Fiduciary Liability Insurance is Worth It

The warranty in the electronics business is gravy for the retailers who sell it. You’ll be surprised how many people pay $20 to get a warranty on a $100 Blu-Ray player. When Best Buy was going national, they advertised how they wouldn’t sell warranties and then realized that they couldn’t turn down all that free money.

A warranty is like insurance, so you should only insure those things that have a high cost replacement. You insure your health, your life, your house, your car,  and some appliances worth insuring.

This isn’t another diatribe about the fiduciary warranty that insurance companies give away for free even though their main business is insuring risk for a fee.

This about plan sponsors who don’t insure their risk by buying fiduciary liability insurance or buying a plan service that could review their plan expenses and/or their plan document/administration.

Fiduciary liability insurance helps protect plan sponsors who find themselves also appearing as defendants in a plan lawsuit filed by an aggrieved plan participant in a town near you.  I had clients sued in a class action lawsuit where the insurance company paid $900,000 for a $1 million legal fee (there was a $100,000 deductible) and this plan sponsor won their case.

So many plan sponsors don’t want to pay for a plan review that can help them identify plan issues they wouldn’t ordinarily find unless they were converting to a new provider. I have a plan review called the Retirement Plan Tune Up for $750 and I can probably count on one hand how many I do a year. When I talk to plan sponsors and advisors, they seem interested but they treat a plan review like a trip to the dentist;: something that they will avoid until it’s too late.

Spending some shekels on a fiduciary liability policy and a plan review is certainly well worth it to avoid a greater harm later.


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An Employer Guide On How To Set Up A Retirement Plan Committee

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Avoid Hiring Plan Providers Because They Were “Juiced In”

Novant Health, Inc. is a non-profit hospital system based in North Carolina and they agreed to pay $32 million in a settlement regarding a participant lawsuit against their 401(k) plan. What’s so odd about the case is that it was resolved before the case was ever brought to a trial.

Why would a 401(k) plan sponsor agree to such a settlement before the case was brought to trial? Maybe it has something to with allegations regarding the selection of the broker of record for the Plan?

It was alleged by the Plaintiffs that the broker of record had extensive business dealings with Novant Health. It was alleged that the broker entered into land development projects and office building leasing arrangements with the Plan Sponsor. The broker was also accused of providing Novant Health a gift in excess of $5 million by a development company owned by the broker. I don’t know if the allegations are true, but what I do know is that the case settled way early in the game.

I have always told plan sponsors to be wary of hiring financial advisors of 401(k) plans because of nepotism, cronyism, or an existing business relationship. Like trying to hire an inexperienced friend as the Synagogue’s secretary, anything that looks bad will be treated as being bad.  Selection of plan providers should always look as it was done on the up and up.

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How to Deal with Employees

I always say that the main reason that I don’t want to have employees is because I was an employee once too. The union lawyers I worked with just didn’t understand the whole dynamic of the employer-employee relationship. They only understood the employee side of things, they only understood that their clients were underpaid and being abused even though they were making decent money and getting great benefits. They never understood the employer side of things because they have no empathy and they don’t care. Having been an employee and having my own business, I understand the relationship far better than I did when I was fighting with a TPA I worked for, for those raises all those years ago.

An employee wants to get paid as much as possible and the employer wants to pay as little as possible. I have yet to find the employee who says they make too much money and I have yet to find the employer that says they pay their employees too little. So the fight over salary will likely be somewhere in the middle, no party is usually going to get their way. I’m all in favor of collective bargaining, heck I used to always say that a missed opportunity was to unionize the employees at my old TPA. It could have helped when they changed the health insurance or more importantly, when they got rid of the free milk for coffee. As far as unions go, I always mock union law firm partners because if they are so pro-union, why don’t they unionize their office staff and associate attorneys? Well, it’s that same lack of empathy because they treat their employees so well, at least that’s what they think. I have quite a few bosses over the years and union law firm partners don’t make such great bosses.

Any organization that wants to be successful needs a staff of employees that are competent and worth their salary. So for a retirement plan provider, that usually means having a good staff of loyal, well trained employees. Due to the nature of the business, there are so many retirement professionals that aren’t very good especially because they never got the proper training. If you have a great team of well-trained professionals, you need to make sure they stick together. It’s no different than a professional sports team, you can’t afford to lose great people through free agency and unlike pro sports, there are no guaranteed contracts in the retirement plan industry.

Keeping good employees isn’t just about pay. Sometimes it’s the little things that get employees upset like again, getting rid of the free milk for coffee. So aside from paying employees far more than they are probably worth, here are some ideas on how to keep good employees

1. Don’t cheap out on the benefits. People won’t feel as bad that they aren’t well paid like other similarly situated professionals if they have decent benefits. Again, when I worked at that TPA, we had some of the worst benefits possible and we were in the benefits business. Every time the health insurance plan was up for renewal, we got another plan that was worse. Having great benefits is a great way to deflect pay that isn’t considered generous and gets people thinking about not moving across the street to work for the competitor if they think their benefits are better than what across the street has.

2. Have a good 401(k) Plan. The TPA had a great plan until they decided to move the plan from Fidelity to Nationwide because they wanted to preserve their pricing under Nationwide. They will deny this that was the reason to this day, but we all know the truth. Having a great retirement plan goes a long way with employee retention, it’s just that most employers forget that the whole purpose of setting up a retirement plan is to serve as an employee benefit. The TPA had a 7 year vesting schedule for a 3% new comparability contribution. My old law firm had a 5% fully vested contribution. Which plan do you think was better?

3. Have a real H.R. Director. I’m not talking about using the boss’ wife, who showed up every now and then. Have a human resources director who will not be related to the folks who run the place. A human resources director can be an effective tool to keep employees happy if they think the h.r. director can be an effective sounding board. Plus human resources director typically have enough people skills to make sure that some employee discipline or termination of employment can be handled in a way to avoid litigation. My TPA was sued by three different employees when I was there for about 4 ½ years. Having a human resources director instead of dealing with the guy in chargey would have gone a long way in deflating issues that became the basis for litigation.

4. Don’t confuse loyalty with longevity. At that TPA, some of the most well treated employees were employees who worked there for many years. The bosses there had way too much loyalty in these employees, more so than for employees who were important cogs in their machine. The problem with having loyalty in employees just because they were there that long is that you may forget why certain employees work at a specific place for so long. Some employees have many years of service working at a place because they love it and some people stay working at a place because they couldn’t get a job anywhere else. Unfortunately for my old TPA bosses, many of their long standing employees couldn’t get a job anywhere else and that was the reason they were long standing employees.

5. Add benefits that don’t really cost anything. There are enough discounting groups or organizations that an employer could join and offer benefits to employees that doesn’t really cost anything. Negotiating with a gym for an employee discount or allowing employees to join a credit union go a long way

6. Provide training. In order to have a competent business, you need competent workers and good training goes a long way. Too many TPAs give training a short shrift and it shows. Good training goes a long way in nipping issues in the bud because if you’re offering a competent service, that is one less issue clients will leave you over.

7. Give real feedback. When I was at a law firm in Boston, they were telling this paralegal how good she was and then terminated her a few weeks later. This isn’t the game of Survivor, there is no need for blindsides. Be frank and honest with employees how they are doing. If they need to improve their job performance, tell them. It will help them and help you.

8. Don’t take away the free milk. At my old TPA, the employees said nothing when I left, when my friend Rich Laurita left, and when a whole bunch of other people left under murky circumstances. They did scream in protest when they did get rid of the free milk for coffee. So never take away the free milk from those coffee lovers, it may start a riot!

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Retirement Plan Features That Are Going Obsolete

My latest article can be found here.

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Communication is everything

I get along with people for the most part because I make the effort. It’s also a lot  easier to function in the retirement plan business when you have more friends than enemies. Unfortunately, there has been a number of personal and business relationships that over the years that fell by the wayside and the common denomination between all of these relationships was a lack of communication. Aside from this job, I walked away from the greatest job I had because I couldn’t tell the guy who the company was named after that his partner of 20+ years was incompetent and held a grudge against me because he felt I was a threat to him . As a plan sponsor, you can’t have relationships fall by the wayside if that’s going to hamper your role as a plan fiduciary.

The most important thing for a plan sponsor is to have communications with the plan providers and plan participants. Constant communication that is clear and understandable goes a long way to avoiding litigation or governmental penalties.

Working with your plan providers, make sure you understand your plan providers and if they speak gobbledy gook like many ERISA attorneys and actuaries, ask them to spell it out. If they are speaking in tongues, get them to speak in English. Let them tell you what you need to know to keep the plan running correctly and efficiently. If they can’t do it because they think they need to speak jargon to justify their bill, get providers who will speak in English.

Communicate with your plan participants, both with required notices and with appropriate education. Giving out Morningstar profile like the h.r. director of my old law firm did, isn’t the right form of communication (sorry Pat, see you at soccer?).  Getting them the appropriate education and advice is.

A constant stream of communication between you, your participants, and plan providers will go a long way to avoiding harm.


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Safe Harbor 401(k) Plan and Non-Safe Harbor Contributions

The safe harbor notice deadline for calendar year 401(k) plans is coming December 1. This notice requirement is one of the requirements for a plan to be a safe harbor, in addition to the fully vested contribution that gives 401(k) plans a free past in the ADP test (for deferrals), the ACP test (for matching), and Top Heavy test. The notice in a sense is a proactive solution since you have to give the notice before the plan year starts (and you won’t be certain 100% that you failed until after the plan year ended), but most times, it is reactive because it is usually done in response to previous bad testing results.

I think one of the differences between a good third party administrator (TPA) and a bad TPA is how they handle safe harbor. Once again, a safe harbor option whether it’s the 3% non-elective, 4% match, or the automatic deferrals QACA match, it’s not for every plan. A plan that easily passes testing doesn’t need it and some plans can’t afford it. However, I have seen TPAs administer plans where the plan sponsor is already making a fully 100% vested contribution to plan participants that exceeds the contribution needed for safe harbor.  For example, I just came across a plan where the TPA is telling the client that they will likely fail the Top Heavy tests even though they make a fully vested, 7.5% matching contribution.  So even though they make a contribution that could have satisfied safe harbor, it doesn’t, so the plan sponsor has to make another 3% contribution to non-key employees.  So if a company is consistently making a fully vested contribution that exceeds safe harbor, there is no harm for making it a safe harbor, it can be a pro-active solution to make sure the demographics of the plan don’t eventually one day cause the plan to fail one or more of the discrimination tests.

Plan design is like a game of chess, it is based on strategy and finding the right moves to achieve the maximum contributions and avoiding unnecessary harm like compliance testing issues. The good TPA is going to be pro-active and have a plan formula of contribution that will maximize contributions and avoid unnecessary contributions.

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End of Year Tips For Retirement Plan Sponsors

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Beware of sending gifts to Plan Sponsors

I have been a New York Giants football since the days of Ray Perkins, Brad Van Pelt, and Joe Danelo. 4 Super Bowl victories have been far more rewarding than my time as a Mets fan.

Thinking about football reminded me of a client my employer, a third party administrator  was trying to smooth out a relationship with the new benefits manager of a law firm with $25-30 million of assets in their 401(k) plan. Without any prodding by our firm, this benefits mangers said he was a Jets fan and he circled out from a schedule of games of the ones he would like to attend. That was the benefit manager’s message that he wanted my TPA to buy him Jets tickets and the TPA got the message by buying these tickets. Needless to say, that law firm was still a client for many years after.

Like Don Fanucci in Godfather Part II, there will always be plan sponsor representatives that would like their beak wet. This type of bribery is something that will always be available in the retirement plan marketplace, but it’s up to the plan sponsor and its providers to make sure that any gifts are de minimis to avoid any prohibited transactions and under the board conduct that could put the plan sponsor in danger.

As a plan sponsor, you need to make sure that there are checks and balances. Having one person making all the decisions is likelier to be prone to bribery and kickbacks than a situation where a committee makes the decisions. Any guidelines that restricts what gifts can be made and requirements of plan providers to report these transactions (just like labor unions and their providers must do annually) will go a long way to make sure that the selection and retention of plan providers is above board.

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Advisors Advantage

My latest newsletter geared towards financial advisors can be found here.

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