401(k) dangers? It doesn’t have to be this way

Thalidomide was supposed to be the wonder drug that helped women manage morning sickness until they discovered it caused birth defects. Asbestos was supposed to be the ultimate fire-resistant material that was later found to cause mesothelioma when produced or when disturbed. When companies decided to ditch defined benefit pension plans for a cheaper alternative in the 401(k) plan, they also had a hidden danger with a 401(k) plan, but it doesn’t have to be that way. If managed correctly, a 401(k) plan is an effective retirement plan for the employer and employees. If not, it’s a retirement plan thalidomide except the plan sponsor doesn’t know the danger.

The switch from defined benefit plans to 401(k) plans switches the burden of funding retirement from the employer to the employee. If the plan is participant-directed, it also switches the selection of investments from employers aided by financial advisors to the folks who have the least amount of background to make these tough decisions, the plan participants. Too many plan sponsors don’t educate their plan participants to make informed investment decisions and too many plan sponsors don’t have a proficient investment advisor to guide them through the financial process. It doesn’t have to be this way. Getting investment advisors who know what they’re doing and getting participants enough investment education/advice isn’t hard, but too many plan sponsors are too lazy to manage. But it doesn’t have to be this way.

Defined benefit plans have pretty straightforward fees. You know how much annual administration is and you don’t have that luxury with participant-directed 401(k) plans that have multiple fees that can confuse anyone including retirement plan professionals. Too many plan sponsors have been sued because the 401(k) plan fees are too high since plan sponsors have a fiduciary to pay reasonable fees. But it doesn’t have to be this way. Plan sponsors can benchmark their fees to see if they are reasonable, actually, they have no choice; they have that duty.

401(k) plans don’t have to be a hidden danger; all they need is a plan sponsor who understands their pitfalls and wants to avoid the liability that goes with it. That’s the tallest order.

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Buying a business? What is with the 401(k) plan?

If you own a business, expanding by buying a competitor goes a long way. Mergers and acquisitions are a huge part of growing a business.

The problem with corporate transactions is dealing with the retirement plan for the company you’re buying. This isn’t an issue if you’re just buying the assets of another business. If you’re buying the stock of another business, you need to protect yourself since a 401(k) plan of the business you’re buying, goes with it. Make sure the merger or stock purchase agreement handles the 401(k) plan and due diligence is needed to make sure the plan that is coming is in good shape.

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Fiduciary Liability Insurance is really worth it

The warranty in the electronics business is gravy for the retailers who sell it. You’ll be surprised how many people pay $20 to get a warranty on a $100 Blu-Ray player. When Best Buy was going national, they advertised how they wouldn’t sell warranties and then realized that they couldn’t turn down all that free money.

A warranty is like insurance, so you should only insure those things that have a high-cost replacement. You insure your health, your life, your house, your car, and some appliances worth insuring.

This isn’t another diatribe about the fiduciary warranty that insurance companies give away for free even though their main business is insuring risk for a fee.

This is about plan sponsors who don’t insure their risk by buying fiduciary liability insurance or buying a plan service that could review their plan expenses and/or their plan document/administration.

Fiduciary liability insurance helps protect plan sponsors who find themselves also appearing as defendants in a plan lawsuit filed by an aggrieved plan participant in a town near you. I had clients sued in a class action lawsuit where the insurance company paid $900,000 for a $1 million legal fee (there was a $100,000 deductible) and this plan sponsor won their case.

So many plan sponsors don’t want to pay for a plan review that can help them identify plan issues they wouldn’t ordinarily find unless they were converting to a new provider. I have a plan review called the Retirement Plan Tune Up for $750 and I can probably count on one hand how many I do a year. When I talk to plan sponsors and advisors, they seem interested but they treat a plan review like a trip to the dentist; something that they will avoid until it’s too late.

Spending some shekels on a fiduciary liability policy and a plan review is certainly well worth it to avoid greater harm later.

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The audit isn’t as random as you think

A small plan received an audit inquiry from the Internal Revenue Service (IRS). Upon further review, it appears that the plan didn’t have an ERISA bond and admitted under penalties of perjury, that they didn’t.

I assure you that the audit wasn’t random. Not having an ERISA bond or having the right coverage will get you an invitation by the IRS or Department of Labor (DOL) for an inquiry.

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It’s a tremendous savings gap

They say a participant needs about $1.8 million for retirement savings, to live comfortably.

The only problem is that the average worker between the ages of 55 and 64 has $207,874 in their 401(k) account. As an industry, we are not doing enough and we need to push for more retirement coverage and tools that will get people to save more for retirement.

We have come far in the last 15 years with fee disclosures and participant education, but we have far to go.

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Need to increase that retirement coverage gap

According to a survey by my friends at Paychex Inc., less than half (37.6%) of U.S. employers offer a retirement plan.

That figure considers all businesses in the U.S. That is a low number and that is why I consistently support State auto-IRA programs that force employers to adopt that plan or a 401(k) plan if they don’t currently offer one. It may go against my libertarian principles, but it’s better for our country and our industry.

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The thing about stealing plan assets

The recent news about RiversEdge, the Third-Party Administrator (TPA) accused of stealing plan assets is alarming, but not new. People and providers with access to plan assets can easily steal. The problem is that it’s one of the dumbest crimes available.

Stealing is wrong, but I think criminals have a better chance of robbing a bank with a pantyhose on their head, than a plan provider stealing assets. A pantyhose might give a bank robber anonymity, but a plan provider stealing plan assets will have the theft documented by a reputable plan custodian. Stealing plan assets from multiple plans creates a shell game because plans will eventually have to pay out participants, as indicated in the Department of Labor’s (DOL) allegations. A plan sponsor I met who used defined benefit plan assets to fund his home renovation was caught up by the DOL investigators over complaints by former participants.

In Star Trek VI: The Undiscovered Country, Captain Kirk, and the Enterprise were being attacked by a Klingon Bird of Prey which could fire when cloaked. When Commander Uhura suggested that the Bird of Prey must have a tailpipe, Spock and Dr. McCoy created a torpedo that could track the Prey’s emissions and attack it. Stealing from plan assets is like having a tailpipe or fingerprints that will catch you if you steal from a plan.

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401(k) dangers? It doesn’t have to be this way

Thalidomide was supposed to be the wonder drug that helped women manage morning sickness until they discovered it caused birth defects. Asbestos was supposed to be the ultimate fire-resistant material that was later found to cause mesothelioma when produced or when disturbed. When companies decided to ditch defined benefit pension plans for a cheaper alternative in the 401(k) plan, they also had a hidden danger with a 401(k) plan, but it doesn’t have to be that way. If managed correctly, a 401(k) plan is an effective retirement plan for the employer and employees. If not, it’s a retirement plan thalidomide except the plan sponsor doesn’t know the danger.

The switch from defined benefit plans to 401(k) plans switches the burden of funding retirement from the employer to the employee. If the plan is participant-directed, it also switches the selection of investments from employers aided by financial advisors to the folks who have the least amount of background to make these tough decisions, the plan participants. Too many plan sponsors don’t educate their plan participants to make informed investment decisions and too many plan sponsors don’t have a proficient investment advisor to guide them through the financial process. It doesn’t have to be this way. Getting investment advisors who know what they’re doing and getting participants enough investment education/advice isn’t hard, but too many plan sponsors are too lazy to manage. But it doesn’t have to be this way.

Defined benefit plans have pretty straightforward fees. You know how much annual administration is and you don’t have that luxury with participant-directed 401(k) plans that have multiple fees that can confuse anyone including retirement plan professionals. Too many plan sponsors have been sued because the 401(k) plan fees are too high since plan sponsors have a fiduciary to pay reasonable fees. But it doesn’t have to be this way. Plan sponsors can benchmark their fees to see if they are reasonable, actually, they have no choice; they have that duty.

401(k) plans don’t have to be a hidden danger; all they need is a plan sponsor who understands their pitfalls and wants to avoid the liability that goes with it. That’s the tallest order.

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Need to communicate better with Start Up Credits

We live in a day and age where information is at our fingertips. Anything we want to know is just a Google search away. Yet many companies interested in starting a 401(k) plan are unaware of the tax credits offered for a plan startup.

According to a new survey, among the small business owners not offering a plan, 72% said they didn’t know about tax credits up to $5,000 being available to cover the costs of starting a 401(k) plan.

While potential plan sponsors can Google these tax credits, plan providers are clearly not doing a great job of letting these companies know that tax credits are available.

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Yes, student loans impact deferral rates and account balances

A recent study showed that student loan debt has a negative impact on deferral rates and 401(k) account balances. Of course, that’s obvious. Some student loans that students take out, resemble the size of my mortgage that I just paid off. When you have more than $300,000 in debt, deferrals are going to be even harder for those making in the 6 figures.

While SECURE 2.0 allows for matching contributions on student loan payments, I don’t know how many plan sponsors offer it, and it doesn’t change that matching contributions are going to be far less cash than deferrals. Until this country figures out how to deal with the cost of higher education, student loans will still be a drag on 401(k) balances, whether student loan matches or not.

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