The narrowing 401(k) margins

When I was 13, I bought my very first computer, an Apple IIe for $2,000, which would be about $4,760 in 2019 money. This year, I bought an Apple MacBook Pro for about $1,800.

In 2008, I was reviewing the 401(k) plan of a soon to be defunct mattress retailer that was on an insurance company platform. A copy of the 1995 contract that actually expired in 2001, charged the plan sponsor 267 basis points in fees.  Obviously, for a plan that had almost $4 million in assets, that was a lot of money. In 1995 when daily 401(k) plan were the exception and not the norm, 267 basis points was reasonable. In 2008, that was outright theft.

Since 1995, fees for daily recordkeeping plans and the margins in 401(k) administration have fallen in price as technology and economies of scale reduced costs. The advent of revenue sharing fees where mutual fund companies kicked back fees to the third-party administration (TPA) firm has helped as well. Since TPA firms had no requirement to breakout revenue sharing fees, the true costs of plan administration were actually masked to the plan sponsor and the plan participants.

With the advent of fee disclosure regulations in 2012, the mask of revenue sharing was taken off and that revenue share subsidy was exposed as another cost of plan administration that acted as sticker shock to plan sponsors. Hungry financial advisors and competing TPAs used that opportunity to recruit new plan sponsor clients by promising lower fees with the use of lower fee mutual funds and/or exchange-traded funds (ETFs).

The cutting of revenue sharing fees did hurt the margins of TPAs that touted these more expensive funds, but fee disclosure regulations and technological improvements had already put pressure on these margins. Transparency and technological breakthroughs in the business narrowed the margins and these narrowing margins are here to stay.

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Hot Topics For 401(k) Plan Providers

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The RFP Process has to be on the up and up

Years ago, as a naïve associate at a semi-prestigious law firm (sorry Lois), I got the short end of the stick to attend a quarterly Taft-Hartley meeting in Staten Island for a multi-employer plan. If you ever have to drive from Long Island to Staten Island, you know what a short stick it is.

The head of the union wanted recommendations for an actuary for a part of their request for proposal (RFP) process. I thought of a few actuaries I could recommend, based on my 9 ½ years working for third-party administrators. I mentioned it to co-counsel and was pulled aside, he told me that the whole RFP process was a sham because the Taft-Hartley plan had absolutely no interest in hiring another actuary. They were happy with who they had.

The RFP process or the less structured process for reviewing plan provider including getting competing proposals from other providers is all about a process and a process that is an actual sham is not a real process. The current provider should partake in the RFP process or at the very least, the plan sponsor should treat all providers as potential providers instead of just deciding that they will keep the status quo because the status quo may not be sufficient.

When it comes to fiduciary responsibility that we preach as a plan provider, we must keep in mind that everything must be above board. Otherwise, it’s not really a process.

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It’s a question of intent

I live in an unincorporated village on Long Island and I’m always amused by the people who want to lead the community without the best of good intentions. There are so many who do charity fundraising for the community and there are those who only do for the sake of doing business for themselves. They will get involved as long there is something that the community can do for them. This isn’t unique to my village; I have seen this behavior with my former synagogue. there are people who come with the best of intentions and there are those who do not.

There is nothing wrong with getting involved in charitable endeavors. I think there is something wrong if you do to get direct business. Sure, charitable work is a great thing to highlight your services because it gives potential clients and spheres of influence that there is something more to you than making a buck.

The issue for me is whether you’re in it for the right reasons and sees that the organization is there as a platform to sell directly to those who are also involved in that charitable organization or to that organization itself. That’s what I have a problem with.

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Something to augment what you do

As everyone knows, I’m not a big fan of payroll providers being third-party administrators, at least the big two. However, there may be opportunities for you to augment your services and make a couple of extra bucks.

A perfect example is when I went to Shea Stadium, you had a very limited menu and it was all fast food. When the Mets opened up Citi Field as a replacement, they realized they could augment their bottom line by offering premium food at a premium price. I tell my son all the time about the limited choices at Shea when he is eating Shake Shack. You need to figure out a way to generate another revenue stream by focusing on something that is ancillary to your business, maybe it’s offering other products and services that connect with your business.

You know better about your business that I do, so just focus on what you can do and what you can add tha5 is close to what you’re doing.

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401(k) Plan Sponsors Maybe Cutting Their Nose To Spite Their Face

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Acosta resigns, so what?

I’m sure that everyone knows that Secretary of Labor Alexander Acosta resigned over the controversy of a plea deal he negotiated as a U.S. Attorney in Florida with Jeffrey Epstein back in 2008.

I’m sure you’ve also seen many articles asking what impact his resignation will impact the Department of Labor (DOL) in the promulgation of a new fiduciary rule and other DOL initiatives. My thoughts are the resignation will do very little. The DOL may change administration to administration, but very little from secretary to secretary. It’s not like Acosta was drafting the new fiduciary rule himself. You have long term DOL officials with the Employee Benefit Security Administration who do the rule drafting, so I don’t see how Acosta resigning will impact the release of another proposed fiduciary rule. Just my two cents, based on ERISA and political experience.

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Say goodbye and get them out

When a participant of yours leaves or is let go, I think one of the most important things you can do is make sure they roll out their assets from your retirement plan.

Sure it means that you might have fewer plan assets in your plan, but I think it’s important to roll out their assets because you don’t need the headache of dealing with former employees. You have notice requirements you still have to deal with participants that are former employees. Plus don’t forget that former employees are bigger pains to deal with than current employees. So I recommend making sure they roll out their money. If they are under your minimum threshold, then cash them out if they don’t. If they are above the minimum, do your best and try to have them move the money out.

You’ll be glad for many reasons that you did.

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