Nitty Gritty Tasks That 401(k) Plan Sponsors Must Complete

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

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Get that bond

It’s an easy requirement that many plan sponsors think they’ve accomplished, but they haven’t received the right one. We’re talking about an ERISA bond and often plan sponsors on a Department of Labor audit are told by the auditor that the general crime policy they have isn’t what they need for that ERISA bond.

The bond should be an ERISA bond and noted as such. It’s to protect plan assets from theft by plan fiduciaries.  The bond must cover at least 10% of the assets handled by the specific fiduciaries, but can’t be less than $1,000. The maximum bond amount required is $500,000 (or $1 million if the plan holds employer securities). The amount of the bond must be based upon the highest amount of funds handled by the specific plan official for the previous year. If there is no previous-year data, the employer must estimate the amount of the bond using procedures contained the regulations. Employers can always choose to purchase bonds for more than those amounts.

The bond terms can be one year; however, bonds can be purchased for multiple years. If the bond covers multiple years, the fiduciary must check the amount of the bond each year to make sure whether coverage needs to be increased due to growing assets.

The bond must cover losses through larceny and theft, embezzlement, forgery, misappropriation, wrongful conversion, and willful misappropriation.

Note that plan fiduciaries are not permitted to have any financial interest in the entity from which the bond is purchased.

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The Belichick story

I’m a fan of Bill Belichick, probably because he was the defensive mastermind of my New York Giants in the 1980s and early 1990s that led to two Super Bowl championships. His defensive game plan against the Buffalo Bills for Super Bowl XXV sits in the Pro Football Hall of Fame. While Belichick has now won 6 Super Bowls as a head coach, he had to get past some obstacles.

While Belichick was a well-respected assistant for coaching legend Bill Parcells, for some reason or another, Giants General Manager George Young hated Bill Belichick. Young claimed that Belichick would never become Giants’ head coach on his watch because he thought Parcells had lousy people skills, dressed like a mess and because Belichick was a former lacrosse player in college. George Young thought Ray Handley was a better fit and history showed what a disaster Handley was after replacing Parcells who left the Giants after Belichick left to take over the Cleveland Browns head coaching job.

Speaking of the Browns, Art Modell who owned the Browns hired Belichick even after George Young took the extraordinary step of trying to talk Modell out of it. Imagine working for a boss who not only wouldn’t recommend you for a promotion but actually called a potential new employer to bury you. Belichick’s struggles as Browns’ coach proved Young right initially, but 6 Super Bowl wins later, now question Young’s status as a Hall of Fame member.

Whether you did anything wrong or not, there may be one or two people in your career that may try to plot against you. They might be co-workers or supervisors, whoever they are, they may not like you for one reason or another. As you know as a kid, not everyone is going to like you and how you handle these terrible relationships will say more about you than them. I had two people in my career that either didn’t like me or actually called other retirement plan professionals to speak badly about me. One person is still mocked in my articles because I think she couldn’t see the future if it was right in front of her (sorry Lois) and the other one, is now one of my best clients. There are those who may not like you, but you just have to deal with it. You can persevere as long as you have talent and the ability to learn from your mistakes, just ask Bill Belichick.

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Evoshare is something every 401(k) plan should consider

I’m not ashamed to admit when I think someone has a good idea and I think that the folks at Evoshare offer something that every plan sponsor and plan provider should consider adding to a 401(k) plan because I believe anything that makes more deferrals possible is a good thing.

EvoShare is a financial platform that enables employees to save for their 401(k) or 403(b) while shopping online and locally at stores, bars, and restaurants. Evoshare allows employees to spend at their favorite businesses, and receive up to 30% cash-back towards their retirement plan through their employer. So it’s more than just a website, a plan participant can take their linked credit card and shop at their favorite local stores and have that cash back go towards retirement.

How does it work? Every quarter, EvoShare sends the employee a check for the total cash back or transfers the funds electronically. At the same time, a one-time payment for that amount is taken from the employee’s paycheck and deposited in the 401(k) plan, so the employee comes out even in terms of take-home pay. I’ve taken a look at their site and it’s easy for a 401(k) plan to set up.

If interested, contact EvpShare and tell them Ary sent you.

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Call an ERISA attorney when you get the government’s call

When you get pulled over by the police while driving, the best way to handle is to be pleasant and not be argumentative. You listen to the officer as to why he pulled over. Being belligerent and non-cooperative will only lead you to a ticket.

When a plan sponsor is contacted by the Internal Revenue Service (IRS) or the Department of Labor for a questionnaire or a request for information, it’s best for them to be cooperative and immediately have them contact an ERISA attorney. Being unresponsive or curt with them may lead them to sniff further and look closer at the plan for potential ERISA or Internal Revenue Code violations.

I had a client that had committed a serious breach of fiduciary duty and their cooperation of the Department of Labor (DOL) agent investigating the matter went a long way into correcting the error and avoiding some serious penalties. The DOL agent was very diligent in her role and was actively finding solutions that the client could pursue in rectifying this matter. Stonewalling the DOL would have been a headache and possible litigation by the DOL. In the end, we came to an agreement and rank and file plan participants were made whole.

A few years back, a potential client who advised me that the DOL was seeking information as to why the defined benefit plan that his bankrupt company had sponsored failed to prepare audits and 5500 filings for the past several years contacted me. This potential client refused to answer the DOL’s request and informed me that he had bankrupted the plan to benefit his personal expenses. I had advised him that he should immediately cooperate and the criminal attorney at my old firm recommended to same to avoid certain jail time for embezzlement. This potential client ignored our advice and declined our representation. He was arrested a year or so later and was convicted and sent to jail for 18 months. Had he played ball with the DOL instead of hiding it, he might have avoided jail time.

Cooperation with the IRS and DOL can go along with defusing problems that threaten the qualification of the plan and increase the liability for the fiduciaries. So if a plan sponsor is targeted for an audit or a request for information, the best bet is to contact an ERISA attorney. I hate to say it, but IRS and DOL agents act differently when working with an ERISA attorney than a client with no retirement plan background. Regardless of the problem, it’s always best to cooperate. So if your client gets contacted by the IRS or DOL, pick up the phone and give an ERISA attorney like me, a call.

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Watch out for those HR issues

Small to medium-sized businesses really need to be up to date with human resources issues that include 401(k) plans. Employers can get into trouble with the Department of Labor just by placing their I-9 forms in an employee’s files.

They need legal resources to rely on whether it’s an attorney or perhaps a PEO. Whatever the resource it is, they do need one.  Having been an employee once, I can state that most employers have no clue about human resources and most of these companies didn’t even have a person dedicated to serving in an HR capacity.

So whether it’s using a lawyer, a PEO, or my affiliated That HR Association, it’s important for employers to understand the legal ramifications of human resources and that there is a lot of stuff that they don’t know in that area.

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When you show you don’t care, they get it

So the afternoon before Thanksgiving, my Verizon FIOS went down and wasn’t coming back so quickly. That means the Internet, TV, and my phone went down when the main unit showed fail.

I called FIOS tech support and they said that they couldn’t communicate with the unit and I needed to remove it from the outlet and then reset. It still wasn’t working and they told me that they would have to send a technician out. The problem is that thanks to the holiday, the technician wouldn’t be coming until Saturday. That meant no TV, Internet, and phone for Thanksgiving and Black Friday. Despite our pleas for earlier help, Verizon had no help for us even when we threatened to cancel the service.

For 13 years, we used Optimum as our cable provider for phone, Internet, and TV. While they were more money, I was happy with the service and especially the complimentary WIFi in thousands and thousands of locations around the area. My wife for a few years was badgering me about FIOS and I succumbed to that in February.  Now I was faulting myself for making the switch.

To add insult to injury, the technician came that Saturday and fixed the problem within two minutes, apparently, a wire was sticking out of the unit. The diagnostics help by FIOS on the phone never mentioned anything about checking the wires and by the naked eye, everything looked fine. Maybe if the tech on the phone asked me to check the wires, maybe I would have discovered the loose one on the bottom of the unit.

So what happened? I ordered Optimum to come back where there will be $5 cheaper and will pay off my early termination fee from FIOS. I also ended my 20-year run using Verizon Wireless and got a free phone for my wife and I and saving $100 a month.  Maybe I was unreasonable to demand such quick service, but dropping the ball with scheduling and not giving me the chance to fix the problem on my home without some guidance cheated me out of a holiday watching football and being stress-free.

When providing a service to a client and they need help, provide the best help you can. If you can’t accomplish everything they need, at least be apologetic and sympathetic. Otherwise, you can lose a long time client.

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If the 401(k) bleeds, it does lead

When the local TV news does a report surrounding a snow storm, I always joke that they should recycle the reporting from supermarkets and hardware stores for barren shelves. It saves time and money.

The same can be said about the recent reports talking about the choppy stock market and participants losing money in their 401(k) plans. If this choppiness leads to a long term correction, expect more reporting and questions on whether the 401(k) plan is the right retirement savings vehicle. There will also be reporting about fees.

How do I know this? Like snowstorm reporting, it’s predictable. What is not predictable is how the industry deals with it and it should not be defensive about it. Until there is something out there that is better and cost effective for the employer, the 401(k) plan is still the most inexpensive option out there. The industry should just strive to improve where it needs to, which is participation and education; I think is where the industry needs the most improvement. Thanks to fee disclosure, you’ll see fewer articles about costs than we did in 2000-2001 and in 2008. I’m just warning you about the articles that come with bad investment news because I’ve lived through it before.

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American Century beats back in-house funds lawsuit

American Century Investments recently won a class-action lawsuit alleging that they profited from their company 401(k) plan at the expense of employees by loading the retirement plan with in-house mutual funds.

The judge in the case stated the trial evidence didn’t show American Century’s decisions were motivated by the desire to place their interests over participants. The judge also reasoned that it is common for mutual funds companies to offer their own investment funds in their retirement plans and there is no duty to offer more than one investment company’s funds.

While many other companies like Waddell & Reed, Deutsche Bank, and Citigroup settled for millions, American Century stood their ground and won the case.

It’s clear that plaintiffs failed to show that having those American Century funds in the plan was an actual breach of fiduciary duty. Like I’ve stated before, mutual funds companies that place their own funds in their 401(k) plan are easy targets for ERISA litigators, so I’m actually happy that a Judge said that just having those mutual funds doesn’t show that it was an immediate breach of duty. I think plaintiff’s counsel need to show an actual breach because, from a business standpoint, it would be bad for appearances if American Century didn’t place their own funds in their own 401(k) plan because competitors would use this to besmirch American Century. Not having your own proprietary mutual funds in your own 401(k) plan looks as bad as the restaurant workers that order takeout.

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The Shocking Truth About Participant Directed 401(k) Plans

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

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