….One More Thing For Plan Providers

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

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The Rosenbaum Law Firm Review

My latest newsletter can be found here.

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I will never understand a TPA asset based fee

I’m stubborn and there are just some things I don’t understand, so hear me out.

I got a call not too long ago from a financial advisor about my practice and how I price my work on a flat fee basis. I told the advisor that I charge $2,000 for a volume submitter retirement plan and the advisor asked me if the price differentiated if the plan had thousands of participants. I understood his question and I kind of thought it was funny because for me, drafting a plan for one person or drafting one for thousands of employees is about the same amount of work. I told him that the number of participants has no bearing on my plan document work and participant account is more interest for a third party administration (TPA) firm who has more expense in administering a retirement plan because of the number of sub-accounts they have to set up (if the plan is a defined contribution plan) or benefit statements they have to provide (for a defined benefit plan).

I’m no expert on TPAs, but I assume the only fee that may go up with an increasing plan asset size is the custody fee because regardless of the size of the plan, a plan is paying up to 6 to 8 basis points in a custody fee for a daily valued no transaction fee 401(k) platform Otherwise, there is no extra cost for a TPA to run a 100 participant, $100 million 401(k) plan than it is for a 100 participant, $10 million plan.

So I am flabbergasted by some very well known and well regarded TPA firms that still charge their administration based on assets. Having them charge on assets is not much more different than me charging for plan documents based on participant headcount. I know if it’s OK if it’s disclosed, but it still doesn’t make sense to me. Call me old fashioned, but I think a fee should be relevant to the work involved and assets bear little relation to the work of a TPA.

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Some random thoughts on the retirement plan business

  1. Cost is an overused consideration for picking plan providers, value and quality are underused.
  2. Target benefit plans are the Boo Berry Cereal of retirement plans. You know they exist, but you rarely see them.
  3. Target date funds, what’s the target? In 2008-2010, the target was the participant’s retirement savings that used them. The target was eliminated with extreme prejudice, as they would say in Apocalypse Now. I will never be comfortable with them.
  4. People can’t understand that profit-sharing plans don’t require profits, but what does a Money Purchase Plan’s name mean? How do you purchase money?
  5. The weirdest 401(k) plan investment I ever came across was an antique toilet.
  6. The quality of a third-party administrator (TPA) can be determined on just one thing, the quality in support and education they give to their administrators. Good TPAs educate their workers, bad TPAs don’t.
  7. The funniest beneficiary form I ever saw is when a participant selected someone as a beneficiary. For the relationship to the beneficiary, the Participant put “Good Time Joe.”
  8. The worst legal determination is when I had to figure out what to do when a beneficiary killed a plan participant.
  9. Plan sponsors will show more concern about plan costs when they realize that if the owners are participants in the plan, they are also paying way too much in fees themselves.
  10. The most difficult client I ever had was a company whose H.R. director had me re-write the plan document 7 different times and at one point wanted me to draft it with elapsed time that required 1,000 hours (which is impossible because they are conflicting concepts).
  11. Love how people talk about ERISA §3(38) fiduciaries being a new concept, I think they were originally part of ERISA when it was signed into law in 1974. Same with multiple employer plans, they have been around since then roo.
  12. A fiduciary warranty offered by a plan custodian is the retirement plan industry’s version of the $3 bill.
  13. Never hire an auditor for your 401(k) plan if they don’t know what revenue sharing is.
  14. Will never forget the gall of a mutual fund company acting as TPA who thought nothing wrong of running a 401(k) plan as a safe harbor plan even though it didn’t have the provision because they never charged for compliance testing.
  15. Plan design is an art, a fancy participant website is not.

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Proposal for tax fee plan withdrawals for LTC premiums

I’m not a fan of reporting legislation, but this piqued my interest.

Sen. Pat Toomey (R-PA), a member of the Senate Finance Committee, is working on a bill that would allow plan participants to withdraw funds from their 401(k), 403(b), 457(b) and IRA accounts to pay for long-term care insurance (LTC) without being subject to the 10% early withdrawal penalty.

The legislation that will be introduced in the next few weeks will also allow up to $2,000 in withdrawals annually per individual to be excluded from income tax, provided the amount is used to pay for qualified LTC insurance for the participant, their spouse or a dependent.

According to the American Association of Long-Term Care Insurance, the average cost of a policy in 2019 is $2,050 for a single male (age 55), $2,700 for a single female of the same age and $3,050 for a couple who are both age 55.

I’m conflicted by this legislation because I don’t like retirement plan leakage, but the fact is that long term care costs are a concern especially when there is a good chance that most participants will need it.

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Schwab to buy TD Ameritrade

Charles Schwab, the largest publicly traded discount brokerage firm and of the largest custodian of 401(k) plan assets has agreed to acquire TD Ameritrade for an all-stock transaction valued at $26 billion. The deal brings together two of the largest brokerage firms, with assets totaling north of $5 trillion, and is expected to close in the second half of 2020.

We have seen a tremendous consolidation in the third party administration and advisory businesses, so it should come as no shock that there would be consolidation in the brokerage/custodial business.

All I can say is expect more deals like this in the future.

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Amazon taps Fidelity for its 401(k)

Amazon is a mover and shaker in e-commerce and they have a pretty large 401(k) plan now. As of the end of 2018, their 401(k) plan has almost $6 billion in assets. So when Amazon ditches Vanguard funds for Fidelity as its recordkeeper for 2020, that is a big deal. Fidelity already has almost $2 trillion in plan assets under administration and handles plans for Facebook and Microsoft.

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Signs of an unhealthy plan

When it comes to your health, there are certain symptoms you should look out for that could be a harbinger of something wrong. The same can be said of your 401(k) plan. Here are some things to consider:

  1. Late deposit of salary deferrals.
  2. Low average account balances.
  3. No ERISA bond in place.
  4. Low deferral participation rate.
  5. Compliance testing failures, corrective contributions made.
  6. Too many hardship requests.
  7. Too many defaulted plan loans.
  8. No benchmarking of fees.
  9. No review of plan providers.
  10. No formal fiduciary process followed.

If you just have one of these symptoms, your plan needs a checkup.

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Make sure RMDs are made

In the past 35 years, it changed on who had to take out a required minimum distribution (RMD) from a qualified retirement plan. Thankfully, it hasn’t changed since 1997. So a person who is a 5% owner has to take out an RMD from the plan after attaining age 70 ½. Non-owners can wake for their RMD until they retire.

As a plan sponsor, you need to make sure that you watch out for 5% owners who may be near their RMDs as well as non-owners who are no longer working for you and cant be found. RMDs are a big issue because a failure of a participant to take an RMD will get that a participant a huge 50% excise tax.

If you do mess up, it’s on you as a plan sponsor to fix that and the best bet is an application to the Internal Revenue Services’ Voluntary Compliance Program to seek a way out of the participant getting a 50% excise tax.

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New study suggests more funds on a lineup

Studies previously showed that participation rates in a 401(k) plan are negatively impacted when there are more funds on a 401(k) fund lineup. However, a new study suggests that adding more funds is better.

A report from Morningstar finds that increasing the core menu size not only results in increased adoption of a plan’s default investment, but it also can result in more efficient portfolios. The report showed that increasing core menu size resulted in increased adoption of the plan default investment, from approximately 74% for plans with 10 funds in the core menu to about 87% for plans with 30 funds.

The report is compelling because it stated that previous studies on fund lineups were conducted before the qualified default investment alternative (QDIA) was added to the Internal Revenue Code in 2006.

I just thought I would throw that out there.

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