In any service industry, the quality of service and price can be far and wide. While people say that I focus way too much on the workings on the third party administration (TPA) business, I have more experience in that field as an ERISA attorney and former employee of a couple of TPAs.
People often ask whether as an ERISA attorney, I work as a TPA as well. I quickly state no, let the folks who know what they are doing do what they are doing. I have too much respect for the work of TPAs to be in that business, which I find gets too much blame and not enough credit, at least for the good ones.
However, looking at the TPA business, I always notice the wide difference in pricing, but more about the wide difference in service. For example, I have a client who clearly was taken advantage of by a TPA that is really in the business of selling insurance, with administration just being treated as an ancillary service. The clients were sold a couple of life insurance policies that the company could no longer afford with a special sub-trust that the Internal Revenue Service no longer finds special.
I have another TPA looking at the plan, which may or may not charge the same price, but offering an exit plan to get out of the plan that is a half million in the hole. The potential new TPA remarked how the plan should have winded down earlier and wondered why the current TPA/ snake oil salesman didn’t advise the same. It’s hard to when you really aren’t in the TPA business and are really in the insurance selling business because terminated plans don’t pay administration fees or pay premiums.
When it comes to finding the right TPA, price is important, but quality of service is the difference maker to me.
6. If the plan sponsor is happy with their providers, they don’t have to determine whether the fees are reasonable or not
5. If their plan is using an insurance company provider, it must be expensive.
4. The more expensive their plan provider, the better they are.
3. The less expensive their plan provider, the better they are.
2. Plan sponsors are not responsible if their plan providers don’t help them with the participant level disclosures.
1. Once plan sponsors get the fee disclosure from their providers, they have to do nothing else.
First the Federal Government created a retirement system where the retirement age was 65 when the average life expectancy was 64 for women and 60 for men. Now Social Security is starting to resemble a Ponzi scheme when life expectancy is about 80.
Then the Federal Government made it difficult for plan sponsors to maintain defined benefit plans and then made it easier for them to phase them out.
Now the Federal Government is pushing for fee transparency and investment advice for 401(k) plans and now President Obama is proposing to phase-out the deduction of 401(k) salary deferrals for participants who make over $250,000.
I’m not trying to turn this into a political debate, but I assure you that someone making over $250,000 who lives in New York, Boston, Chicago, San Francisco, Miami, and Los Angeles has not struck it rich.
The problem I have with this proposal (which will be dead on arrival thanks to a Republican House) is that who do you think makes the most deferrals within a 401(k) plan? Those who can afford to make them, those who are financially better off. If these folks stop deferring because they will be taxed twice (first on the deferrals, then at distribution at retirement), then the asset size will be reduced for 401(k) plans, which will increase the cost for everyone else (economies of scale in the 401(k) business means more assets equals less fees as a percentage of assets). The proposal is also based on the false assumption that those who will lose that exemption on deferrals will still defer. Another false assumption is that those who make over $250,000 have enough savings for retirement. There are folks who make over $250,000 that spend every nickel they have and the only savings they have is retirement savings. The proposal will end up creating more people who didn’t save for retirement and the last thing this country needs is more problems to the retirement crisis we are facing.
This proposal is short sighted, it is shortchanging the retirement savings of many Americans for easy revenue today to pay for our of control spending. Thankfully, this proposal is going nowhere.
Nice article on RIABiz.com about how the Department of Labor (DOL) included in the final rules on fee disclosure regulations a requirement for plan sponsors to fire their advisors if they fail to provide information regarding fees and information about their 401(k) plan within 90 days of a written request. The new provision added a little teeth to the disclosure rules as previous versions indicates that 401(k) plans should fire these advisors instead of requiring them.
Many thanks to the DOL for stating the obvious that plan sponsors are on the hook for plan providers who won’t abide by the fee disclosure regulations and that it is their fiduciary responsibility to fire them.
Plan providers are like doctors, good ones will keep you from harm and bad ones will make you seriously ill. It is incumbent on plan sponsors to keep the good providers and get rid of the bad ones.
Now if the DOL could only convince plan sponsors to make sure they understand their responsibility in picking their plan providers and checking up on them. For plan advisors like me, we are here to help in that fight.
While the talk about retirement plans is usually centered on 401(k) plans, the value of a defined benefit plan for those companies that could afford it should not be discounted. Thanks to the generous deductible contribution of the requirements of minimum funding, small business owners can certainly sock away more money than they ever could do with a defined contribution plan.
The problem with these huge deductible contributions, is that there are always some unscrupulous plan providers that exploit the defined benefit plan sponsor’s ability to make large contributions to their own advantage.
Defined benefit plans are huge savings vehicle for retirement, but they should not be used solely as a vehicle to purchase life insurance. I have seen too many defined benefit plan sponsors purchase large life insurance policies where their minimum funding contribution is used solely to pay the premium of a large insurance policy within the plan. The problem? When times go bad and the plan sponsor doesn’t have the financial wherewithal to continue making the contributions, they essentially forfeit the goal of the life insurance policy. A company that didn’t buy a policy or bought a smaller policy is in a better spot as ceasing future accruals isn’t such a calamity as to those that lost their policies.
Life insurance is an attractive tax savings vehicle with a defined benefit plan, but like red meat and wine, it should only be used in moderation. I would recommend avoid setting up a defined benefit plan with the whole purpose of funding life insurance. I would recommending not using a third party administrator (TPA) who also sells life insurance because I believe it’s the ultimate conflict of interest when your plan designs you create as a TPA is used to sell life insurance you’re selling. Let’s face it; there are bigger margins in life insurance than plan administration. Also avoid defined benefit plans that feature special trusts and special trustees as the Internal Revenue Service have found these as possible grounds for plan disqualification.
How to avoid these insurance hucksters? Pick a TPA that is independent from an insurance sales person, make sure your entire annual minimum contribution isn’t fully used to pay the life insurance premiums, and get a second opinion from an ERISA attorney.
Defined benefit plans should be used to save for retirement, not to net an insurance salesman a huge commission.
They often say that the road to hell is paved with good intentions. I don’t know who said it first (I heard it was originated with St. Bernard, the saint, not the dog), but perhaps they were a 401(k) plan sponsor that had a loan provision that did the plan a lot of harm.
While the idea of a retirement plan is for a savings vehicle and any access by the participant to that money defeats that purpose, I like offering the provision so that a participant can leverage it when they are in a cash bind.
The problem with the loan provision is that I have come across too many compliance issues with it that has caused plan sponsors lots of grief. The grief usually involves the requirement that the loan be paid back in at least a quarterly basis or be considered a default, where the participant is required to receive a 1099 form for a deemed distribution. This error is as result of the third party administrator not keeping tabs on the loan. This may be a result of an incompetent administrator, incompetent plan sponsor, or as a result of the plan offering multiple loans. Any loan that does not meet any of the plan loan requirements is considered a prohibited transaction, which risks the plan’s tax qualification.
How to avoid the mess? I still think having a loan provision that offers multiple loans is a recipe for a disaster, I always recommend only allowing one loan outstanding at a time. In addition, make sure the TPA you work with has the software necessary to track these loans, as well as making sure the payroll information is correct for loan repayments.
Isn’t it funny that on the same day that the Department of Labor issues the final rule on the Section 408(b)(2) fee disclosure regulations that they issue proposed rules on adding annuities back into 401(k) plans? To me it’s a mixed message or a strange sense of humor that the DOL is talking about fee transparency while apparently promoting the use of a financial product from an insurance industry that isn’t known for free transparency.
I’m just saying it seems to be a mixed message to me.
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