The Rosenbaum Law Firm P.C. Blog

Advisors ask me all the time about the role of education in participant-directed 401(k) plans. 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 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 and smart401k.com, who could offer investment advice that an advisor can’t if they won’t comply with the investment advice regulations.

If I got $5 for every time an advisor or other plan provider told me they had an in with an association, I’d probably have enough to pay my mortgage. The problem. Having an in doesn’t mean that advisor or plan provider can offer a pooled employer plan (PEP) or other retirement plan solution that will actually get clients.

I had an in with a group of sole proprietors when. I first started my own practice and that. Went nowhere since such small business people didn’t exactly have enough to save for a qualified plan. Even if this group had bigger pockets, soliciting business from such a core group is a slow and tedious process.

The “I have this in with an association” line reminds me of the “I know a guy” from the first Ant-Man movie. It might mean something in soliciting business, but it might not either,  From my experience, it usual;y doesn’t lead to much business.

Only 20% of people aged 20 to 29 in the world believe they’ll achieve their full retirement income goals, according to the survey of residents of 15 countries conducted last year by the nonprofit Transamerica Center for Retirement Studies, Aegon Center for Longevity and Retirement (ACLR), and Instituto de Longevidade Mongeral Aegon. Only eleven percent said they believe they’re on track to achieve about 75% of their retirement income needs.

What does it mean? It means that at least for the United States, we have a job to do. If I would say that the retirement plan industry could improve the most, it would be with interaction with plan participants. Plan providers need to understand that the future of the business rests with younger participants and this survey is a clue that there is a lack of confidence in younger participants that they could achieve their retirement goals.

What the Reddit group wallstreetbets did with Gamestop in a short squeeze was something quite amazing. I joined in for a couple of days with the purchase of AMC stock that I quickly dumped after only making a couple of hundred dollars. The volatility of owning the stock and seeing the volatility of Gamestop and the attitudes of members of the Reddit group is just another reason why I hate self-directed brokerage accounts for 401(k) plans.

Gamestop is a $10 stock but was trading north of $400 before it crashed down back to double digits. It. Still is trading 9-10 times what it’s worth and it’s amazing how many of the Reddit group members were insistent they would hold on to the stock no matter what. While so many people. Made money with Gamestop, what about those who got in at $400?

What we don’t need is 401(k) participants with that fearless type of investing. The problem sometimes with fearless investing is the insistence on blaming others when the stock goes bad. Many Gamestop investors blame Robin Hood’s trade restrictions. The implosion of Gamestop’s stock, but again, it’s a dying business. What will stop a 401(k) day trader from blaming a plan fiduciary for allowing them to have a self-directed brokerage account? Nothing.

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

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

I’ve written blog posts about the problems that I see when a plan provider I know gets purchased. From experience, any purchase comes along with a lot of change. The problem is most of the time, it’s not good.

Some larger providers purchase another plan provider and it actually may cause a huge headache for the purchaser, that they never anticipated.

For example, a large third-party administrator (TPA) might decide to purchase a registered investment advisory firm. In business, it might make sense for companies to expand their business by adding a separate line that is closely connected with their primary business. It’s why M&M Mars bought Wrigley. The problem that the TPA doesn’t understand is that transaction may get many advisors who brought their business, very wary. The last thing an advisor wants is to bring in business to a provider that might be a competitor. In the history of retirement plans, there have been TPAs that were producing (meaning they had an affiliated advisory company) that stole business from advisors who referred them their clients. When you’re a plan provider, you have to be paranoid because of the competition out there.

There are two types of ERISA attorney, those that work for a plan provider and those that don’t. Many ERISA attorneys haven’t had the luxury that I have, by having experience doing both.

Being in my own practice, my allegiance is to my clients and no one else. I will offer them the solutions that are for their benefit and the benefit of plan participants. When I worked for a third-party administrator (TPA), I cared about the clients, but my allegiance was to the people signing my paycheck. So much of my job working for TPAs was putting out fires that our administrators caused. I had to keep the clients happy, but also protect our interests.

When a plan sponsor has trouble with the plan due to errors by the TPA, the TPA attorney will try to fix things, but as minimally as they can. The reason is they are trying to protect the TPA. They may suggest that errors can be self-directed, even though the guidance out there says that they can’t. Legal opinions do depend on a certain point of view.

One of the quirks with pooled employer plans (PEPs) is the need for a corporate trustee. The only problem is that most trust companies have been ill-prepared to take on that task, in terms of contracts for PEPS. The other wrinkle is many trust companies don’t want the headache of being the trustee of a PEP, especially the added responsibilities.

Just another issue out there for PEPs.

I have very strong opinions on the retirement plan business and that might be a reason I’m not asked to speak at many events, but it is, what it is. My opinions are shaped by my experiences and that includes over 22 years as an ERISA attorney. If I think payroll provider third-party administrators (TPAs) aren’t good, that is going to be different than the opinion of someone who works for one of these TPAs. My opinion isn’t wrong and neither is theirs.

Opinions are opinions. They are only wrong if they’re based on inaccurate facts, like the folks who all of a sudden became epidemiologists during this pandemic or those plan sponsors who swear they’re paying nothing for administration. People are entitled to their opinions, they are not entitled to their version of the facts.