The Rosenbaum Law Firm P.C. Blog

I’m not a fan of reporting legislation, but this piqued my interest.

Sen. Pat Toomey (R-PA), a member of the Senate Finance Committee, is working on a bill that would allow plan participants to withdraw funds from their 401(k), 403(b), 457(b) and IRA accounts to pay for long-term care insurance (LTC) without being subject to the 10% early withdrawal penalty.

The legislation that will be introduced in the next few weeks will also allow up to $2,000 in withdrawals annually per individual to be excluded from income tax, provided the amount is used to pay for qualified LTC insurance for the participant, their spouse or a dependent.

According to the American Association of Long-Term Care Insurance, the average cost of a policy in 2019 is $2,050 for a single male (age 55), $2,700 for a single female of the same age and $3,050 for a couple who are both age 55.

I’m conflicted by this legislation because I don’t like retirement plan leakage, but the fact is that long term care costs are a concern especially when there is a good chance that most participants will need it.

Charles Schwab, the largest publicly traded discount brokerage firm and of the largest custodian of 401(k) plan assets has agreed to acquire TD Ameritrade for an all-stock transaction valued at $26 billion. The deal brings together two of the largest brokerage firms, with assets totaling north of $5 trillion, and is expected to close in the second half of 2020.

We have seen a tremendous consolidation in the third party administration and advisory businesses, so it should come as no shock that there would be consolidation in the brokerage/custodial business.

All I can say is expect more deals like this in the future.

Amazon is a mover and shaker in e-commerce and they have a pretty large 401(k) plan now. As of the end of 2018, their 401(k) plan has almost $6 billion in assets. So when Amazon ditches Vanguard funds for Fidelity as its recordkeeper for 2020, that is a big deal. Fidelity already has almost $2 trillion in plan assets under administration and handles plans for Facebook and Microsoft.

When it comes to your health, there are certain symptoms you should look out for that could be a harbinger of something wrong. The same can be said of your 401(k) plan. Here are some things to consider:

1. Late deposit of salary deferrals.
2. Low average account balances.
3. No ERISA bond in place.
4. Low deferral participation rate.
5. Compliance testing failures, corrective contributions made.
6. Too many hardship requests.
7. Too many defaulted plan loans.
8. No benchmarking of fees.
9. No review of plan providers.
10. No formal fiduciary process followed.

If you just have one of these symptoms, your plan needs a checkup.

In the past 35 years, it changed on who had to take out a required minimum distribution (RMD) from a qualified retirement plan. Thankfully, it hasn’t changed since 1997. So a person who is a 5% owner has to take out an RMD from the plan after attaining age 70 ½. Non-owners can wake for their RMD until they retire.

As a plan sponsor, you need to make sure that you watch out for 5% owners who may be near their RMDs as well as non-owners who are no longer working for you and cant be found. RMDs are a big issue because a failure of a participant to take an RMD will get that a participant a huge 50% excise tax.

If you do mess up, it’s on you as a plan sponsor to fix that and the best bet is an application to the Internal Revenue Services’ Voluntary Compliance Program to seek a way out of the participant getting a 50% excise tax.

Studies previously showed that participation rates in a 401(k) plan are negatively impacted when there are more funds on a 401(k) fund lineup. However, a new study suggests that adding more funds is better.

A report from Morningstar finds that increasing the core menu size not only results in increased adoption of a plan’s default investment, but it also can result in more efficient portfolios. The report showed that increasing core menu size resulted in increased adoption of the plan default investment, from approximately 74% for plans with 10 funds in the core menu to about 87% for plans with 30 funds.

The report is compelling because it stated that previous studies on fund lineups were conducted before the qualified default investment alternative (QDIA) was added to the Internal Revenue Code in 2006.

I just thought I would throw that out there.

As part of an analysis, Fidelity Investments compared average asset allocations of participants to an age-based Target Date Fund and they found that nearly a quarter (23%) of 401(k) savers still have a higher percentage of equities than recommended, including 7% who are 100% invested in equity.

This should shock no one. Again, I always believe that participants are ill-equipped to make sound investment decisions and this analysis is consistent with that. As an industry, we still don’t do enough in educating plan participants.

One of my favorite sayings is that you should never make yourself a target, but when you are a mutual fund company and you use your own proprietary funds as an investment option in your 401(k) plan, you are certainly a target for the ERISA litigators as part of a class-action lawsuit.

Prudential now faces a self-dealing lawsuit filed by participants in its defined contribution retirement plan, alleging various fiduciary breaches under the Employee Retirement Income Security Act (ERISA). The lawsuit alleges that Prudential put their interests ahead of those of the plan “by choosing investment products and pension plan services offered and managed by Prudential subsidiaries and affiliates, which generated substantial revenues for Prudential at great cost to the plan.

My feeling on these type of cases is that Prudential doesn’t put proprietary funds in their plan to make money off their employees, they do so for appearances’ sake. It reminds me of the joke where restaurant workers order takeout for lunch, it looks bad. Inconsistent with the joke, Prudential using other fund family products and not their own proprietary funds look bad too.’

The problem for many of these companies is that the cost of appearances will increase, thanks to the cost of defending class action lawsuits like this.

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

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