Fiduciary Liability Insurance and Plan Reviews are 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 gave away for free even though their main business is insuring risk for a fee.

This 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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Watch that you don’t get overpaid

I don’t believe in coincidence and when something happens twice, it’s a cause for concern. Within the past couple of months, I’ve had to deal with third party administrators (TPAs) paying ERISA §3(38) fiduciaries in excess of their contracted fee.

Advisors who are fiduciaries need to understand that getting paid in excess of their fee isn’t found money, it’s money that needs to be turned over back to the plan. It’s no time for a shopping spree because as a plan fiduciary, it’s a prohibited transaction to take a fee in excess of the contracted amount and as a fiduciary, you can’t use plan assets to to your benefit. Sure, the TPA messed up, but it’s your job to turn the money over as soon as possible.

As a fiduciary for a plan, I was paid double my fee one quarter and I held that excess in escrow until the TPA discovered the error. You need to watch those quarterly payments to see anything that’s different from the norm.

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You don’t know everything

I am proud to say that I learn something new every day, whether it’s retirement plan related or something related to pop culture. Sometimes, I’m wrong about things. I’m 47 years old now and I tell you: I don’t know everything.

Funny? No, I’m being serious because there are a lot of people in this business who seem to know everything or tell you, that they do. Don’t be like these people, people like that don’t do very well over the long run? Why? Arrogance is one of the deadliest traits in the retirement plan business because arrogance really means that you’re not open to any change. There are s many providers who didn’t want to adjust to a transparent fee environment and paid a high price by having to leave the business whether it was a purchase or it was an involuntary shutting down the doors.

This business known as the retirement plan industry is always in flux, thanks to the regulations, thanks to a change of the law, thanks to the changes in the market, and thanks to technology. You don’t know everything because I can tell you that over my 20 years as an ERISA attorney, everything has changed.

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The worthless J.D. Power surveys

I’m going to say something and that means J.D. Power will never sponsor one of my events, but those J.D. Power surveys on the best workplace plan providers are kind of worthless.

J.D. Power offered a study behind their annual rankings. The study rated the financial services companies that manage workplace retirement plans. This year, the ratings were based on the responses of some 8,300 workers who participate in such a plan.

The problem with these surveys isn’t about who topped the rankings (Fidelity and Schwab are good people), it’s the fact that these type of surveys are always stacked in favor of large, bundled providers. It seems that large unbundled providers such as my friends at Ascensus can’t lead at the top nor can any other unbundled provider. Unbundled is still a great option for most plan sponsors and they’re never represented at all in these surveys.

Just my two cents.

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MFS is latest proprietary fund settlement

Massachusetts Financial Services Co. (MFS) has reached a settlement of nearly $7 million in a lawsuit alleging that the company enriched itself at the expense of its employees’ retirement savings by loading its 401(k) plans with costly, underperforming proprietary funds.

MFS must also make changes to its retirement plans as part of the settlement, including using a nonproprietary investment instead of an in-house option as a default fund and hiring a third-party consultant to evaluate the plans’ investment lineup and investment policy statement annually.

As discussed in earlier articles, fund providers that use their own proprietary funds in the fund lineup are targets and they’re easy targets for ERISA litigators. If you’re MFS, it’s the cost of doing business because how could MFS offer a 401(k) plan without using some of their proprietary funds. It’s like the restaurant staff that orders takeout, it looks bad if there are no MFS funds in their own 401(k) plan.

MFS is part of the proprietary fund providers that settled their own 401(k) lawsuit, along with Branch Banking & Trust Co. ($24 million), Allianz ($12 million), Citigroup Inc. ($6.9 million), TIAA ($5 million), Deutsche Bank ($21.9 million), Franklin Templeton Investments ($14 million), Waddell & Reed Financial Inc. ($5 million), Jackson National Life Insurance Co. ($4.5 million), Eaton Vance ($3.5 million) and New York Life Insurance Co. ($3 million).

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401(k) Plan Sponsors Need To Focus On These Issues

My latest article on can be found here.

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The message has to resonate

For some reason, my unincorporated village doesn’t have a mayor or village board of trustees, but we have our own sanitation district where we elect the commissioners. For many years, a party boss and his son controlled the district through their handpicked and elected commissioners. After Hurricane Sandy and the poor response by the Sanitation District, there has been a lot of reform and the old-timers who financially benefited from it are gone and the unionized workers finally got a contract with a better raise.

So for some reason, a newcomer decided to run because of his ambition and because there has been a lot of fighting between the current board and the old-timers who lost their power and jobs. The problem with the newcomer is that while he has a strong branding campaign and a likely paid strategist behind him, his campaign isn’t making a ripple because his message is failing to resonate and catch on with the voters. He’s talking about listening and respecting, without bothering to learn the issues that affect the Sanitation District. The current board is doing a good job, the workers are doing a great job, and people are happy with the service.

When dealing with a potential client, I think it’s important that your message to them resonates and brings up a call to action that they might want to pursue. It’s hard to talk about fiduciary issues when a potential client has hired some good fiduciary providers. It’s hard to talk about investment costs and rate of returns when the potential client is using Vanguard funds. There needs to be a connection and an understand, there needs to be something you’re selling that a potential client is willing to buy. Generic, positive messages aren’t going to get the job done, whether you’re running for Oceanside Sanitation Commissioner or being a plan prov

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Think of something new

When I was a synagogue vice president, I came up with new ideas for events because the old events that the synagogue kept on running attracted the same crowd over and over again. For the Friday night dinner, they would offer the same Sabbath chicken meal and it didn’t help that our caterer wasn’t very good since the beginning of time. I had a BBQ dinner in September and I also had a Chinese food dinner as well. There was more interest in the dinners and events that I offered because I offered something new. What worked well in 1979 may not work well today, so you should consider offering something different when it comes to holding events, whether it’s to get business or educate participants.

That’s how I came up with the idea of That 401(k) Conference by offering something different and unique for 401(k) advisors. I’ve been invited to too many regional conferences at the local hotel, eating rubber chicken. That 401(k) National Conference at Disney World will also have the uniqueness, that will allow it to stand out from other national events.

The same old, same old gets tired. Think of something unique and different in the events you aim to conduct.

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If you build it, they may not come

I think the one place where the retirement plan industry has failed is in communication to plan participants. The industry has done better in fee transparency and communicating with plan participants, but has done a terrible job in communicating with participants.

The problem that I find is that the industry as a whole doesn’t communicate well with participants because they don’t talk on a level that participants may understand and there is a lack of a connection with a good chunk of the audience. As I always say, I don’t think communication with participants has changed over the last 20 years even though the demographics of the participant audience. Communication that did well with baby boomers probably doesn’t do as well with millennials.

I think the communication is a huge problem because it was the baby boomers that were the better savers and once they all start pulling out assets out of the 401(k) plan, you may see a negative outflow that might hurt the industry as a whole.

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Saying it ain’t broken, don’t fix it is a cop-out

I remember when I first saw the political sign as a freshman at Stony Brook over 25 years ago where the student government Acting Treasurer Naala Royale was running for her own full term. Her motto for the race was that “If it Ain’t Broken, Don’t Fix It.”  If you knew anything about Polity, the student government at Stony Brook, you knew it was broken and it needed to be fixed. Actually about 15 years later, the administration Stony Brook got so fed up with Polity, they destroyed it completely and started a whole new student government.

I liked Naala, but I hated the slogan. I think that phrase is a cop-out, it’s a sign of complacency. It’s a sign to me that we need to maintain the status quo because it’s the status quo and because it’s always been that way. People become complacent because they are afraid of change, they have the fear of the unknown.  Heck, if Steve Jobs would have remained complacent when he took over the role as interim C.E.O. of Apple in 1997, they probably would have been out of business by now. Complacency is for the lazy, innovation is for the ambitious.

I remember my old law firm. I wanted to use Twitter, LinkedIn, and blogging to build a name for myself and my practice of trying to save clients on administration costs and minimize liability at a flat fee. I was told by the head of the advertising committee (which was actually one person and he didn’t bring in any business) that social media was barred by the New York Attorney Advertising Rules. If anyone knows anything about social media, to be effective at it, it can’t be advertising. I tried to bring in business and I was a failure because there was no financial incentive for me to draw in business and no financial incentive for the partners to work with me. For some reason, the Managing Partner either didn’t like me or felt threatened by my non-lawyerly ways of networking and working with potential clients and with financial advisors. It was a law firm that employed few associates and mostly partners, they didn’t see the associates for what they should be, the future of the firm. The new ways that lawyers market themselves with social media scared the heck out of them, maybe that’s why they are hurting as they’re half as big as when I left.

Too many plan providers also have that complacency bug. It could be the financial advisor making 75 basis points for working with a plan sponsor and not working with them on an investment policy statement or providing participant education. It could be the TPA insisting that the insurance based platform with wrap fees was the best value for a $14 million plan or the ERISA attorney charging $7,000 for an individually designed plan document when a volume submitter or prototype was available. In these situations, it was more profitable to be complacent and these providers were hoping that the plan sponsors wouldn’t be wise to what they were doing.  Complacent providers get replaced because they are broken and they needed to be replaced. I never heard of a financial advisor being replaced because they were too responsive to the client when it came to the IPS and fund selection. I never heard of a TPA being replaced because they fully disclosed fees to the client years before they were legally required to do so. I never heard about an ERISA attorney being replaced because they use flat fee billing instead of the chiseling hourly fee.

How many plan sponsors still have the same providers because that’s the way they always have had them? How many plan sponsors have that “if it ain’t broken, don’t fix it” mentality?  I have a client being sued by the Department of Labor because she used a TPA for 28 years without realizing they didn’t do valuations or distribution forms for owner-employees.  Plan sponsors have too much fiduciary liability to be complacent. Instead of being convinced that things aren’t broken, plan sponsors need to make sure that their plans have advisors that are at the top of their game and willing to be ahead of the curve because those that don’t change with the times will have the times change them.

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