Plan settlement shows you what’s wrong

Finding things wrong with a 401(k) plan is very easy when a settlement in. a lawsuit has been reached.

BTG International just settled a lawsuit where they are paying $560,000 in a settlement. The complaint stated that the 401(k) plan more than 100 investment options, 53 of them “appear to be managed by John Hancock, with the remainder paying revenue sharing to John Hancock.” John Hancock is a solid plan provider, but more than 100 investments in a 401(k) plan and 53 managed by Hancock? This was a lawsuit waiting to happen.

The complaint also alleged that BTG limited their selection of funds to only those funds which provided enough revenue sharing. They also alleged that the defendants failed to accurately disclose the fees John Hancock received on Form 5500 filings from 2012 to the present.

I’m an ERISA attorney and if I had a client that had more than 100 investments, I’d say they’d have a problem even without looking into the Hancock proprietary products. We can argue whether plans should have more than a dozen funds (not including target date funds), but we all can agree that with over 100 funds, it’s probably at least 80-85 too many. I always say in life, “don’t make yourself a target.”

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McKinsey & Co. settles for $39.5 million

Putting your proprietary funds in a 401(k) plan makes you a target and if you don’t offer them, it gives you the impression you don’t like your products.

McKinsey & Co. is shelling out $39.5 million to 33,000 people who were participants in the company’s profit-sharing and money-purchase plans.

Participants in the plans sued them in early 2019, alleging that McKinsey violated ERISA by including in-house managed funds from McKinsey Investment Office on the plan menu. The McKinsey office received investment management fees of between $20 million to $36 million per year from those funds, which the Plaintiffs allege were more expensive and had weak performance relative to other available investment options. McKinsey also agreed to retain a third party to review the plan’s investment options and expense reimbursements.

I don’ know anyone at McKinsey, I think offering these funds were a recipe for disaster especially because they were pocketing fees on the plan. Putting your own proprietary funds in your own plan should only be about appearances, not pocketing the money.

The two plans in question had more than $6 billion in assets, which helps explain the $39.5 million settlement.

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Free record keeping and you

Several of the large bundled providers are offering free recordkeeping for parts of next year if plan sponsors switch over to them. It might be a gimmick, but it’s clever marketing. When they are large in the 401(k) business and they have other sources of making money (their bread and butter is investments), they can afford to do it.

If you are a small or medium-sized third-party administrator (TPA), you can’t unless you want to go out of business. You can’t afford to provide your services for free and like I always say, providing free service might show clients that your services provide no value as long as they’re free.

You can compete with the big boys and girls on price, you’re not going to be able to match them on price if the price is free.

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The Bonus Problem

When I first started as an ERISA attorney, I worked for a kind man named Harvey Berman in 1998, working for his law firm affiliated with his third-party administration firm. During Christmas time, he gave me a $300. That was the first and last bonus I ever received.

I know people do get bonuses, my wife is an attorney and she gets it. The problem with bonuses is the treatment under 401(k) plans. While many plans exclude bonuses from the definition of compensation, many do not, and that means the bonus paycheck is subject to the deferral election made by the plan participant (unless the plan has a separate bonus election in their plan document).

Not letting participants defer their bonus when the plan document allows them to, creates what we call a missed deferral opportunity, which might require corrective contributions on your part as plan sponsors. To eliminate the potential headache, make sure participants can defer or exclude bonuses from the definition of compensation. As someone who fixes plan problems for a living, I just need you to understand that the best way to avoid a problem is avoiding the problem.

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Marketing is sometimes, just marketing

The Miller Lite Ads did not inspire to drink beer, but the advertisements were comedy gems from Rodney Dangerfield, Billy Martin, John Madden, Red Auerbach, and a whole host of other sports celebrities (and writer Mickey Spillane for some reason). Less filling, tastes great were the rival chants and Lite Beer from Miller was the first and most successful light beer (until surpassed by Bud Light and Coors Light).

If you drink the beer and you have a sense of taste, you know it’s not very good. It was more marketing that a decent beer recipe. While you may be enticed by the great marketing of a plan provider, you need to dig deeper under the surface to make sure they can do the job. When it comes to marketing, there is nothing wrong to buy on “sizzle”, as long as there is some steak.

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Pooled Plan Provider Registration Rule Proposed

The Department of Labor (DOL) proposed a rule that set the registration requirements for a  pooled plan provider for pooled employer plans, known as PEPs.

PEPs will be available starting Jan. 1. The SECURE Act stipulates that pooled plan providers must register with the Labor Department before opening up shop. The DOL believes that there will 3,200 entities that will initially register to serve as pooled plan providers.

The DOL proposed rule would create a new form — EBSA Form PR — for interested parties to submit.

The proposed rule would require an initial registration filing and supplemental filings to report any changes, information about each specific pooled employer plan before initiation of operations, and information on specified reportable events. It would also require a final filing once the last pooled employer plan has been terminated and ceased operations.

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DOL issues lifetime income illustration regulations

The Department of Labor (DOL) released regulations that require retirement plan sponsors to attach on participants’ account statements an estimate of how much monthly income their accrued account balance would produce when they’re retired.

Two-lifetime income illustrations would be required annually. One would convert accumulated savings to a single life annuity. Another would convert them to a qualified joint and survivor annuity. The rule would apply to defined contribution retirement plans, such as 401(k)s.

The lifetime income disclosure interim final rule will go into effect one year after it is published in the Federal Register. 

The DOL rule does contain assumptions that plan administrators must use to ensure a uniform methodology in calculating the monthly payment illustrations. The assumptions cover the date on when the annuity payments begin, age, spousal and survivor benefits, interest rate, and mortality.

 While I’m wary of annuities in defined contribution plans, I should note that the DOL rule does not require a retirement plan to offer annuities or participants to use annuities. So if this helps participants understand their retirement needs, I’m all for it.

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Pooled Employer Plans For Plan Providers

My latest article for can be found here.

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The Rosenbaum Law Firm Review

My latest newsletter can be found here.

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Dealing with clients isn’t one size fits all

I believe that in this business, there isn’t a one size fits all. That deals with 3(38) advisors, new comparability, safe harbor, and anything where there is a choice. It also deals with how you interact with clients, no two clients are the same.

I always talk about how successful marketing and successful client retention is based on making a connection. We are in the connection business and some clients are hard to connect to than others. Some clients are more difficult, based on personalities, backgrounds, and everything else under the sun.

How we can succeed and understand that clients are like friends and families with vary degrees of personalities and adjusting our approach to meet their needs.

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