The Rosenbaum Law Firm P.C. Blog

One of my biggest complaints about the retirement plan industry is when a service provider gets hired to perform one job and then discovers another way to make money off the relationship.

Participant data is becoming the latest example.

A recent Government Accountability Office report examined the privacy disclosures of 31 retirement plan service providers and raised concerns about how participant information may be used beyond simply administering the retirement plan.

That information can be extremely valuable. We’re talking about names, addresses, Social Security numbers, account balances, and other financial information.

A recordkeeper legitimately needs participant data to recordkeep a 401(k) plan.

The problem is when access to that information becomes an opportunity to market other financial products and services to participants.

The GAO found that 29 of the 31 privacy disclosures it reviewed did not limit the provider’s ability to share participant information for marketing purposes. More than half also did not limit the ability to sell participant data.

That’s a problem.

When an employer hires a recordkeeper, the participants didn’t necessarily volunteer to become prospects for that recordkeeper’s other businesses.

I’ve complained for years about recordkeepers using their access to participants to pursue IRA rollovers, wealth management relationships, and other products outside the retirement plan.

Participant data should be used to administer the retirement plan. If providers want to use that information for something else, plan sponsors should know exactly what’s happening.

Plan sponsors have fiduciary responsibilities. That means they should be asking providers how participant information is collected, protected, shared, and used.

The GAO has recommended that the Department of Labor provide additional guidance concerning participant data privacy.

I think that’s overdue.

A participant’s retirement account isn’t a customer acquisition list.

Plan sponsors should make sure their providers understand the difference.

Every time Bitcoin spikes, you can almost set your watch to what happens next in the 401(k) world.

People start talking about cryptocurrency in retirement plans. Again.

Participants see Bitcoin going through the roof and wonder why they can’t invest their 401(k) money in it. Providers see participant interest and start thinking about products they can sell. Plan sponsors start wondering whether adding cryptocurrency will make their plan look cutting-edge.

My advice hasn’t changed: I don’t think it’s a great idea.

I’m not anti-Bitcoin. What somebody wants to buy in their personal brokerage account is their business. A 401(k) plan is different because the plan sponsor has fiduciary responsibilities in selecting and monitoring the investment options offered to participants.

Bitcoin going up doesn’t eliminate those responsibilities.

The problem with chasing an investment after a huge run-up is that everyone suddenly develops amnesia about risk. Volatility becomes an afterthought because people are staring at the returns. Then Bitcoin drops 30%, 40%, or more, and everyone suddenly remembers that retirement accounts are supposed to be about retirement.

A plan sponsor also needs to ask what adding cryptocurrency actually accomplishes. Is it improving the retirement plan, or is it being added because participants are excited about Bitcoin today?

Those are two very different things.

I’ve always believed that a good 401(k) investment menu should be boring. Give participants diversified, prudent choices that allow them to build retirement savings over decades. A retirement plan doesn’t need to chase every investment trend that gets people talking.

Bitcoin may continue going higher. It may eventually become a much more accepted part of investing.

That’s not the point.

The question for a plan fiduciary isn’t whether Bitcoin is hot.

It’s whether putting it in the 401(k) plan is prudent.

Those aren’t the same question.

Mistakes happen in the retirement plan business. I’ve been doing this long enough to know that perfection isn’t a realistic standard.

What bothers me is when the plan sponsor repeatedly discovers the mistakes.

A census gets uploaded incorrectly. An eligibility date is wrong. A distribution is mishandled. The plan document doesn’t reflect what everyone thought the plan provided. Testing uses incorrect compensation. A participant who should have entered the plan wasn’t allowed to participate.

Then the sponsor finds it.

The plan sponsor isn’t your quality-control department.

Providers are paid because retirement plans are complicated and plan sponsors need expertise. That means there should be procedures designed to catch mistakes before the client catches them.

The occasional error isn’t necessarily a reason to fire a provider. A pattern of errors discovered by the client is something completely different. Eventually, the sponsor starts wondering what else is wrong that they haven’t found yet.

That’s when confidence disappears.

Quality control isn’t glamorous. Nobody wins a sales presentation by showing off their internal review procedures. Yet strong internal controls may be more valuable to the client than half the bells and whistles providers use to sell their services.

Providers should regularly review their work, especially in areas where errors create expensive corrections. Eligibility, compensation, contributions, testing, distributions, and plan provisions deserve more than a quick glance.

When an error is discovered, don’t just correct that particular mistake. Figure out why it happened and whether the same weakness could affect other clients.

A good provider fixes errors.

A great provider builds processes that make the same error less likely to happen again.

Your client hired you because they need help administering their retirement plan.

They shouldn’t also have to proofread your work.

One of the most frustrating experiences for a retirement plan sponsor is being bounced around between departments.

That’s a recordkeeping issue.

That’s a TPA issue.

You need payroll.

That’s handled by distributions.

Talk to your relationship manager.

Nobody cares about your org chart.

The plan sponsor hired a provider or group of providers to help administer a retirement plan. They shouldn’t need an advanced degree in your corporate structure to figure out who can fix a problem.

I understand specialization. The person handling compliance testing isn’t necessarily going to process a participant loan. The person working in sales isn’t going to calculate a corrective contribution. Large organizations need departments and defined responsibilities.

The problem starts when those internal divisions become the client’s responsibility.

Good service means owning the issue even when you aren’t the person who can ultimately resolve it. Instead of telling the client to call another department, connect them with that department. Instead of saying something isn’t your responsibility, help identify whose responsibility it is. If multiple providers are involved, don’t immediately point fingers at the recordkeeper, TPA, advisor, or payroll company.

Help solve the problem.

I’ve seen relatively minor administrative issues turn into major client relationship problems because everyone involved spent more time explaining why the problem belonged to somebody else than actually fixing it.

Plan sponsors have businesses to run. The 401(k) plan is important, but administering it isn’t their full-time job. They shouldn’t have to manage your organization on top of managing their own.

Your internal structure exists because it makes sense for your business.

That’s fine.

Just don’t make your client navigate it.

When a plan sponsor brings you a problem, the best response isn’t, “That’s not my department.”

It’s, “I’ll help you get this resolved.”

One thing plan sponsors need to understand about a 401(k) plan is that it has a very long memory.

Employees leave. Human resources people leave. Payroll companies change. TPAs get fired. Recordkeepers get replaced. The company may even be sold.

The plan remembers everything.

An eligibility mistake from three years ago doesn’t disappear because the person who made the mistake no longer works for you. Incorrect compensation used for contributions doesn’t become correct because you switched payroll providers. A missed participant deferral isn’t erased because you moved the plan to a new recordkeeper.

Retirement plan problems have a funny way of surviving the people who created them.

I’ve seen plan sponsors assume that changing providers somehow gives them a fresh start. It doesn’t. In fact, a provider change sometimes uncovers problems because somebody new is finally looking at the plan and asking questions that the former provider never asked.

That’s why maintaining records is so important.

Plan sponsors should retain plan documents, amendments, testing results, Form 5500 filings, contribution records, payroll information, committee minutes, participant communications, and important correspondence with providers. When somebody asks what happened five years ago, “the person who handled that left” isn’t going to be a very satisfying answer.

The same is true when acquiring a company. You’re not just acquiring employees and assets. There may be retirement plan history attached to that company that needs to be understood.

A 401(k) plan isn’t like replacing an old computer and starting with a clean hard drive.

Its history follows it.

The best protection is good records, good procedures, and providers willing to ask questions about what happened before they arrived.

Because while people forget, your 401(k) plan has a very good memory.

Getting a new retirement plan client is exciting. There is the proposal, the presentation, the promises about service, technology, responsiveness, and how everything will be better than what the plan sponsor has today. Everyone is on their best behavior because everyone wants the sale.

Then the paperwork gets signed.

That is when the real relationship begins.

I’ve seen plenty of situations where the sales process was terrific and the actual service was anything but. The salesperson promised accessibility, quick responses, and a dedicated team. Six months later, the plan sponsor is sending a third email trying to get an answer about a distribution or payroll issue.

A proposal is marketing. A relationship is execution.

The easiest way for a plan provider to lose credibility is to create expectations during the sales process that the service team can’t possibly meet. Maybe the salesperson promised something the platform doesn’t actually provide. Maybe they promised a level of attention that isn’t economically feasible for that size plan. Maybe the people servicing the plan never even heard what was promised.

None of that is the plan sponsor’s problem.

Providers need a better handoff between sales and service. Every material promise made during the sales process should make its way to the people actually responsible for the relationship. If something can’t be delivered, don’t promise it simply because you want to close the business.

There will always be another prospect. Your reputation is much harder to replace.

Plan sponsors don’t remember every feature in the PowerPoint presentation that convinced them to hire you. They remember whether you answered the phone when they had a problem.

Selling the relationship gets you the client.

Delivering the relationship is what keeps them.

There is an old saying that the customer is always right.

When it comes to a retirement plan, the owner isn’t always right.

I’ve dealt with enough plan sponsors over the years to know that business owners are used to getting their way. It’s their company. They built it, they own it, and they’re usually the person making the final decision.

A 401(k) plan doesn’t work that way.

You can’t simply decide that you want to give yourself a contribution and not give one to employees if the plan document and applicable rules don’t permit it. You can’t let a favored employee into the plan early because they’re doing a great job. You can’t approve a distribution because somebody really needs the money if the plan doesn’t permit the distribution.

You also can’t ignore the plan document because doing something differently seems easier.

The rules don’t care that you own the company.

This is where good plan providers earn their money.

Sometimes the most valuable thing a TPA, advisor, recordkeeper, or ERISA attorney can tell a plan sponsor is “no.”

Nobody likes hearing it. I’ve certainly had clients who didn’t appreciate the answer. But I’d rather have an unhappy client for five minutes than a client with a compliance problem that takes months and thousands of dollars to correct.

The worst providers are sometimes the ones who always say yes. They want to keep the client happy, avoid an uncomfortable conversation, or simply don’t want to challenge the owner.

That’s not service.

Good providers explain why something can’t be done and, when possible, offer a compliant alternative that accomplishes what the sponsor is trying to achieve.

Owning the company gives you plenty of authority.

It doesn’t give you the authority to ignore ERISA, the Internal Revenue Code, or your own plan document.

Sometimes the owner simply isn’t right.

Plan sponsors sign a lot of paperwork when it comes to their 401(k) plan.

Plan documents. Amendments. Recordkeeping agreements. Investment paperwork. Payroll authorizations. TPA agreements.

My advice is pretty simple: don’t sign something you don’t understand.

One area where this especially bothers me is TPA contracts. I’ve reviewed agreements that seemingly absolve the TPA of almost everything while making the plan sponsor responsible for almost everything.

The TPA isn’t responsible for inaccurate information. They’re not responsible for payroll problems. They’re not responsible if the sponsor doesn’t provide information on time. They’re not responsible for certain errors. They’re not responsible for the work of other providers.

After reading some of these agreements, I sometimes wonder what they’re actually responsible for.

I’m not suggesting that these provisions are necessarily unreasonable. A TPA can’t be responsible for bad census information supplied by the employer, and every service provider needs reasonable limitations on its liability.

But there is a difference between reasonable protection and a contract that essentially says the provider is responsible for nothing.

The problem is that most plan sponsors don’t read these agreements. They see a signature page, sign it, and move on.

Then something goes wrong.

That’s usually when somebody finally reads the contract and discovers what they agreed to.

This isn’t limited to TPAs. Plan sponsors should understand agreements with recordkeepers, advisors, payroll providers, and anyone else servicing the plan. Know what they’re supposed to do, what you’re supposed to do, what you’re paying, how the relationship can be terminated, and what happens when somebody makes a mistake.

You don’t need to negotiate every sentence in every agreement.

You should at least understand what you’re signing.

A contract doesn’t become unfair because you didn’t read it.

And your signature doesn’t mean less because you didn’t understand it.

There are certain problems in life where waiting might actually help.

Late 401(k) deposits aren’t one of them.

Employee salary deferrals are plan assets once they’re withheld from employees’ paychecks and are required to be deposited into the plan on a timely basis. When those deposits are late, you potentially have a prohibited transaction and a fiduciary problem.

Yet I’ve seen plan sponsors discover late deposits and treat the issue like an unpaid library book.

We’ll get to it eventually.

Don’t.

Once you discover late deposits, figure out what happened, determine which contributions were affected, calculate the lost earnings, and work with your professionals to correct the problem.

Depending on the circumstances, correction may involve restoring lost earnings, addressing excise taxes, reporting the delinquent contributions on the Form 5500, and potentially using the Department of Labor’s Voluntary Fiduciary Correction Program.

The biggest mistake is pretending the problem doesn’t exist.

I’ve always said that most retirement plan problems are fixable. The IRS and Department of Labor understand that mistakes happen. What creates bigger headaches is discovering a problem and allowing it to continue.

You also need to figure out why the deposits were late.

Was payroll responsible? Did somebody go on vacation? Did the person responsible for submitting contributions leave the company? Was there a problem transmitting the payroll file?

Fixing the past without fixing the process means you’re probably going to have the same problem again.

Plan sponsors sometimes worry that admitting an error will create liability. In reality, ignoring a known problem can make the situation considerably worse.

Late deposits don’t improve with age.

They don’t disappear because nobody complained.

When you discover them, correct them, document what happened, and fix the process that caused them.

Because with 401(k) problems, procrastination usually isn’t a correction method.

One of the biggest sources of confusion for 401(k) plan sponsors is figuring out who is actually responsible for what.

You have a financial advisor. You have a TPA. You have a recordkeeper. Maybe you have an ERISA attorney. Everybody is involved with the same 401(k) plan, but they don’t all have the same job.

Your financial advisor isn’t supposed to be your TPA.

A good retirement plan advisor can be an invaluable resource. They can help with investments, fiduciary process, fees, participant education, provider searches, and overall plan management. The really good advisors also recognize problems and know when to bring in somebody else.

But they aren’t necessarily supposed to calculate your nondiscrimination testing, interpret complicated plan provisions, determine corrective contributions, or provide legal advice.

I’ve seen too many situations where a plan sponsor asks the wrong provider a question and assumes the answer is definitive.

That’s how problems start.

The same thing works in reverse. Your TPA isn’t necessarily your investment advisor. Your recordkeeper isn’t your ERISA attorney. Your payroll company isn’t your TPA just because it sends the deferrals to the recordkeeper.

Every provider has a role.

As a plan sponsor, one of the smartest things you can do is understand those roles. Ask who handles eligibility. Ask who monitors contribution deposits. Ask who reviews your plan document. Ask who is responsible when something goes wrong.

Most importantly, make sure somebody actually owns each responsibility.

The worst answer in the retirement plan business is: “I thought they were handling it.”

Your providers should work together as a team, but that doesn’t mean they’re interchangeable.

A great advisor knows when something belongs with the TPA.

A great TPA knows when something belongs with the attorney.

And a smart plan sponsor knows enough to make sure the right question gets to the right person.