Two former employees of Trader Joe’s have sued the company alleging breaches of fiduciary duty in the management of the company’s 401(k) plan.
The $1.6 billion plan was targeted over Capital Research, the plan’s recordkeeper and the investment adviser to the American Funds. The recordkeeping fees were based on a percentage of assets and came in at $140 a head and the suit alleges that fees should be closer to $40 a head. Also, the plan was targeted over the use of proprietary American Funds and not for using low-cost index funds.
The lawsuit will show whether there is something bad about Trader Joe’s, other than the parking lot.
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The required minimum distribution rule for both qualified plans and individual retirement accounts is being pushed to 72 instead of the odd 70 ½. What does it mean? To me, it means that people are living longer and plan providers need to adjust their strategies to reflect that. The days when people would stop working at 65 are long over, people are living longer and stretching out their retirement years because they either have to or want to.
Whether it’s a participant population that is getting younger, older or a wider disparate age, plan providers need to understand the changes and make changes on their own to reflect that. Whether it’s target-date funds, enrollment meetings, website interfaces, there are so many things to consider and reflect that people are living longer and working longer.
Plan sponsors with their proprietary funds have a unique problem. Using proprietary funds will lead to litigation and not using them, makes them look bad in the eyes of competitors. A 401(k) plan sponsor not using their funds is like restaurant workers who order takeout, it looks bad. Yet there is a price for these proprietary fund plan sponsors for looking good.
As part of a class-action lawsuit, M&T Bank or its insurers will pay a gross settlement amount of $20,850,000. Also, M&T will have to hire an independent consultant who will review plan investment options and opine whether proprietary funds should be retained. if any proprietary M&T funds are retained, those mutual funds shall rebate to the plan the same percentage of investment management fees rebated to other retirement plans (or their recordkeepers) that hold the same share class of such proprietary funds.
It is my opinion that these types of settlements are the cost of doing business for a mutual fund company or a company that has their proprietary mutual funds.
I was born in 1972 and aside from fashion, music, and interior decorating, I’m a fan of the 1970s, which was the decade for baby boomers. The 401(k) plan business sprouted out of the 1980s and it grew in tandem with the generation that benefitted the most of it, that same baby boomer generation. I have clothing that is older than many of the kids coming into the workforce today.
This generation called millennials never knew a life that wasn’t in an internet age, they don’t know what it’s like to make 401(k) investment changes through pen and paper or the phone. Yet, most plan providers treat millennials and baby boomers the same and it’s ridiculous. Whether it’s the communication, the enrollment meetings, and the web interface, most plan providers think they can rely on what worked for baby boomers. No millennial is going to say OK, Boomer to me, but I realize that there are vast differences between the generations that plan providers service and there will be a time in the next 15-20, where my generation, Generation X is going to start making retirement plans. If this 401(k) industry is going to thrive it’s because it adapted to a changing environment of plan participants, who may interact differently and deal with retirement differently. Plan providers need to look at their communication tools and see what they can improve with a generation that may not be able to save as much as baby boomers did (thank you student loans).
Imagine if Mark Zuckerberg hatched the idea for Facebook, yet all he did was talk about the site instead of developing. Imagine if Jeff Bezos talked for a year or two about selling books on the Internet instead of going through developing the actual Amazon website.
It’s not enough to have a great idea in the retirement plan space, you need to develop a plan to carry it through to the marketplace. I will have to say that one of the most annoying parts of this business is hearing plan providers with terrific ideas, yet failing to come to the market with them. I once had a third party administrator client who promised he’d make us all rich in the open multiple employer space, instead, he dawdled long enough for the Department of Labor to put the kibosh on them in that TAG advisory opinion.
Great ideas aren’t enough, a plan to take those ideas to the marketplace are needed.
The biggest change under SECURE Act is the treatment of long-time, part-time employees under your 401(k) plan. Going forward, it will change how you see the 401(k) plan and how you will have to start measuring if you have long term, part-time employees.
Under current law, your 401(k) plan can exclude part-time employees from participation if these employees don’t complete 1,000 hours of service in a year. The SECURE Act will require you to extend participation to any part-time employee who has worked at least 500 hours in each of the immediately preceding three consecutive 12‑month periods (for salary deferral purposes only). That means you won’t have to provide matching or other employer contributions to these part-time employees. These changes are effective for plan years beginning after December 31, 2020, but you won’t have to consider hours of service before 2021 as part of this eligibility calculations.
That means that the change will take a couple of years before these part-time employees can be considered eligible. Before that time, your 401(k) plan will have to be amended to incorporate these new eligibility rules and you will need to update your payroll and/or human resources information systems to identify and track this new class of part-time employees for eligibility purposes.
I can’t predict sporting events or the lottery, but I can tell you that this change will cause a lot of plan sponsors to make mistakes by failing to count hours and cover these part-time employees. So I think you need to start counting hours and keeping tabs who will be eligible.
My latest newsletter can be found here.
My latest article for JDSupra.com can be found here.