The Rosenbaum Law Firm P.C. Blog

The non-ERISA §403(b) space is the last bastion of high, hidden costs in retirement plans. That’s the problem when a plan isn’t covered under ERISA and the fee disclosure regulations. So when it comes to 403(b) plans for teachers, the action is left to the states and until recently, the states have been limp in any enforcement action.

Delaware’s Attorney General reached a settlement with 403(b) provider Horace Mann, which involves $500,000 in fines and the reimbursement of costs including annuity fees to as many as 157 educators. This is in addition to the Securities and Exchange Commission and New York state regulators starting to take a look at 403(b) plan providers.

The attorney general’s office started looking at Horace Mann and a former registered representative in 2016, shortly after Delaware’s  403(b) plan switched from using 13 companies to administer accounts to Voya.

A Horace Mann representative advised many of his 403(b) clients to stop contributing to the 403(b) program after the switch to Voya, and instead purchase Horace Mann annuities in individual retirement accounts. Horace Mann admits Hofmann failed to provide key disclosures and it’s clear he no longer works at Horace Mann.

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

For the past 7 years, fee disclosure has certainly helped you as a plan sponsor to finally understand the true cost of plan administration. That’s important because you have a fiduciary duty to only pay reasonable plan expense.

The problem is that fees are only one part of the picture. You only have to pay reasonable plan expenses and not the lowest. You need to weigh the cost vs. service. Just hiring a plan provider that is cheap is an absolutely bad idea. Nothing wrong with picking up the same product on discount at Target than Macy’s, but retirement plan services don’t work that way because plan providers don’t offer the same exact service. Provider A charging $25 a head might is probably offering a lower level of service than Provide B that charge $50. It’s your job to compare the pricing and services between Providers A and B.

As a plan sponsor, you can’t just shop on price. Price is important, but it’s just one factor in considering hiring a plan provider.

I was a first-year law student participating in moot court, just because all second-year students participated even when I knew I had zero interest in ever being a litigator. In those days, my mother would buy me these cheap character ties at Marshalls, as well as these really nice Nicole Miller ties (it was the 1990s).

The second-year students were in charge of the moot court and one of the judges in my case was a highly opinionated student government official. After I presented, he criticized my Flintstones tie as being inappropriate. I don’t judge people by the look of their tie, but a lot of people do. While I like to wear Mitchell and Ness jerseys, I don’t wear them to important meetings with potential clients and if I do dress that way with other providers, I warn them ahead of time that I’m doing it. The point is that while you should never judge a book by its cover, people still do and you shouldn’t lose a potential opportunity just because of the way you dressed.

Every time I’ve spoken to other plan providers about sure things they are working on, all I later see are missed opportunities. There are no sure things in this business, there are opportunities.

Even when you have a signed contract with certain retirement plan projects such as starting a new multiple employer plan, it’s still not a sure thing because you still got to bring assets over to make a go of it. The sales process is long, tedious, and at certain points, not fun. It’s a marathon with enough twists and turns because selling retirement plans isn’t the same as selling products that are impulse purchases like candy at the supermarket checkout line.

I’ve seen many opportunities fall by the wayside that was supposed. to be sure things because of the cockiness of the provider and them counting their eggs before they’re hatched.

A long time in a galaxy, far far away (the time before fee disclosure regulations), I talked to the top salesman of a certain third-party administration (TPA) firm that charged an asset-based fee. The TPA wasn’t a producing one, they just did the TPA work.

I asked the salesman why they priced plans that way because my experience working for TPAs is that it’s no more to run a 100 person $100 million plan than a 100 person $10 million plan, that TPA work is based on the number of heads (accounts). I believed that pricing based entirely on assets wasn’t rational.

Well, some ERISA litigators feel the same way. One of the big staples of the Trader Joe’s case is the fact that Trader Joe’s TPA fees are asset-based and therefore, aren’t rational or prudent under ERISA. “The cost of recordkeeping services depends on the number of participants, not on the number of assets in the participant’s account. Thus, the cost of providing recordkeeping services to a participant with a $100,000 account balance is the same for a participant with $1,000 in her retirement account.” I’ve been saying that for years, the only difference is that I’m not suing anyone.

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.

My latest newsletter for retirement plan providers can be found here.

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

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.