The Rosenbaum Law Firm P.C. Blog

A federal court ruled that Edison International must pay more than $7.5 million to compensate plan participants for its decision to include high-fee retail share mutual funds in its 401(k) plan when identical institutional share classes were available at lower cost in the long running Tibble v. Edison case.

The federal judge said Edison breached it fiduciary duty of prudence by including 17 mutual funds in its 401(k) plan that could have been obtained at lower cost. The case was a watershed for the industry because it was the one big case that held that plan fiduciaries need to make sure of the costs of the investment options offered under the plan.

This decision in California is now only the second time that a final judgment reached after trial in a case accusing a 401(k) plan fiduciary of imprudent and disloyal investment selection. The first involved a $13.4 million judgment against ABB Inc.

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

There is a great scene from the movie In The Line of fare where Clint Eastwood’s character Frank Horrigan who is a Secret Service agent is on the phone with potential Presidential assassin Mitch Leary, played by John Malkovich. Leary calls Horrigan a friend on the phone and Horrigan retorts: “I’ve seen what you do to friends.” Horrigan just saw photos of Leary’s dead friend who was killed because Leary slit his throat.

If you see someone do badly to someone, realize that you can be next. So if you’re working for someone and they do something bad to an employee, that means they can do that to you. Same with a plan provider that you’re working with. If you see them acting in an unprofessional manner with an employee or another plan provider, chances are they will do that to you. Heck, I’ve learned it the hard way with a plan provider I worked with, who did some terrible things to their employees. It shouldn’t have been a surprise when they skirted a huge legal bill and then avoided service of process before I eventually got a default judgment. You’re not special, so bad behavior geared towards someone else can eventually be geared towards you.

The Fiduciary Rule is like a bad soap opera where the action takes too long to happen and it’s just stretched out over time making small turns with some end game to happen later down the line.

The Office of Management and Budget has approved a proposal to delay for 18 months implementation of the remaining provisions in the Department of Labor’s (DOL’s) fiduciary rule.

The DOL has proposed pushing back the applicability of the enforcement mechanisms in the fiduciary rule from Jan. 1, 2018, to July 1, 2019, while it undertakes a review of the measure mandated by the Trump White House.

What does it mean? The DOL under Trump wants to gut the rule and it needs the time and political capital to do it. Taking out the enforcement mechanism of the fiduciary rule makes the rule essentially toothless. It kicks the can down the road to the point where the DOL could kill the new rule once and for all. The problem with kicking down the can is that any political future is uncertain. Just ask the DOL under President Obama making the applicability date in 2017 when they thought Hillary Clinton would be President.

What will happen with the rule? Your guess is as good as mine.

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

My latest article for JDSupra.com 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.