Associations and MEPs

I have worked with several associations in setting up a multiple employer plan (MEP) and even more, that didn’t want to start one.

As I often discuss, starting a MEP isn’t easy because of the times it takes to grow assets and become viable. For associations, a MEP could be another way of showing value for association memberships, but the association may be wary of the work that is involved. There will always be liability issues of being a fiduciary of any kind and the question of whether it really will be of value to them, especially in terms of membership interest and revenue.

There is no slam dunk and every association is different because the dynamics with every organization is different. However, if you have contacts with the powers that be at these associations, I think this could be a tremendous thing.

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Make sure what you sell works

At home, I have Verizon FIOS for TV and the Internet and that was after having my cable provider, Optimum for about 13 years. A few months back, I was enticed to re-sign with Optimum and their new Altice converter box/router. When it came the day of installation, the Altice system failed during installation and the installer told me that the Altice system was buggy and wouldn’t be great for another 4 months, so I canceled the installation.

As a plan provider, you can’t afford something buggy that won’t work. Whether it’s your website or an app or any type of system where plan sponsors have an interface, you can’t afford to look bad in front of clients and other providers. You only get one chance to get it right and that’s what beta testing is all about.

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Get the best person for the job, period.

I’m a long-suffering fan of the Mets and over the past two years, I’ve had to deal with the underwhelming leadership of Mickey Callaway as the team’s manager. Callaway was never a manager and it showed. He was a successful pitching coach of the Cleveland Indians and he did a heck of a job in mismanaging the rotation and bullpen as Mets manager. So when Mickey was fired, the hope was that the Mets would hire an inexperienced manager. Well, they didn’t. They picked future Hall of Famer and former Met Carlos Beltran. I knew that successful managers weren’t going to get the job because the General Manager wouldn’t be able to control a Joe Girardi or Buck Showalter. Since Brodie Van Wegeman was going to pick the manager as general manager, he was going to pick a candidate that he could control.

The point is that when hiring employees, hire the best people for the job. Never let your ego or standing get in the way of hiring the best candidates available, period. If you’re incompetent and you just want to hire employees that are worse than you, they’re still going to eventually find out that you’re not up to the task.

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The thing about stealing plan assets

I have been an ERISA attorney for 21 years now and the biggest thing that amazes me is when a fiduciary to a plan steals money from a 401(k) plan. I’ve seen plan sponsors do it, I’ve seen employees do it, and I’ve seen plan providers do it. I knew Matt Hutcheson and Jeff Richie.

What amazes me about it is that eventually if you steal, you will be found out. Stealing millions or even thousands of dollars will be eventually detected. You have a better shot of wearing pantyhose on your head and robbing a bank in getting away with it than stealing from a 401(k) trust where your fingerprints will be everywhere.

So don’t steal, it will never work out.

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Let’s be honest about teachers and their 403(b) plans

Non-ERISA 403(b) plans are the last stand for poorly run, highly expensive retirement plans. It is still the wild, wild West because, without ERISA coverage, there is no Department of Labor support in fee disclosures and avoiding other abuses. Thanks to the nature of 403(b) space, multiple high-cost providers compete at every school district in New York. Depending on the district, a school district may have 6-10 providers to choose from and that only drives up costs so only the most expensive providers can compete. Many years ago, I worked with a teachers union and their hope for an endorsed program. They looked at all the providers and when the providers realized that they would have to compete on the level of hundreds and hundreds of school districts, only the high cost, annuity based providers were still interested.

The problem with non-ERISA 403(b) plans is that it leaves the individual states to help teachers out and most have punted the ball. Thankfully, New York might be an agent of change. The New York Department of Financial Services has opened an industry-wide investigation. The state agency. has issued requests for information from insurers on their policies and procedures around 403(b) fees and how these retirement programs are being marketed to teachers. This might be the impetus to change the last stand of high-cost retirement programs and teachers deserve better.

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Goldman Sachs sued for using proprietary funds in their 401(k) plan

Goldman Sachs has been sued for the alleged “unlawful” management of its company 401(k) plan for using their in-house actively managed proprietary mutual funds.

A participant in the $7.5 billion 401(k) plan sued Goldman Sachs, claiming the firm breached its fiduciary duties under federal retirement law by retaining costly and underperforming proprietary investments in its 401(k) plan.

It should be noted that Goldman removed its proprietary mutual funds from its 401(k) plan in 2017, but the plaintiff claims it did so only after legal rulings against other financial services firms highlighted its liability risk.

As I will always note, any mutual fund company using their proprietary funds in their 401(k) plan are a target of litigation.

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Warren gets assailed by ARA for 401(k) tax

As far as an industry watchdog group, let’s just say that the American Retirement Association (ARA) does its job. Regardless of party affiliation, the ARA takes on politicians with proposals that are harmful to the retirement plan industry and plan participants.

As part of her Medicare for all proposal as part of her presidential campaign, Senator Elizabeth Warren has called for a financial transaction tax that could hurt the 401(k) balances of all participants, especially the middle income. Warren proposes a financial transaction tax that would impose a 10-basis point tax on the sale of bonds, stocks or derivatives, but there doesn’t appear to be an exemption for investments in 401(k) plans, IRAs or pension plans. A 10 basis point tax is huge when we consider the lowered costs these days of 401(k) plans, we have many plan providers who don’t make 10 basis point and we know several fund companies that don’t make that on their index funds.

An analysis by Vanguard has indicated that American workers will have to work 2½ years longer to make up for the lost retirement savings due to this new tax. I’m not going to delve into politics here, but I think it’s fundamentally wrong to tap the deferred retirement savings of millions of Americans to pay for any program, whether it’s needed or not.

Bravo to the ARA for saying what needed to be said.

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2020 Limits Announced

As I’m sure you heard, the Internal Revenue Service released their 2020 Cost of Limit Adjustment limits for qualified plans and individual retirement accounts.

The salary deferral limit for participants in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $19,000 to $19,500.

The catch-up contribution limit for participants aged 50 is increased from $6,000 to $6,500.

The limitation regarding SIMPLE retirement accounts for 2020 is increased to $13,500, up from $13,000 for 2019.

The limit on annual contributions to an IRA remains unchanged at $6,000. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.

Effective January 1, 2020, the limitation on the annual benefit under a defined benefit (DB) plan under § 415(b)(1)(A) is increased from $225,000 to $230,000.The limitation for defined contribution (DC) plans under § 415(c)(1)(A) is increased in 2020 from $56,000 to  $57,000. The annual compensation limit under §§ 401(a)(17), 404(l), 408(k)(3)(C), and408(k)(6)(D)(ii) is increased from $280,000 to $285,000. The dollar limitation under § 416(i)(1)(A)(i) concerning the definition of “key employee” in a top-heavy plan is increased from $180,000 to $185,000. The limitation used in the definition of “highly compensated employee” under§ 414(q)(1)(B) is increased from $125,000 to $130,000.

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Be clear

In communications with other plan providers, clients, and potential clients, you have to be clear. There isn’t much room for miscommunication. When dealing with clients, miscommunications can lead plan sponsors to some huge mistakes.

Everything you write or say must be clear, there can’t be room for misinterpretation because the stakes are pretty high. I’ve seen too many plan sponsors that were harmed because the third-party administrator wasn’t clear on the information needed for an end of year census.

If you tell people what you need and what they need to know in a clear language, a lot of mistakes will be avoided.

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Correct the late deferral issue correctly

Correcting your late deferrals by depositing them and making a contribution to make up for lost earnings in your 401(k) plan isn’t enough.

Why? Well, Form 5500 requires you to truthfully answer whether you have late deferrals. If you answer yes (well you have to under penalties of perjury), it will alert the Department of Labor (DOL) as to your issue. The DOL will check their files and see if you filed a Voluntary Fiduciary Compliance Program, application with them. If you didn’t, they will contact you and give the suggestion you should, which would also include Form 5330.

Many plan sponsors don’t do that because of the cost and wait to hear from the DOL. Speaking from experience, I’d rather nip problems in the bud and complete the issue ahead of time.

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