interest.

While a plan provider needs to understand the prohibited transaction rules under ERISA and the Internal Revenue Code, a plan provider should also identify the non-retirement plan rules on conflicts of interest. For example, if you are on a private school committee and you are hired as the school’s retirement plan advisor, you may not have an issue with the prohibited transaction rules, but you may have a problem with the school’s rules on conflicts.

Nepotism is as bad as cronyism, so getting hired as a retirement plan advisor because you’re related to a decision-maker is also a potential problem. It might be Kosher with ERISA and the Internal Revenue Code, but it may not pass muster with the courts and/or the Department of Labor under review.

Just because something might be OK with retirement plan rules, it may not be good for the organization or person that did the hiring.

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Some people will do as minimal as possible

Another thing that sets plan providers apart is the work ethic, whether they will do what’s needed to be done or do it as minimally as possible.

If you’re working with a third-party administrator (TPA) and it’s their job to bring a plan aboard, some will just not help you in what you need to get done especially if you’re working on their behalf. A great TPA is going to have all hands on deck and help you in any which way they can.

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VALIC sued over surrender charge

One of the most annoying parts of being an ERISA attorney is dealing with surrender charges for clients who want to escape an insurance provider before the contract is up.

The administrator of the D.L. Markham, DDS, MSD, INC. 401(k) Plan has filed a lawsuit against the Variable Annuity Life Insurance Co. (VALIC) is being sued by D.L. Markham, DDS, MSD, INC. over fees he says were improperly withheld from plan assets in a class action lawsuit.

In 2018, VALIC was hired by the plan sponsor to maintain the plan on VALIC’s retirement platform by entering into an agreement with VALIC whereby it would provide administration, individual services and investment products.

The contract was an annuity contract selected by the plan sponsor for which VALIC serves as the issuer and contract recordkeeper of the assets invested under the contract.

Less than 2 years later, the plan sponsor decided to terminate the plan’s contract with VALIC and select a successor plan service provider.

VALIC informed the plan sponsor that there was a 5% surrender charge on transfers out of the contract on amounts contributed in the previous 60 months, which would effectively cover all assets to be transferred by the plan. Only VALIC is expressly authorized to waive the surrender charge.

The plan sponsor claims they had actual knowledge of the surrender fee and VALIC refused to waive it

In August 2020, all plan assets were transferred from the VALIC platform to the successor service provider’s platform. A surrender fee of $20,703 was retained by VALIC, representing approximately 4.5% of the pre-fee account balances.

This should be an interesting case because VALIC certainly has surrender charge language in their contract (every insurer does that imposes a surrender charge) and unless a federal judge says that such clauses violate ERISA, I’m not sure how far this survives a motion by VALIC for summary judgment.

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Revenue Sharing is costlier to plan participants

I love when studies on retirement plans state the obvious.

According to researchers from Vanderbilt University; the University of Texas at Austin and the National Bureau of Economic Research (NBER); and the Board of Governors of the Federal Reserve System, revenue sharing paying mutual funds are more expensive than funds that don’t pay them.

The results indicate that revenue sharing translates into higher expense ratios in the retirement setting, while direct fees are not significantly different across revenue-sharing and non-sharing plans. Consequently, participants face higher all-in fees in revenue-sharing plans.

Higher fees are not offset by higher returns, according to the study.

You don’t need a brain surgeon to figure that it’s actively managed plans that pay revenue sharing and these funds have a higher expense ratio that can pay revenue sharing to the recordkeeper.

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IRS increase user fees

The Internal Revenue Service (IRS) has announced increases to user fees for letter rulings and determinations with respect to employee plans. The increases will take effect on January 4, 2021.

The IRS issued Rev Proc 2021-4, which will be effective January 4, 2021 and  will reflect increased user fees for the following types of letter ruling and determination letter requests:

  • Letter ruling request for Five-Year Automatic Extension of the Amortization Period – Current fee = $1,000; New Fee = $6,500
  • Form 5300 (Application for Determination for Employee Benefit Plan) – Current fee = $2,500; New Fee = $2,700
  • Form 5307 (Application for Determination for Adopters of Modified Volume Submitter Plans) – Current fee = $800; New Fee = $1,000
  • Form 5310 (Application for Determination for Terminating Plan) – Current fee = $3,000; Fee effective New Fee = $3,500

Over the last 10 years or so, IRS has increased these types of fees in the hopes that many plan sponsors don’t seek such rulings.

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COVID caused retirement plan raid

Kiplinger conducted a poll that showed that plan participants did raid their retirement plan accounts because of COVID.

The poll showed that nearly 60% of Americans withdrew or borrowed money from an IRA or 401k during the pandemic, and nearly two-thirds (63%) used those retirement savings to cover basic living expenses.

These numbers are staggering but are not surprising when you consider how many people truly live from hand to mouth, week to week.

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How A 401(k) Plan Sponsor Can Avoid Getting Ripped Off By Their Plan Providers

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Watch out for excessive termination fees

It’s pretty simple as a 401(k) plan sponsor, you have a fiduciary duty to only pay reasonable plan expenses.

When terminating your third-party administrator (TPA), you need to identify the costs of de-converting the plan to the next TPA. Hopefully, those costs are known to you when you signed that original TPA contract. If not, understand the costs and how it bears to the annual fee that you have been paying. While a de-conversion/termination fee is an acceptable fee in the 401(k) plan business, it should bear some reason for the annual TPA fee. De-converting shouldn’t be more than the annual fee, it shouldn’t be half the fee. A month or two, maybe. As a plan sponsor and fiduciary, you can’t pay unreasonable plan expenses, you’d be breaching your fiduciary duty if you did.

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