The Rosenbaum Law Firm P.C. Blog

A well-respected registered investment advisor was recently named as a defendant in a class-action lawsuit against a $1 billion 401(k) plan.

I’m not going to cite the particulars and I’m not going to opine because a complaint filed in Federal court isn’t evidence that this advisor did anything wrong. The point is that no matter the processes you put in place or the respect that you have in the industry, you can get sued in a class action lawsuit as a plan provider whether you have done anything wrong or not.

You can never keep your eye off the ball and you have to understand the pressures that come when dealing with plan costs, revenue sharing, and share classes. There are ERISA litigators hunting for plans to sue and these issues I just named are currently the issues being litigated about. Only constant vigilance will keep more than a step away from getting sued.

While many of us in the retirement plan world were publicizing a class action lawsuit against a $9 million, apparently the plaintiffs had a change of heart.

The case was Damberg et al v. LaMettry’s Collision Inc. and the plaintiffs had alleged that the fiduciaries of their plan breached their duties under the ERISA by allowing excessive fees to be charged for plan investments, record keeping and administration.

Why was the case voluntarily dismissed? Beats me, maybe the plaintiff’s attorney figured there wasn’t much of a recovery for a $9 million 401(k) plan or maybe the plaintiffs had a change of heart. It really doesn’t matter if you think about it.

Why isn’t it important? Regardless of whether the plaintiffs would have recovered against the 401(k) plan, all that matters is that a small 401(k) plan was sued by plan participants. The headache of having to go through litigation takes enough time and money that it doesn’t matter when the defendant 401(k) plan fiduciaries wins or not. I once knew a union that won a class action 403(b) lawsuit. They had $1 million in legal fees which was paid by a fiduciary liability policy with a $100,000 deductible. The union won, but at what cost? I’m sure they regret every minute of it.

So the point is that it doesn’t matter that the plaintiffs had a change of heart, what matters is that a small 401(k) plan was sued because if one small 401(k) plan can get sued, there will be other small plans that will be too.

People often ask me how I got into ERISA/retirement plan law and I tell them the truth: it’s because it’s the first job I got.

The person that gave me that first job was an ERISA attorney named Harvey Berman. I’m sad to report that Harvey passed away a few weeks back at age 77.

Harvey Berman was a top notch ERISA attorney before even ERISA was enacted. He was a partner of a New York city law firm and was involved in a third party administrator that kept on merging and changing its name. Names includes Ibex and Mobius Tech, before Harvey and his partners sold that business which became CBIZ Retirement Services Inc.

I’d be lying to say that Harvey and I were close. As with every employer-employee relationship, there was always going to be tension but Harvey would never hold a grudge even though I would.

The job I got from him starting as an ERISA attorney was from a newspaper ad that actually showed up on that fairly new thing called the word wide web. Harvey was looking for an ERISA attorney he could train to replace the paralegal that did all of his legal work named Marge Tracy. The job paid $35,000 to start and based on what Marge and Harvey taught me, I really should have paid him. If my career is a building, working for Harvey Berman was the foundation.

When CBIZ decided to jettison their daily 401(k) administration business, my time working for Harvey was going to come to an end. I decided to leave early for another job working for a third party administration firm because I didn’t have the heart to be there when the doors were going to close. Hervey was upset at me and he told me that whoever I was going to work for down the line wouldn’t treat me as well as he did. I thought he was being arrogant, but for the 12 years I worked for other businesses and law firms, he was probably right. I never had to fight Harvey for a salary increase and Harvey game me the only Christmas bonus I got ($300 just after three months of working).

People who were heavyweights in the retirement plan business aren’t like sports heroes, celebrities, and politicians because people forget those who were there before and left the scene. Harvey Berman needs to be remembered as one of the heavyweights in the retirement plan business and he needs to be remembered for being a decent and honorable man. In the 18 years I’ve been in business, I’ve met some unsavory people including someone sitting in Federal prison. Harvey was a good man and if he didn’t take a chance on an inexperienced ERISA attorney, you wouldn’t be reading this article right now.

Harvey Berman, Rest In Peace.

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T. Rowe Price just released a study that show that 401(k) plans with an automatic enrollment feature have a 40% increase of participation by participants in salary deferrals than those plans that don’t offer automatic enrollment. Thanks to T. Rowe Price for stating the obvious, plan participants are likely to participate more when they are kind of pushed to participate (by requiring them to affirmatively decline to avoid automatic enrollment).

If you’re a plan provider and your pay is dictated on plan assets, I think automatic enrollment is a no brainer because it will essentially grow your business because it will grow the assets of your 401(k) plans under management. More than 50% of 401(k) plans now offer automatic enrollment.

Aside from just increasing assets, I believe automatic enrollment is an effective tool in order to sway plan participants that are automatically enrolled to eventually decide to defer on their own. If you have good marketing materials and can appeal through education to get participants to voluntarily contribute, you’ve done your job.

Not only will you get rewarded through automatic enrollment, an effective program in getting those automatically enrolled to defer on their own is all the evidence you need to show clients and potential clients how well you serve in your role as a plan provider.

In life, giving people a wide variety of choices is a good thing. However, when it comes to daily valued 401(k) plans, too many choices isn’t a good thing. It sounds counter-intuitive, but too many choices offered to plan participants is usually a mistake.

Offering participants the right to self direct their own 401(k) account sounds like a great idea because plan sponsors are giving a plan participant a choice in shaping their retirement. The problem with these choices is that plan participants get paralyzed by being offered too many choices; they tend to get overwhelmed. For example, people assume offering so many different mutual funds on a plan’s investment menu is the way to goo. However, studies have shown that the more investment options offered under the plan, it tends to actually depress the deferral rate of plan participants. Offering 57 mutual funds on a lineup sounds like a good idea on paper, but it overwhelms plan participants to the point that they don’t want to participate and defer their income.

The same can be said by offering participants a self-directed brokerage account. Allowing plan participants the right to a brokerage window within the 401(k) plan allows them to purchase stocks and other investments apart from the typical mutual fund menu offered under a 401(k) plan. Again, a study has shown that plan participants who use a brokerage window tend to have a worse rate of return on their 401(k) account than those participants who stick to the core fund lineup.

Offering 25+ versions of Tide detergent probably has done well in selling detergent, offering too many choices within a 401(k) plan isn’t a great thing.

I love Clint Eastwood movies and one favorite is “In The Line of Fire’.  John Malkovich is playing a wannabe Presidential assassin named Leary and Clint is playing  Frank Horrigan, the Secret Service agent who is trying to catch him. For me, my favorite scene is when Clint and John Malkovich are on the phone and John calls Clint’s character a friend.

Frank Horrigan: I know who you are – Leary.

Mitch Leary: I’m glad, Frank. Friends should be able to call each other by name.

Frank Horrigan: We’re not friends.

Mitch Leary: Sure we are.

Frank Horrigan: I’ve seen what you do to friends.

Mitch Leary: What’s that supposed to mean?

Frank Horrigan: You slit your friend’s throat.

While not the same thing is slitting a friend’s throat, it is amazing to me how large 401(k) providers handle the 401(k) plans of their employees. I can attest that as someone who worked for a third party administrator once, I can tell you that our 401(k) plan wasn’t very good. It’s kind of like the old adage about the cobbler’s children having no shoes.

Mass Mutual just settled a class action lawsuit on their own 401(k) plan.  Mass Mutual is forking over $30.9 million as well. In addition to the payment, MassMutual also agreed to keep the plan’s annual record-keeping fees no higher than $35 per participant for the next four years. The agreement includes a four-year ban on calculating record-keeping fees as a percentage of plan assets.

If Mass Mutual overcharges their own employees, does that mean they do it for their “real” clients? That’s not for me to say, that’s for an independent review to find out.