The Rosenbaum Law Firm P.C. Blog

I’ve seen the articles that pop up about how 401(k) plans are somehow to blame for the lack of retirement savings or their replacement of defined benefit plans as the savings vehicle for private employers. I don’t like to blame inanimate objects and I won’t blame 401(k) plans for what people do.

401(k) plans popped up when a man named Ted Benna used his interpretation of the 1978 Internal Revenue Code to create a 401(k) plan for his employer. The idea was that this cash or deferred arrangement would have employees defer income on top of their pension plan. Ted didn’t think at the time that 401(k) plans would grow to the point that they would be the savings vehicle of choice for employers. 401(k) plan popularity exploded in the late 1990’s thanks to a booming stock market and technology that made it easy for participants to direct their own investments with the intent of eliminating the liability for investment losses for the employer.

People blame the 401(k) plans for the death of defined benefit plans. I think that’s nonsense. I think they were going to be phased out eventually because employers were tired of paying for the retirement benefits of their employees. People don’t want to mention this, but one of the biggest problems that defined benefit plans and Social Security have is that people live longer now. No one wants to mention it, but one of the biggest problems it has was that when it was created to provide benefits for retirement at age 65 in the 1930s, the life expectancy was 64. The same can be said for defined benefit plans. You tie an employer benefit tied to age 65 and people work past 65, that’s a problem. The problems with funding defined benefit plans, especially when in times of down markets and the problems with people working and living past 65 are problems that exist whether 401(k) plans were there or not.

Employers would have phased out defined benefit plans whether 401(k) plans existed or not because of the cost. Cost of employees is always a consideration and providing health benefits would be a problem if 401(k) plans didn’t. You can’t blame 401(k) plans for the inevitable cutback in employee benefits; especially defined benefit plans. Employers would have found a way to shift funding retirement benefits to the employees to the point where they might not have offered any type of plan if something like the 401(k) plan didn’t exist. Maybe they would have shifted to a money purchase plan, but that requires a set contribution every year.

The 401(k) plan isn’t perfect, it’s one of the reasons I still have a job. However, blaming it for the death of pensions is silly. Pensions would have died anyway, thanks to cost.

There are certainly going to be lots of losers when the fiduciary rule gets implemented and there is going to be on clear winner. I’m not talking about registered investment advisors or attorneys who made a mint in getting broker-dealers to comply.

The big winner is going to be benchmarking services. In order to meet the best interest exemption of the new rule, brokers are going to utilize benchmarking services a lot more to determine whether their fees are reasonable because that’s going to be one of the ways that brokers can show that what they did was in the best interest of clients.

It’s just a shame these companies aren’t publicly traded because that’s a place I’d put some shekels in.

The Plan Sponsor Council of America’s newest annual report shows that in 2015, 25.5% of small 401(k) plans offer automatic enrollment. In their survey, small plans are considered plans with less than 50 participants.

While the typical default rate of automatic enrollment is 3%, 51.6% of automatic enrollment plans have a default rate greater than 3%.

For smaller plans that don’t have a safe harbor plan design and have potential plan testing issues, automatic enrollment is a no brainer since it helps boost the deferral rate for non-highly compensated employees and the rues concerning them give enough liability protection for plan sponsors to offer them.

With the fiduciary rule coming down the pike in April, people ask me what the next big thing to shake up the retirement plan industry will be. I’m no soothsayer, but I think there will be a couple of areas that the Department of Labor (DOL) will probably take a look at.

I think one area that the DOL is going to factor on is trying to get plan participants who direct their own investments in a 401(k) plan more education and/or investment advice to help them make informed investment decisions. With the new fiduciary rule, I expect that investment advice will be easier for plan sponsors to provide.

The second area is multiple employer plans (MEPs). I believe that the DOL will correct their error from 2012 and make it easier for Open MEPs to function because it would be easier to cover employees in 401(k) plans by making it easier for employers to offer them 401(k) plans without all of the liability that goes with it.

I’m sure that people will say that the Trump presidency will put a kibosh on any type of retirement plan reform, but the fact is that positive change in the retirement plan industry has happened under both Republican and Democrat administrations.

In my practice, I always talk about how plan fiduciaries can be held personally liable for any issues regarding their retirement plan. Many plan sponsors just don’t pay any attention to that threat until they see it happen to themselves.

However, personal liability does happen and it just happened in a case involving an Employer Stock Ownership Plan (ESOP).

In Mississippi, in the case of Perez v. Bruister, Herbert C. Bruister, owner of a DirecTV installation company accused of mismanaging an ESOP, must turn over three vehicles (which includes two Lexuses) as part of a $6.5 million judgment (plus $3 million in attorneys’ fees). Bruister was held to have caused the ESOP to purchase his company stock at an inflated price.

Bruister has to also cooperate with participants and the Department of Labor in selling his multimillion-dollar life insurance policies, which he offered as security pending an appeal.

The case has been dragging on for years, so the Court refused to take Mr. Bruister’s pleas of poverty or lack of a car to reduce the award against him.

So I often talk about how plan fiduciaries can be held personally liable, well here is proof that it can happen.

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

When it comes to mutual funds offered under 401(k) plans, I’ve always believed that the multiple share classes was something out of an alphabet soup. I’m not an advisor, so I don’t know how or why there is so many share classes, but it puts a cloud on what should be a transparent proposition: what the investment costs and what the advisor is getting for recommending it.

I believe one of the positive developments you’ll see from the fiduciary rule is the elimination of many share classes from this alphabet soup, which always puts the plan sponsors on the hook for potential liability when a less expensive share class is readily available. The fiduciary rule with the best interest contract exemption will help eliminate share classes that are put in place for the best interest of the advisor and not of the plan sponsors and participants. Brokerage firms and mutual fund companies will come up with the great idea that less is more, so there will be less available share classes for retirement plans and that will end up saving participants money in administration expensive. Tibble v. Edison was a watershed because it put share classes as a atopic that is a big concern for plan sponsors. Requiring all advisors to act in the best interest of clients will end the practice of selecting funds and share classes based on the trails they make for advisors.

You will still have share classes, dealing with the size of the plan, but there will be far less in terms of classes with varying fees for the advisors.

In a very novel retirement fee lawsuit, a plan sponsor is being sued over the cost of multiple plans and the use of multiple record-keepers.

The class action complaint seeks damages on behalf of nearly 20,000 participants, who argue their nearly $1 billion in combined plan assets should have earned them a better deal on investments and administration. The case in the Federal District Court of Minnesota is Morin et al vs. Essentia Health.

In thus case, participants argue their employer failed to use the combined bargaining power of its two retirement plans—one a traditional defined contribution plan known simply as the Retirement Plan and the other, which is a 403(b) plan.

The Retirement Plan had 16,848 participants with balances and held approximately $982 million in assets at the end of 2014. The 403(b) Plan had 2,836 participants with balances and held approximately $103 million in assets. The plans were combined administratively in 2012, even though they are still separate plan.

The claims for damages look to the period prior to the administrative merger of the plans. According to plaintiffs, defendants kept the plans’ records and operations separately.

Essentia Health used BMO Harris as the record-keeper for the Retirement Plan and Lincoln National Corporation as the record-keeper for the 403(b) plan.

The plaintiffs claim that while the Plans were operated as two separate entities, this should not have diminished their combined bargaining power and should have offered plan providers the ability to service both plans as a way to lower fees.

They claim that Essentia Health was paying $142 per head for administration of the retirement plan, which is pretty high for a plan with nearly a billion in plan assets. Quite honestly, I don’t know if the $100 million from the 403(b) plan would have helped, which is what I think was a bloated amount.

I still think this is a very eye opening case by a lawsuit against an employer with multiple plans and I don’t understand the rationale of an employer to use multiple providers for multiple plans in this day and age of competitive pricing. I also don’t think the 403(b) plan is much of an issue because I think the fees were way over inflated over the nearly billion dollar defined contribution plan.

I’ve been involved with so many small organizations both profit and non-profit in one form or another as employee, officer, or client. The one thing that is consistent with each organization is that the leadership sets the tone. The culture of the place is dependent on how the leaders set it as to what kind of organization it is. People learn from the top and they will take their cue from their leaders.

Whether an organization is wonderful or whether the employees will stab in each other in back can trace its steps to the acts of their leaders. So that means that if you’re a plan provider and you’re in charge, you’re the one is essentially going to be the one responsible on what that organization will stand for in the marketplace.

You need to stand for professionalism, respect, and openness for your clients and your employees. Dysfunctional organizations have one thing in common: dysfunctional leadership. One of my favorite sports figures was Al Davis whose Oakland-Los Angeles-Oakland Raiders had the motto: “Commitment to Excellence”. While this is the first time that the Raiders have made the playoffs since 2002, the motto still resonates. You need to make sure that your organization has a commitment to excellence and a dedication and respect for your clients and employees. Anything short of that isn’t good for business.

There is a point where you have to realize that no matter how good you are and no matter how good your service is, there is always going to be a client that isn’t going to be happy with you. Sometimes no matter how hard you work and how much you try, there is always going to be someone out there that you cant please. It kind of reminds me of the managing attorney at my old law firm. Sometimes, people don’t like you and you can’t fathom why. Sometimes you’ll have some clients who will dislike you from day one and you can’t change that.

What can you do? Just accept it and move on and ensure that this type of client is few and far between. You cant be sensitive and try to drown out the criticism by attacking the client. Just accept the fact that there are times that you just can’t satisfy a client.