The Rosenbaum Law Firm P.C. Blog

Schwab conducted a survey where 61 percent of millennial women and 44 percent of millennial men feel they don’t know what their best 401(k) plan investment options are.

While I suppose that I’m a Generation X member, these results are alarming because the retirement savings of the millennial generation is going to be the future of the 401(k) plan business. The point here is that it shows that we have a communication problem between plan advisors and plan participants as to what the best investment options and I believe it’s because the investment education provided to plan participants isn’t enough. These are people who clearly need their hands held to make the best investment decisions they can. It’s not a knock on millennials because I do that by just watching the latest season of Survivor, but there is certainly a major issue in having these people make their own investment decisions,

With the Fiduciary Rule going to be implemented or delayed come April, one thing the Department of Labor should certainly consider is the expansion of investment advice available to plan participants because by the looks of the survey, people from the next generation of 401(k) plan participants are having a rough time in making investment decisions that they can deal with.

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

When I first started in the business in 1998, daily valued, participant 401(k) plans were starting to become a big deal because the technology caught up with the idea of plan participants directed investments and that their changes can be made daily. Eventually the Internet caught up and allowed investments over the web. One of the biggest selling points about participant directed 401(k) plans is that plan sponsors weren’t going to be held liable for losses incurred by participants who exercised investment control. The problem is that ERISA 404(c) wasn’t a real bargain.

The litigation over larger 401(k) plans these days tend to be over the mutual fund lineup of participant directed plans that was supposed to offer sponsors some offer of protection, the problem is the protection is limited to the plan sponsors prudently selecting investment options and giving participants enough information to make informed investment decisions, while we haven’t had many lawsuits over the education piece of 404(c), I think we eventually will. The focus of the litigation is dealing with the selection of investments and its connection with plan expenses. Some plan sponsors have been sued because the use of revenue sharing was a factor in selecting plan investments and sponsors have been sued for selecting retail share classes of mutual funds when less expensive institutional share classes of the same funds were available.

Plan sponsors are being sued over fund lineups because when they set them up, they were sold a bill of goods about liability and low cost that really want true, plan sponsors and their plan providers didn’t have the foreseeability that revenue sharing and high investment expenses as well as plan expenses were ripe for litigation because up until about 9 years ago, a plan participant had a tougher time suing a 401(k) plan. It’s only because of the evolution on legal thinking about plan costs and action by the Department of Labor that has spurred ERISA litigators to target plans with expensive fund lineups. In addition, don’t be surprised that litigation will eventually finds its way against 401(k) plans with large fund lineups because ERISA litigators will argue that large fund lineups aggrieved participants because too many funds is overwhelming and has the potential to depress plan participation.

While not having such dangerous side effects, 404(c) plans have turned into a Thaliodmide for plan sponsors that didn’t properly review investment lineups for expense related issues.

Andy Puzder, CEO of CKE Restaurants Inc., the parent company of fast food chains Hardee’s and Carl’s Jr., will be the next Secretary of Labor if confirmed by the Senate. Apparently, Puzder’s company has a lousy 401(k) plan and I say: so what?

While people don’t know how Puzder will deal with the fiduciary rule, reporters are trying to find and angle and they thought they found one with the fact that his company has a lousy 401(k) plan. I don’t see that as real news because I would have been surprised if his company’s plan was actually fine.

Brightscope gave CKE’s plan, a 50, which is an average score for restaurants. The top rated fast food plan according to the Brightscope rating has a 73.

CKE is in the fast food business and unlike McDonalds and Burger King, a good chunk of their restaurants are company owned and not franchises. They have 20,000+ employees and when the people working in the restaurants and when they want $15 an hour in pay, they’re not going to have a lot to save for retirement. That’s why the deferral participation rate is 10% and the average account balance is only $39,000.

Fast food plans are lousy in general. The third party administrator is Marsh & McLennan Companies who in my mind are expensive for plans with only $47 million in assets (I say only when you look at the head account of participants). Another reason for the lousy score is that they are stingy with contributions, they don’t make any and that is par for the course for fast food companies.

I still contend that most retirement plans are poorly run and that’s the fault of those who have a say in running the plan. I would think CKE’s plan has some sort of retirement committee and Puzder’s biggest failing is that the buck stops with him on why the plan is so expensive for participants. The fact that his underlings are running a poor plan is a reflection on him, but I think it would be a greater reflection if CKE was in another business other than fast food. So when they say CKE has a bad plan, I put an asterisk next to it because that’s the story of a fast food plan and doesn’t give me any insight on how Puzder will act in the retirement plan space.

I’ve heard of for years on how small 401(k) plans and their plan fiduciaries don’t get sued. While they are never going to be the target for a class action lawsuit because they don’t have enough assets to justify an ERISA litigator to use, they’re still a threat.

While it won’t make the evening news, there is another Department of Labor (DOL) lawsuit against a small plan maintained by a defunct plan sponsor and the plan fiduciary who was responsible for a not so nice thing. The DOL is suing a defunct Pennsylvania employer Wind Turbine Solutions LLC and the plan fiduciary Matthew Kenneth Smith for what went on in the Wind Turbine Solutions LLC Retirement Trust.

From 2011 until the company folded in April 2014, Wind Turbine Solutions and Smith served as plan fiduciaries. They withheld approximately $78,000 from the employee participants’ wages and salary for salary deferrals; failed to transfer a significant amount of the deferrals to the plan; and failed to pay interest on the unremitted contributions.

The remittance of salary deferral contributions is a big thing for the DOL to crack down on, so it’s always important for a plan sponsor whether in business distress or not, to timely remit what’s been withheld.

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

Thanks to fee disclosure regulation and litigation against plan sponsors, plan sponsors are focusing on the costs of administering their plan. That’s great, but there’s a problem because of the focus. A study recently shows that mot plan sponsors see reducing costs as a primary focus of a plan sponsors, but that means they totally doesn’t get the Fiduciary responsibility about fees.

Plan sponsors as a Fiduciary have the responsibility to pay only reasonable costs, reasonable costs isn’t the same as lowest costs. If a plan sponsors is being charged a fair fee from a competent plan provider in relation to what other providers charge for a similar service, they don’t have to change. There areno requirements for plan sponsors to find cheaper providers. If a plan sponsor is using a third party administrator that is charging a reasonable fee and doing a good job of plan administration, there is absolutely no reason that a plan sponsor to change.

Fee disclosure regulations was manna from heavens for providers like me who were preaching fee transparency before it was cool. We always knew that one of the drawbacks about any fee transparency is that plan sponsors would think that this was some sort of requirement for the, to hire the cheapest providers and the race to zero in terms of lower plan costs was going to be a problem.

So dear plan sponsors, you don’t have to get the cheapest provider, just a competent providers who charges a reasonable fee, OK?

Social media is an amazing thing except when it isn’t. It’s a great way to share information about your business, start relationships, and expand your network. I remarked to the current Dean of my old law school that despite the terrible employment situation of newly admitted attorneys, I would have loved the opportunity to be a law student now since I could build a practice and a network that I couldn’t do 18 years ago.

There are certainly downsides to social media and I’ve been a part of it here and there, but I’ve learned to avoid getting into any type of disagreement with someone online. The difference between conversations with people and any post or email is that communication that isn’t verbal doesn’t have a tone. When you speak with someone, you know when they’re yelling at you, when they’re sarcastic, or when they’re downright hostile. Emails don’t have that luxury because it doesn’t have the tone so you may post something online that you think is calm and someone thinks that you’re trying to attack them. So when someone reads a post f yours that maybe different from their view, there are some people who may think it’s an attack when it’s not,

A few weeks back, I had a conversation online on Facebook about some allegations against Donald Trump. While I didn’t support Mr. Trump, I thought one of these accusations made against him through some sort of lawsuit was false because the mainstream media didn’t want to touch it and there were no substantiated claims other than the filing of a lawsuit. The plaintiff couldn’t produce herself for interviews and no one including Hillary Clinton wanted to touch the case with a ten foot pole. Them the lawsuit was drop amid allegations that threats were made, so I thought the lawsuit was without merit. So I get attacked by another attorney who claims to be a litigator and he said that I don’t know anything about the law and I don’t know anything about Federal Civil Procedure because no attorney would risk sanctions by bringing a frivolous case like that into Federal Court. I know he was an attorney because he put ESQ. in his profile name, he assumed that I wasn’t because I didn’t (more on that). So he was asking me whether I was admitted to Federal Court (I’m not) and I just don’t told him that it didn’t matter because in his mind, I wasn’t a lawyer. I then said that one should never assume someone is not a lawyer and that I have enough appreciation for the Ethical Rules not to disparage someone who might be an attorney about their lack of legal knowledge. I also cited that while it’s proper to address another attorney as ESQ., it is a faux pas for an attorney to use ESQ. for himself. Let’s just say, I made my point and didn’t hear from him again.

I’ve really stayed clear of most of the community groups in my area on Facebook. I’m still there looking, but I don’t post because you’re dealing with a lot of people who have a difficult time of dealing with people that have a different opinion that they have.

Your reputation in business is probably the most important thing you have and you don’t need something like a LinkedIn or Facebook fight to sully it. I’ve seen too many careers destroyed because someone said something that they shouldn’t have. Look at someone like Al Campanis. Al Campanis was a friend of the great Jackie Robinson and he’ll be remembered for making some unfortunate comments on why there wasn’t enough African-American managers in Major League Baseball on Nightline. He lost his job and his reputation, 20 years as Dodgers general manager with 4 pennants and a World Series title didn’t mean anything when he lost his job. Let’s not forget about Anthony Weiner, who may go to his prison for social media after losing his job, reputation, and wife.

There is nothing wrong with conversing with people on social media, just don’t lose your cool. if they lose their cool, don’t roll in the gutter with them. Take the higher road because your reputation is certainly more important than anyone who takes different opinions as some sort of personal vendetta they need to carry.

The Government Accounting Office (GAO) took a look at 80 401(k) plans and concentrated on the features that they believe limit an employee’s ability to save. While the Internal Revenue Code and ERISA currently allow all of these features, so it’s great to focus on them and see whether they are really necessary.

At the small sample of plans they looked, they found that 41% of these 401(k) plans don’t permit those younger than 21 to participate. While the statutory requirements allow an employer to maintain an age 21 and one year of service requirement, I think this is an unnecessary requirement. Why is that? Employers can certainly allow those under 21 to be involved in the plan as well as those who didn’t complete that year of service, but still be allowed to test the plan as if they still had the age 21 and one year of service requirement. We call that the otherwise excludable rule. So aside from worrying about turnover and small account balances, I don’t think it’s right to impose an age 21 requirement especially if this is a place of employment where young people work. A 401(k) plan shouldn’t be treated like a bottle of beer.

The GAO stated that 71% of these plans had a vesting provision for employer contributions. I like vesting, I think you need to spend a certain amount of time with an employer to receive a non-forfeitable right to the contributions they’re giving you. A vesting schedule to me is an incentive tool to keep good employees for working for you. In the early days of ERISA, you could have a 10-15 year vesting schedule. Now it’s a 6-year maximum schedule. Having never spent more than 5 years at one place, I could see how that would negatively impact my savings, but I still think that it’s a tool for employers to use.

The GAO then says that 24% of plans require participants to be an employee on the last day of the plan year to receive a match. While many people will think that’s a low number to have that requirement, just remember that most plans that match probably match on a payroll period basis, so it’s a compliance headache to do that and then have a last day employment requirement because it would lead to forfeitures and compliance errors. Again, I like last day employment requirement. It’s an incentive to keep your good employees to stick around to get the employer contribution they’ve been working all year for.

While the GAO is asking the Treasury Department to consider making revisions that may disallow these features, I think they need to remember that not only is a retirement plan a savings vehicle for plan participants, it’s an important benefit used to recruit and retain employees.

Someone I know in the industry advised me again how a low cost index fund company was all of a sudden joining together with a well known third party administrator (TPA) in going after smaller plans because their bundled provider solution was always too pricy for most small and medium sized plans.

Partnering up with a TPA to go down-market as I say is actually a smart move. This TPA has traditionally done a solid job in plan administration and has the much-needed breadth of experience in dealing with smaller to medium sized plans. The pricing I’ve seen seems reasonable, but the devil is in the details I guess in the help the TPA is willing to give the plan sponsor in terms of handle holding. Since the bread and butter of their business is actual administration and not payroll, I’m hopeful that the service is good.

For the mutual fund companies out there, I think you’ll see more of these small market solutions because everything that a mutual fund company does in the 401(k) plan business is all about increasing distribution of their product. That’s why they became bundled providers in their first place. No mutual fund company gets into the TPA business for fun and giggles.

I also believe that more and more litigation against plan sponsors who use bundled provider TPAs and selecting the proprietary products of the bundled TPA is going to get these mutual fund companies to rethink their position in the retirement plan space. Partnering up with an independent TPA while private labeling the small to medium sized plan solution is probably a better option in many situations especially with constant threats of litigation. I just think this somewhat new solution (I think it’s been around a coupe of years) is going to catch on.