I met a group of advisors this morning trying to get into the 401(k) business and I was really impressed with the philosophy, their practice, and how they want to be surrounded by top retirement plan providers. They are an advisory team that is ahead of the curve and will certainly make waves and be successful. Financial advisory firms that understand their role in the plan sponsor’s fiduciary are the future of the industry.
They presented me with a new client that they have and the issue of that client’s 412(i) defined benefit plan. For those who don’t know, Section 412(i) defined benefit plans are funded by life insurance. There were some abuses within these types of plans and the Internal Revenue Service did some cleaning up that area. They are still a viable plan if the intent is to provide retirement benefits. The plan in question was not to provide retirement benefits, but something quite else.
The plan was being administered by a producing TPA. This wasn’t a TPA with a registered investment advisory firm. This was a TPA that sells insurance or more like an insurance salesperson who also happens to administer retirement plans. The client was paying over $110,000 for a $5 million whole life insurance policy. The problem? Life insurance (unless with some estate planning of setting up a life insurance trust) is part of a person’s taxable estate and guess what is the exclusion amount for estate taxes in 2011? $5 million. So if the client died today, the insurance policy in the plan would certainly push the client’s estate into the estate tax. Proper estate planning is to minimize estate taxes, not create them. Clearly this plan did not take estate planning into consideration and was just basically a great commission for this insurance agent masquerading as a TPA.
That TPA is very soon going to be the past of the industry if the Department of Labor changes the definition of a fiduciary because this insurance salesperson will certainly become a fiduciary and you owe a fiduciary duty to a plan sponsor, you are going to have up with a good enough excuse to explain why the purchase of a $5 million life insurance policy was prudent and saying it was a great commission for the salesperson isn’t going to cut it.’
The future of the industry meeting the soon to be past of the retirement plan industry. It’s the irresistible force meeting the immovable conflict of interest. The irresistible force will eventually win in the end.