An advisor friend of mine advised me of a potential client that was considering making the move to an insurance company based provider. Nothing too strange about that, except for the fact that the 401(k) salesman for the insurance company provider indicated that the insurance company would serve the plan in a fiduciary role, which is news to me and news to the financial advisor. While insurance companies have been tinkering with fiduciary guarantees and some are working with ERISA §3(38) fiduciaries, but at this level this service provider could not be serving as a fiduciary and has had a history of court cases where they fought the responsibility of being a fiduciary.
So plan sponsors should be wary of some 401(k) salespeople who overpromise and undeliver. The plan sponsor in question should review their contract with the insurance company provider to determine whether the insurance company provider is serving in a fiduciary capacity or not.
401(k) sales people can be an interesting lot. Some of them like my friends Carlos Tariche of Kravitz and John Grace of Chernoff Diamond had extensive careers as plan administrators before becoming salespeople. Some don’t have the retirement plan background and were probably coming from a mutual fund company wholesaling background or working for a broker dealer or registered investment advisory firm. Salespeople don’t have to be retirement plan experts at all, but they need to surround themselves with those that are to avoid the overpromising of services and not to get the third party administration firm in trouble. My good friend Rich Laurita who was the greatest 401(k) salesperson I ever worked with knew very little about retirement plans, but he was a master of human relations. Rich knew his limitations, so he would bring me in from time to time to help with the sales pitch and to ensure that the client got what was promised for.
The other salespeople who were working with Rich at the time he got ill were not as smart to bring me in and help out. I used to joke that they couldn’t spell 401(k). There was one salesman who signed up a client with problems passing the discrimination tests because of its transient workforce. This salesperson asked me if it was OK if the illegal aliens working for this new client defer under the 401(k) plan using phony social security numbers. Yes, you read that right. Then there was the other salesperson who I understand years after I left told a major Long Island accounting firm that our company had its own audit practice to audit our audit eligible plans. Of course, years later, that tiny tidbit of information sunk that TPA. Don’t fret about that salesperson, they promoted him.
There are many fantastic 401(k) salespeople out there and some not some very good ones. Regardless of their professionalism, it would be wise for plan sponsors to review the contract with their TPA to determine that they are actually getting what they were promised for. Plan sponsors should consult with a retirement plan consultant or an attorney to determine whether their service contracts meet their expectations.