The Rosenbaum Law Firm P.C. Blog

My word is my bond; at least I try to make it that way. My opinions on which providers are good for plan sponsors aren’t for sale and neither should yours.

When I get asked for referrals, I always try to point out at least three competing providers to plan sponsors because I don’t want any suggestions that I’m just pushing one because it could benefit me and I want the plan sponsor to pick a provider they are most comfortable with.

I just received a call from an irate plan sponsor who felt swindled by a broker for their retirement plan. The broker was referred by the third-party administrator who was referred by their attorney. The attorney won’t return calls, there may be a reason or two why.

Thanks to the popularity of my articles and blog, I get a lot of requests to meet with financial advisors and third-party administrators. Of late, I have not done a good enough job in meeting them. I think some of it is my schedule and some of it is remembering how many other plan providers I met and how little business came from it.

Regardless, I have heard of some brokers offering some sort of referral program. I have to clearly state that I have never been directly or indirectly paying for making a referral and I never will. My opinions on who is a good plan provider are my own and it’s not for sale. I sure could use the money, but there are more things important than money: my reputation and that’s not for sale.

You must know about the shoemakers’ children and how they go barefoot and have no shoes. In the retirement plan industry, we have retirement plan providers and their employees’ retirement plans.

I know, I have been there. The third-party administrator I worked for didn’t have a great plan, it was often alleged we switched platforms to salvage our premier pricing with a certain insurance company. Don’t know if it was true, but that is what was alleged.

So for me, it’s no surprise that mutual fund companies are being sued by former employees over their own 401(k) plan. While I don’t know all the facts and it will be decided in the courts, one fact (if true) fascinates me.

I often waste time analyzing irrational behavior through rational eyes and I always ponder: “what were they thinking?” So when I hear that part of the complaints is that all of the mutual funds in a mutual fund company’s plan were funds from that fund family, I ask: “what were they thinking?”

When you have thousands of mutual funds out there and hundreds of mutual fund companies, it’s just amazing that any plan sponsor (whether it’s a mutual fund company or not) thinks it’s prudent that every fund on the plan’s lineup is from the same mutual fund company. It doesn’t look right and it doesn’t look prudent, especially when there is no mutual fund company that has superior success in every sector of the market. In addition, any plan that only has funds from the same mutual fund company is often being administered by bundled providers who are mutual fund companies (i.e, plan being administered by T. Rowe Price with only T. Rowe Price funds). How is a plan sponsor able to offer a rational explanation that it was prudent to select mutual funds from one company? I don’t think they can, especially when the mutual fund company is one of the plan providers.

Often in the retirement plan business, if it doesn’t look right, there is usually something wrong. Any plan using the mutual funds from only one mutual fund company is a plan with something wrong.

Mutual of Omaha Insurance Co. and its subsidiary United of Omaha has agreed to settle Mutual of Omaha’s 401(k) plan over allegations of self-dealing.

The settlement involves a cash payment of $6.7 million as compensation to a class of participants.

The lawsuit alleged that the 401(k) plan’s fiduciaries violated their fiduciary duties by selecting numerous investment options that were Mutual of Omaha proprietary funds. Again, this is the cost of doing business as a mutual fund company/plan sponsor.

My latest newsletter for plan providers can be found here.

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

In life, giving people a wide variety of choices is a good thing. However, when it comes to daily valued 401(k) plans, too many choices isn’t a good thing. It sounds counter-intuitive, but too many choices offered to plan participants is usually a mistake.

Offering participants the right to self direct their own 401(k) account sounds like a great idea because plan sponsors are giving a plan participant a choice in shaping their retirement. The problem with these choices is that plan participants get paralyzed by being offered too many choices; they tend to get overwhelmed. For example, people assume offering so many different mutual funds on a plan’s investment menu is the way to goo. However, studies have shown that the more investment options offered under the plan, it tends to actually depress the deferral rate of plan participants. Offering 57 mutual funds on a lineup sounds like a good idea on paper, but it overwhelms plan participants to the point that they don’t want to participate and defer their income.

The same can be said by offering participants a self-directed brokerage account. Allowing plan participants the right to a brokerage window within the 401(k) plan allows them to purchase stocks and other investments apart from the typical mutual fund menu offered under a 401(k) plan.

Again, a study has shown those plan participants who use a brokerage window tend to have a worse rate of return on their 401(k) account than those participants who stick to the core fund lineup.

Offering 25+ versions of Tide detergent probably has done well in selling detergent, offering too many choices within a 401(k) plan isn’t a great thing.

I always say that I come up with many ideas, but most of them are bad. Seriously, there are so many bad ideas out there in the 401(k) space and one of the really bad ideas out there are bundled plan providers using their own, expensive proprietary funds for their own 401(k) plans. If you think ERISA litigators are sharks, then consider the provider’s proprietary funds are blood in the water.

Bundled providers are in the 401(k) plan business and a good chunk of their business is their own proprietary funds. Let’s be honest, the reason that so many mutual fund companies serve as a bundled provider because being a provider is a great mechanism to distribute their own funds. The problem is that when you have bundled providers who don’t have a sterling reputation as a low-cost mutual fund like Vanguard or reasonably priced like Fidelity, there is going to be an issue especially if the provider is an insurance company.

The point here is that if a bundled provider is going to use its own proprietary funds in their plan, a cost is one of the most important considerations as well as the rate of return if the funds are actively managed.

I was a volunteer and officer for an organization where I stated that the leadership (not including me) was stuck in 1980.

What it meant was that this leadership couldn’t adjust to the current age when it came to recruiting new members and raising contributions. What worked well 40 years ago doesn’t mean it will work today.

I worked for a law firm that acted as if time stood still. I tried to use social media to generate discussions that would help me net clients, but the Managing Attorney didn’t get it even though her husband was doing the very same thing for his own law practice.

The point here is that the retirement plan business continues to evolve. Retirement plan rules change; the attitudes of plan sponsors change. The opportunity to get new clients changes. You need to be open to what’s new out there and determine what will work and what still works.

By the way, the best thing to happen in 1980 was the U.S. Olympic Hockey Team. Thank you.

Third-party administrators (TPAs) are the most important plan provider that a 401(k) plan has and the biggest problem is those plan sponsors and many of their advisors don’t know that. That’s a huge problem because it can only hurt a TPA that is good at what they do.

A good TPA goes a long way in minimizing financial risks to a 401(k) plan sponsor, as well as maximizing employer contributions/tax deductions. TPAs need to do a better job in marketing themselves, as well as expressing why they shouldn’t be replaced for 5 dollars less. TPAs are not a convenience store that all sell the same products or a McDonalds where the fries and burgers taste all alike. A good TPA is all about putting plan sponsors out of harm’s way at a cost-effective price. That’s it and TPAs need to a better job of expressing that.

With COVID and massive layoffs, we certainly have a partial termination problem to consider. If an employer has a turnover rate of 20% or more, that counts as a partial termination, and employers have to fully vest employees they’ve laid off, just as they would have to fully vest employees if the 401(k) plan was ended altogether.

The problem with partial termination is that it’s often not considered or determined until the plan year is over and after participants have been paid out after they have been terminated and paid what the employer thought was their full vested balance. The big partial termination headache is having to reinstate forfeited account balances and track down former employees with forfeited unvested balances, that are now reinstated.