My latest newsletter for retirement plan providers can be found here.
When I first started out, I worked as an attorney affiliated with a third party administration (TPA). The problem with this TPA that it had 4 main partners and two other employees who had small ownership interests; it was a tribe with two many chiefs. Another problem is that it can never keep order in their daily 401(k) administration practice.
It seemed that every 6 months, there was a new method in running that area. It was either a new person in charge, a change in the delineation of duties, or some other change. One change where the person in charge of administrators was made the head of the daily 401(k) operation caused the entire compliance staff to quit. That person placed in charge was no-nonsense and his authority was curtailed by the chiefs when he was forced to report to someone else.
The TPA never kept to its plans, it always changed them without giving one a shot. At one point, one of the chiefs (still a chief even though they sold the business to a national conglomerate) said that if the new plan didn’t work, he’d fire himself. It didn’t work out and Dan didn’t keep to his promise. It was only near the end when the entire business was going to close as the entire block of business was sold off that things were starting to run well.
Any plan that you have in reshaping your business has to take time and it has to be the right plan. Changing plans all the time without giving time for one to work isn’t the way to run a business. It’s like the old Soviet Union who every 3 years, came up with a new 5 year plan.
When Honda unveiled the 1986 line of Acura cars, it was one of the first entrances of the Japanese Auto industry into the luxury part of the market. While the cars were impressive, they were initially beset by factory defects. Eventually, Honda was able to work out its kinks on Acura and it became the most successful Japanese luxury car brand until the rise of Lexus. Based on that experience, I’ve learned not to buy the first year of a new model or car redesign to ensure the kinks are worked out.
In the 401(k) market, when there is a new product introduced, the financial industry and the third party administrators embrace the product without seeing if the kinks were worked out. The perfect example of this was the introduction of target date mutual funds. The mutual fund industry thought that the target date funds were the cure for participants who were overwhelmed by the many funds that were offered for participant direction. Target date funds were supposed that one stop shop that a participants could rely on, to take them into retirement as the fund would recalibrate to a more fixed income tilt as the fund reached the retirement target date.
As well know, the kinks of target date funds weren’t worked out. The bear market tested out the kinks and the kinks were terrible. Participants were unaware of their large equity exposure in many funds and there was a wide variety of equity exposure within the target date funds offered by mutual fund companies for the same specific retirement target date.
So my point is that the 401(k) industry will churn out new products to help with retirement savings, just make sure the kinks are worked out before you invest in them.
Being a plan sponsor is a tough job and the amount of paperwork that goes with it can be overwhelming. The paperwork includes plan documents, summary plan descriptions, amendment, valuations, trusts statements, and payroll.
The fact is that as a plan fiduciary, plan sponsors need to keep good records. It’s important to have correct records when you need to pay former plan participants out, but they need to protect themselves. I have seen too many plan sponsors get into trouble with plan compliance or audits by the Internal Revenue Service or Labor Department because they no longer have copies of the documents they once had.
While spaces for document file cabinets are usually at a minimum, there is a friend out there than can help you avoid losing necessary plan documents and that’s a scanner.
Saving all the necessary plan documents and valuation reports through scanning them as a pdf can help plan sponsors avoid losing documents and save on the need for space of filing cabinets. While plan sponsors should maintain original copies of all plan documents, they can scan the rest. A good scanner won’t set you back and plan sponsors probably have that option with their copier.
Plan sponsors should scan all their plan files as they come in and label them in any easy to understood manner. Creating specific directories on the network for specific plan years is also a great way to keep these things organized.
Something as simple as a scanner can help a plan sponsor exercise their duty as plan fiduciaries.
One of my favorite lines from Seinfeld is when George Costanza gets a job where Elaine works at Pendant Publishing. He’s fired for having sex in the office with the cleaning woman. George pardons ignorance, asking whether it was wrong for him to do that and if it was, he had no idea.
When it comes to 401(k) plan sponsors, they should know that using plan assets for their own benefit is wrong. They can’t claim ignorance because a retirement plan is for the exclusive benefit of participants.
Wallace Gregerson, the former owner of a defunct lighting fixtures company called Lighting Affiliates, Inc. is going to spend 3 1/2 years in prison for stealing $755,000 in 401(k) plan assets to fund country club dues, business expenses, and his daughter’s tuition.
I still find it amazing that people still do this because stealing from a retirement plan that has a Form 5500 annual return and plan providers who serves as a check and a balance leaves a trail of evidence that is going to lead straight to the boss he steals. Gregerson did fool the plan providers when he withdrew the money with claims he was starting another plan, but he was tripped up in the lies eventually. Stealing from a plan is like running a ponzi scheme; you will eventually get caught.
My latest article for JDSupra.com can be found here.
I remember as a kid that there was a move to use margarine because of the cholesterol that was in butter. Who can forget those talking Parkay carton commercials? Of course, we later learn that many margarines had high amounts of trans fats, which is just as bad as cholesterol. For the past 45 years, we’re still having a similar debate with sugar vs. artificial sweeteners.
In the retirement plan business, we don’t deal with margarine and NutraSweet, but we have been talking a lot about fees. Plan administration fees have been the talk of the retirement plan business for the past 10 years and continued focus thank to the fee disclosure regulations put forth by the Department of Labor. The obsession about fees can be a problem when the discussion about selecting and or replacing plan providers is based solely on fees. Fees are really about reasonableness and paying reasonable plan expenses for the services provided. It’s not about picking the cheapest provider.
Focusing too much on fees means there is less focus on finding the right providers and a good chunk of the time, the best provider candidate for the plan isn’t the cheapest. I see to often, plan sponsors picking a cheap third party administrator that is short on competence, which leads to higher compliances costs later when penalties are tacked on for incompetent administration.
Fees should always be a concern but focusing too much on fees is like eating margarine with high trans fat because it’s as unhealthy as butter without the taste.
My friends at Plan Design Consultants have created a new program called KIC(k)START, which is an approach for them to garner more plans and help out the advisors they work with.
The program offers 401(k) plans with safe harbor plan design. What’s unusual is that as a third party administrator (TPA), Plan Design Consultants waives the installation fee and offers a flat $1,000 fee, when the industry usually charges per head or by assets.
I contacted J.D. Carlson at Plan Design Consultants and asked him about the program. Carlson said that he was trying to find creative ways to help their advisor partners and they are going to try to utilize this program to grow their client base.
As for the elimination of the installation fee, Carlson said: “We wanted to create an incentive for start-up plans and make this thing really, really easy. So eliminating the one-time set-up costs was a no-brainer. The provisions for KIC(k)START are mostly pre-set with some choice in a few areas, this template approach minimizes our time and creates the opportunity to remove the install fee.”
As far as the flat fee, Carlson said this approach was best for the KIC(k)START program and he didn’t see this as something that will catch on in the industry as the new standard. “I’m not sure that flat fee is really the future of 401(k) Administration. I still believe that TPAs bring immense value and expertise when it comes to compliance and administration work. The beauty of 401(k) plan design is that there are so many options, so many different ways to build/design a plan, therefore one flat fee doesn’t really mesh well with 401(k) Admin. However, KIC(k)START is a creative approach that utilizes simplicity and the ability to take advantage of a low, flat fee structure”, said Carlson.
More information can be found at http://www.plandesign.com