What To Avoid In Hiring Plan Providers As 401(k) Fiduciaries

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There is a difference in the quality of service that TPAs offer

In any service industry, the quality of service and price can be far and wide. While people say that I focus way too much on the workings on the third party administration (TPA) business, I do have more experience in that field as an ERISA attorney and former employee of a couple of TPAs.

People often ask whether as an ERISA attorney, I work as a TPA as well. I quickly state no, let the folks who know what they are doing do it. I have too much respect for the work of TPAs to be in that business, which I find gets too much blame and not enough credit, at least for the good ones.

However, looking at the TPA business, I always notice the wide difference in pricing, but more about the wide difference in service. For example, I have a client who clearly was taken advantage of by a TPA that is really in the business of selling insurance, with administration just being treated as an ancillary service. The clients were sold a couple of life insurance policies that the company could no longer afford with a special sub-trust that the Internal Revenue Service no longer finds special.

I have another TPA looking at the plan, which may or may not charge the same price, but offering an exit plan to get out of the plan that is a half million in the hole. The potential new TPA remarked how the plan should have winded down earlier and wondered why the current TPA/ snake oil salesman didn’t advise the same. It’s hard to when you really aren’t in the TPA business and are really in the insurance selling business because terminated plans don’t pay administration fees or pay premiums.

When it comes to finding the right TPA, the price is important, but the quality of service is the difference maker to me.

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Advisors Need To Offer Education

Advisors ask me all the time of the role of education in participant directed 401(k) plans and it’s an important question. Participant directed 401(k) plans that are governed under ERISA §404(c) offer the plan sponsors liability protection based on a participant’s gains or losses on their account when they direct their own investment.

There have been so many misconceptions that plan sponsors and advisors have had concerning ERISA §404(c) plans. They had this belief that if they just give a mutual fund lineup and some Morningstar profiles to plan participants that they are exempt from liability. ERISA §404(c) protection is about following a process and Morningstar profiles is just not enough education to give to plan participants. On the flipside, education to participants doesn’t have to amount to an MBA education.

I think an effective education component to ERISA §404(c) plans should include enrollment meetings where the characteristics of the plan are discussed, as well as the investment options, and offering the building blocks of financial education to assist participants to get a better understanding on how to choose investments.

Advisors that may have issues in offering education should always consider using some of the online resources out there such as rj20.com, who could offer investment advice that an advisor can’t if they won’t comply with the investment advice regulations.

In addition, written materials such as plan highlights and some Morningstar profiles should always be distributed.

Also while many advisors dislike, one on one meetings to participants should always be offered. While most participants will probably shun such meetings, they should always be offered to those that want them because as we know, every participant has a different financial goal and need.  One on one meetings offer participant individualized attention on asset allocation and fund choices; it can be an effective means of educating plan participants more than what a general enrollment meeting can offer. It can help participants understand how retirement plan assets relate to their other assets as part of a comprehensive financial plan.

Advisors should always look at education as liability protection, because offering participant education help a plan sponsor minimize their liability under ERISA §404(c).

While I always stress education as important part of the fiduciary process, it’s not about achieving a specific result from participants directing their own investments. Offering participants educations is like the old proverb, “You can lead a horse to water, but you can’t make him drink.” So no matter how great the education component is, there is no guarantee that it will help plan participants achieve a better financial result because like they say, there is no guarantee in life, except maybe death and taxes. The participant who put all his money into a mid-cap fund because he considers it the “average of the market” may still do so even after getting an education at the enrollment meeting and through one on one meeting. As with most things with retirement plans, it’s about following a process and not guaranteeing a result.

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Find those “missing” plan participants

Missing plan participants are usually only an issue when a retirement plan decides to terminate and wants to avoid dragging out the process and having to file another Form 5500.

Now there maybe further reasons for plan sponsors to clear out their plans of missing participants. The U.S. Department of Labor (DOL) is pursuing audits of defined benefit pension plans with “missing” participants. One doesn’t have to assume that if this happens, that other plans will be pursued.

This started from a pilot program in the Philadelphia DOL office and met with success, so it’s being stretched out nationally.

The Philadelphia office began looking at the Forms 5500 of defined benefit plans to identify plans with a lot of terminated vested participants who weren’t being paid out. When the DOL contacted plan sponsors asked about these participants, the plan sponsor said they were missing. The problem is that the DOL sent a certified letter to the participants’ last-known addresses where these participants responded and many didn’t know there was a benefit to them.

From October 2016 to August 2017, the Philadelphia DOL office recovered more than $165 million in benefits that should have been paid to participants.

The problem here is that DOL auditors will monitor plan sponsors’ failures to locate and contact missing participants and will treat that failure as a breach of fiduciary duty under the Employee Retirement Income Security Act (ERISA), which can trigger substantial penalties. So plan sponsor should formulate a program now to deal with missing participants by finding their last known address and contacting them; contact them by phone: or pay for an online search. Doing nothing could be a problem. Again, while defined benefit plans are the target, it’s a safe bet that other plans will merit the DOL’s review.

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Avoid the headache: Stick to what you know

Over the past 7 years as a solo ERISA practitioner, I always get asked if that’s all I do. It’s not some kind of insult, but a question on whether I also do financial advisory work and/or third party administration work. The answer is no and I stick to what I do.

Over the years, I’ve seen plan providers get into trouble by offering advice that they are not experts in. Unless they have an ERISA attorney on staff, a TPA is not a lawyer and an ERISA lawyer is certainly no financial advisor. My wife and I always chuckle when non-attorneys give legal advice and I’m sure other providers would chuckle if I gave financial and/or plan administration advice.

You should stick to what you know. It will save you and your client, a giant headache.

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Plan Providers and Plan Sponsors Can Still Lose By Winning

The news comes trickling in for 401(k) plan providers and plan sponsors beating back class action lawsuits.

Many plan providers win their case as defendants because the plan participants fail to convince a judge that the provider serves in a fiduciary capacity. Plan sponsors often win, just because the plan participants showed that a certain decision like using revenue sharing funds was a clear breach of the sponsor’s fiduciary duty.

While plan providers and plan sponsors win their case, they have still lost. The news about them winning is far less public than the new about them getting sued in the first place. In addition, the cost of litigation is burdensome even if the providers and sponsors have fiduciary liability insurance.

There is no champagne celebration for winning a case on summary judgment because of the huge cost in publicity, time, and cost. Even if the plan provider and plan sponsor did nothing wrong, something they did suggest that there was impropriety that an ERISA litigator that was good enough in order to commence litigation.

So if a plan provider and plan sponsor have won their case, they’ve really won a hollow victory.

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The Truth And Myth Over The 401(k) Investment Policy Statement

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

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Don’t get out of your level of comfort

I started this law firm about 17 years ago as a side project. It is where I could offer legal services on the side while I did my normal day job. It was an experiment on whether I could go out on my own and I learned during that time what worked and didn’t.  I can tell you that advertising in the local Pennysaver or advertising yourself as low-cost legal providers are likely misses.

So part of my practice was offering most services such as tax preparation and wills on a flat fee. For a time, wills were ridiculously low such as a will for $100. I had a tax client who wanted me to do a will and she knew about those fill in the blank forms that Staples offered.  I had software that produced wills in a Microsoft Word format. The clients asked me whether I would do their wills using those fill in the blank forms and whether I would cut my fee. I told them I wouldn’t because that was outside my comfort zone and my will fee was ridiculously low as it was.

A good part of my practice is working with financial advisors and TPAs. Some have me on a monthly retainer; most just call out of the blue with questions (feel free to call). Many advisors ask for my opinion on clients who request something outside the box, such as asking an ERISA §3(38) fiduciary who uses index funds to retain some of the actively managed funds that the previous advisor added to the fund lineup or a financial advisor being asked to assist a plan sponsor with an Internal Revenue Service (IRS). Being a retirement plan provider is hard enough without adding stuff to your plate that may put yourself out of your level of comfort. If you are a §3(38) fiduciary, the whole point was for the plan sponsor to offer discretionary control over plan investments and you don’t have control when the plan sponsors are asking you to retain their previously added investment options. Being a financial advisor doesn’t mean being an ERISA attorney in handling plan audits.

The road to hell is paved with good intentions and I am sure that there have been plan providers being sued for errors caused in favors these providers did for specific plan sponsor clients that the provider knew was out of their level of comfort.

It’s easier to say yes to every plan sponsor request, but it takes a better businessperson to turn down business that may increase your liability and get you out of that zone of comfort.

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The greatest plan audit ever

For 18 years, I have been working on retirement plan audits. Either the plan was under examination by the Internal Revenue Service (IRS) and the Department of Labor. I can count on one hand how many plans had real issues and thankfully all of them were resolved with a plan being disqualified.A few weeks back, I had the best audit that I ever went through with a client. What was great is that there were no missing items that the IRS agent needed to see and he proclaimed he was going to issue a

A few weeks back, I had the best audit that I ever went through with a client. What was great is that there were no missing items that the IRS agent needed to see and he proclaimed he was going to issue a no action letter. What made the audit a great experience was the fact that there was a plan sponsor who took their role as a plan fiduciary seriously and a registered investment advisory firm who know a lot about retirement plans was handling them. The plan sponsor and the advisor were able to get all the information that the agent needed, so there were no outstanding questions left. I’ve had so many audits where I had to get information from a former third-party administrator or the plan sponsor had to get an old plan document out of storage.

As a plan sponsor, if you are ever contacted for an audit, call an ERISA attorney. Then talk to your plan providers and try to get everything that the government auditor is asking for. That is what makes the plan audit as painless as possible.

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How And Why Plan Providers Should Help Increase 401(k) Plan Assets

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

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