Retirement plans aren’t paint by numbers

I grew up in the 1970’s and 1980’s, so many of the toys I had are a little quaint when you see the toys of today. I had Star Wars figures, but outside of Luke, Leia, Chewbacca, and C3P0, I always had those characters that were in the movie for five seconds. Speaking of toys, one toy that is forgotten wasn’t a toy, but an art project. That is paint by numbers.

Too often, many financial advisors take a paint by numbers approach when it comes to the retirement plan needs of their clients. The not so good financial advisors will look at a plan sponsor’s retirement plan needs and think 401(k) plan with a comp to comp allocation will work all the time. The excellent financial advisor will consult with a retirement plan advisor at a full service third party administration (TPA) firm or an ERISA attorney and determine which specific plan design works best for the plan sponsor and the needs of all the employees. That may take the form of a 401(k) plan with a comp to comp allocation, but sometimes it may not. Sometimes, a new comparability plan design with a 3% non-elective safe harbor contribution works best. Sometimes a cash balance plan or a floor offset works best.

As with my complaint with some of the bundled and payroll provider TPAs, all retirement plans don’t fit within the small boxes that their administration and plan document permits. Sometimes, the best design for plan sponsors fall outside the boxes and into the hands of an unbundled, full service TPA. It takes the good financial advisor to know when to ask for help in plan design, otherwise the plan sponsor and their highly compensated employees may be living money on the table.

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Revenue Sharing is becoming the 401(k) Leisure Suit

When I was a child, I remember bringing the soundtrack to Saturday Night Fever for my first grade class’ Chanukah party (I went to a Jewish day school). To this day, I still don’t how to operate a record player. Around the same time, my Uncle’s Cadillac had an 8-track tape cassette. A few years later, I had a JVC boom box with a cassette player. If you go to a music store (if you can find one), you won’t find much room for LPs, cassettes, and 8 tracks.

When I entered the 401(k) plan business, revenue sharing was all the rage. It was supposed to help plan sponsors reduce plan expenses by using revenue sharing funds. It looked good on paper until the fight for fee disclosure began and plan sponsors (many through litigation by aggrieved plan participants) learned that revenue sharing was nothing more than a shell game because the revenue sharing was only provided because the funds that paid revenue sharing were more expensive than those who don’t.

Much like LPs were replaced by cassettes; which were replaced by Compact Discs; which were replaced by MP3s, revenue sharing is being replaced by fee transparency, which makes clear what third party administrators receive from direct and indirect sources (revenue sharing). Litigation has proven that revenue sharing is too costly because litigation is looking more at fiduciary responsibility and making sure that investment selections weren’t just predicated on the fact that these investment options were selected because they pay revenue sharing.

Leisure suits were once in style and while people claim style is cyclical, leisure suits never made a comeback. Revenue sharing is becomes a lot like a leisure suit, it’s not going to come back in style and most plan sponsors and their plan providers are going to touch it with a 10 foot pole.

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Plan Sponsor Should Avoid These Retirement Plan Provider “Con Games”

My latest JDSupra.com article can be found here.

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It’s always the Plan Sponsor’s fault

Seven years ago, I was asked to look at a $25 million 401(k) plan that was in complete disarray and I was flabbergasted because it belonged to a law firm that claimed to have an ERISA practice. There was no financial advisor on the plan, no investment policy statement, no education to plan participants, and it didn’t seem that the investment lineup for the plan has been changed since the go-go days of the 1990s.

The two trustees followed most of the path that I set up for them except for the fact that they didn’t pick a financial advisor among the pool I recommended to interview. What was rather insulting to me is that I was not consulted about their process in selecting a new third party administrator (TPA) until it was already done and I was disappointed that they selected a bundled provider without considering someone unbundled for a plan that size.

Fast forward 7 years and I get a call from an accountant that this plan is going through a lot of trouble. There was an issue with them owing over $100,000 in contributions, which was odd to hear since the plan was using new comparability and safe harbor. Well, my services were not requested because one of the trustees is still mad that I made her a punch line for the past 4 years in my articles and in my book. I understand people having thin skins and not enjoying my barbs, but the fact is that the reason that the plan has always had issues is because of her and the other trustee who don’t seem to fully understand the grasp of their role as the decision makers of the Plan.

I’m sure she didn’t want to hear the “I told you so line” from me, but ultimately the plan sponsors are at fault for about 100% of the problems they may have with their retirement plan. The plan sponsor goofs and forgets to include people in their plan,; it’s their fault. The TPA does the same; it’s still the plan sponsor’s fault because they hired that TPA.

We live in a world where no one has any responsibility, it’s always someone else’s fault. We see that in politics all the time, you can be office for two terms and it’s still the fault of the guy before you. Well I’m telling you that when it comes to retirement plan sponsors and the fiduciary responsibility, it’s always their fault.

I don’t know how the law firm will correct these errors, but I’m sure the legal fee they are paying is far greater than what I’d charge. What is still amazing is that that these two plan trustees are still the trustees, especially since the woman who dislikes me also happens to be that law firm’s human resources director. To properly manage a 401(k) plan is usually a human resources function. I’m sure in that law firm; associate attorneys have been fired for less. Actually, I know for a fact that they have been fired for less and some of these associate attorneys end up becoming household names in their legal field. But that’s another story for another day.

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Beer Distribution and the Bundled Provider TPA

In England, many of the top pubs are owned by British breweries because watering holes are an effective means of beer distribution. If a business can control the method of distribution of their own products, they can expand the distribution while saving a couple of shekels by avoid having to pay a third party to distribute.

The 401(k) industry is dominated by mutual funds, so it should come as no shock that many mutual funds companies offer services as a third party administrator (TPA) because it’s an effective means of distributing their mutual funds. Mutual funds distribution is extremely important for mutual funds companies because their bread and butter are the funds’ asset management fees and more assets under management equal more revenue for the mutual fund company.

While many mutual funds companies only offer TPA services for larger plans, there are a few mutual funds companies that have been rather aggressive in offering TPA services to small and medium size plans. While mutual fund companies do offer an attractive alternative as part of a one stop shop, plan sponsors are under misimpression that the mutual fund companies’ TPA services are free or close to free.

As stated in a previous article about 401(k) administration, there is no such thing as a free lunch or free 401(k) administration. Mutual fund companies make their money as a TPA through those very same mutual fund management fees that I had discussed earlier. Many of the same companies that offer TPA services are the very same mutual funds companies that offer revenue sharing or sub TA fees to TPAs for plans that use their funds. So by keeping plans under their roof, these mutual funds companies can keep their revenue sharing/ sub-TA fees to themselves. These mutual fund companies also guarantee the fees they make, by requiring that a percentage of a plan’s assets (up to 100%) be invested into their own proprietary mutual funds. I recently came across a 401(k) plan with a mutual fund company as a TPA that offered 12 mutual funds to participants for directed investment and all 12 funds were the fund company’s proprietary funds.

For plan sponsors and trustees who serve as fiduciaries under ERISA, it is a question of the prudence rule and whether it is prudent to offer investments into a specific mutual fund company, only because that mutual fund company is the TPA. While some mutual fund companies have sterling reputations, there are a still a number of mutual fund companies who have been tainted by the late trading scandals of the last decade, as well as poor performance and high fees. All plan sponsors that utilize a mutual fund company as a TPA should understand that there is a cost involved with their plan’s administration (check those disclosure forms), as well as being advised as to the standing of the mutual fund company within the entire mutual fund industry to make sure it doesn’t become the next Steadman fund family.

Plan sponsors should consult with their 401(k) financial advisor to determine whether a mutual fund company as a TPA is the right fit for them. Mutual fund companies may be an attractive option for some, but plan that offer what is known as out of the box provisions may not be a good fit, as well as a plan sponsor that wants unbundled options in the selection of mutual funds.

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Plan Sponsors Should Avoid Using Their Payroll Provider as Their 401(k) TPA

My latest article for JDSupra can be found here.

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Yeah, I know, Everyone does it

I was never part of the in crowd. Look at my picture, could I ever be in the “in crowd”? I’m always the odd one out, that’s why I dressed up as the Rodney Dangerfield character, Al Czervik from Caddyshack on Halloween. While I always heard the excuse “that everyone is doing it”, I was always the guy who wasn’t. That’s it for my therapy today.

A big part of my practice is assisting financial advisors, third party administration (TPA) firms, and plan sponsors nationally with what I call an open phone policy. Financial advisors, TPAs, and plan sponsors can call me up with any questions they have about qualified and non-qualified plans without having to worry that they are going to be charged for just getting an answer to a question. I am all about building relationships and helping people in the retirement plan community, save one retirement plan at a time. So if you need any quick answer or help, give me a call (cheap plug).

That being said, I got two questions on the left coast that were different but both ended with that saying I have heard so many times over the last 16 years as an ERISA attorney.

The first question came from a TPA in California. A defined benefit plan sponsor wanted to invest in a mortgage in a building that the plan sponsor would buy and the plan sponsor would live in. Of course, there is something called a prohibited transaction and an exemption from the Department of Labor won’t happen. Of course, the client’s financial advisor claimed that what the plan sponsor wanted to do was fine “because everyone does it.”

In the second question, an attorney friend of mine asked me about a client of theirs who had a retirement plan, but wasn’t covering the leased employees in their office. Since the leased employees didn’t meet any of the exceptions for coverage set out by the Internal Revenue Code, they had to be covered. Of course the client thought that not covering the leased employees was fine “because everyone does it.”

As an ERISA attorney, I have to counsel my clients to operate their sponsorship of retirement plans within the limits of the Internal Revenue Code and ERISA. I don’t care what everyone else is doing if what they are doing would result in plan disqualification or sanction if caught by the Internal Revenue Service and Department of Labor. Plan sponsors and plan trustees are plan fiduciaries and have to act prudently within the confines of the law. Simply saying everyone is breaking these laws is no defense.

I had a client being sued by the government because as a plan fiduciary, they didn’t make sure the TPA was doing their job. Saying that they aren’t liable because most other plan sponsors don’t make sure their TPAs are doing their job is no defense.

The DOL and IRS won’t care if everyone is doing it; they just want to make sure plan sponsors don’t.

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Advisors Advantage

My latest newsletter geared towards retirement plan professionals can be found here.

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A 401(k) Financial Advisor Shouldn’t Refer a TPA Just Because They’re Cheap

My latest JDSupra.com article can be found here.

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Some Plan Sponsors will cut their nose to spite their face

I used to spend much time trying to explain irrational behavior through rational thought and it’s really impossible. If you’re a plan provider, don’t waste your time doing that.

There are some plan sponsors out there that would rather cut their nose to spite their face or continue with a bad plan provider because of a crazed notion of “loyalty”.

Most of the time, the plan sponsors you will meet will make rational decisions in selecting plan provider and making any plan changes. Some just won’t because of an irrational choice or decision.

Seven years ago, I helped a plan sponsor out with their 401(k) plan.  They had no financial advisor, they had no investment policy statement, they had no investment education provided to plan participants, and hadn’t changed funds in a decade. They eventually fixed the plan, but they hired new plan providers without consulting me. I was offended by that because the same trustees who neglected their plan now all of a sudden thought they knew better than me because they didn’t seek my opinion. They also changed third party administrators and picked one that wasn’t suited for a plan that size. It’s irrational, but that’s what people do.

Present day, the plan has a huge compliance problem that may cause the plan sponsor over $100,000. One of the trustees reached out to me while the other one spurned my services, probably because of a grudge or because they didn’t want to me say: “I told you so.” I’m not like that, my position is to help plan sponsors out as much as I can at an affordable price. This plan trustee would rather pay three times as much in legal fees because of a grudge. People who make bad choices usually consistently make bad choices.

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