The Rosenbaum Law Firm P.C. Blog

While the Frontline’s recently program on 401(k) plans was very sobering, a lot of people missed the point of it and I also think that the folks who produced the program did as well.

While many in the 401(k) industry don’t like any criticism, the problems with 401(k) plan are a lot greater than high fees, self dealing among providers, and poor active funds. Frontline misses the point in its inference that inexpensive index mutual funds will cure the problems of 401(k) plans.

The problem again rests in the fact that participant directed plans shifted the responsibility of investing to the people in this industry who really have no business in making any investment decisions, the plan participant.  The Frontline program really didn’t do any examination that plan participants get little or no information in making investment decisions and that the recent guidance allowing for plan providers to give investment advice is not really giving plan participants the help they need.

I love John Bogle like the next guy, but even with an all index fund lineup, poorly educated plan participants will still make poor investment decisions because most plan participants don’t understand the power of dollar cost averaging and diversification, the essential building blocks of investing.

When I worked at a law firm, we had a poor 401(k) plan that offered no education or any review of the fund lineup for about 10 years until I got there. I had one plan participant who put 100% of his allocation towards the midcap funds because midcap meant it was the middle of the market. Well, I guess an S&P Mid-Cap 400 won’t do him a lot of good at 100% allocation, but the Frontline producers may assume that it does because index funds are low cost and do better than 70% of the active funds in its class.

As I’ve stated before, investment education for most 401(k) plans is either non-existent or piss poor. Plan providers, especially investment advisors need to do a better job to convey their message of investment education or hire providers who can do the job.

401(k) plans can do better, it’s up to all of us including plan sponsors to do better. We need to start on better education for plan participants.

My latest JDSupra.com article can be found here.

My latest newsletter can be found here.

When politicians and their supporters talk about that some people should take a greater share of the burden, more people (especially those who this share of the burden was supposed to help) end up paying a price.

President Obama’s new budget proposal aims to trim Americans’ nest eggs by setting a cap on lifetime contributions of 401(k)s at an average of $2.7 million will end up hurting more people than just getting the rich.

Initially, it was estimated that the cap would affect only 180,000 of the 60-million retirement-benefit participants.

However, the Employee Benefit Research Institute estimates close to 1 million young people in their 20s and 30s who are aggressively saving through their defined-contribution plans, as well as older people who have accumulated a few million dollars collectively in all their retirement accounts, could run into the cap problem.

In addition, the “chutzpah” of this proposal is calculating the limit and who actually has to do it. Obama proposes to limit the deduction or exclusion for contributions to defined-contribution plans, defined-benefit plans, or IRA for an individual who has total balances or accrued benefits under those plans that are sufficient to provide an annuity equal to the maximum allowable defined-benefit plan benefit. The maximum benefit, the administration said, is currently an annual benefit of $205,000 payable in the form of a joint and survivor benefit commencing at age 62, is indexed for inflation, and the maximum accumulation that would apply for an individual at age 62 is approximately $3.4 million.

Did you get that? Of course not? Do you know who will have to calculate these limits, as it is tuned in to the defined benefit plan limit? Of course, employers because they have nothing better to do.

If you tell employers that they will have to enforce a benefit limit on their top paid people and in most instances, the very same people they are talking to. Do you think employers who are told that they have this added recordkeeping burden as well as limiting benefits to their top paid people is less likely or more likely to maintain a 401(k) plan?

While the latest Frontline documentary pin the death of defined benefit plans on 401(k) plans, people forget that limits placed on defined benefit limits set for the by TEFRA and the Tax Reform Act of 1986 did more damage to defined benefit plans as it limited the benefit and compensation earned by the top people for the employers maintain them. So while people think that limiting benefits to the top paid people was a good thing, it hurt lower paid people worse. The coverage of lower paid people in defined benefit plans went from 24% in 1981 to about 17% in 1987 because so many employers wanted to chuck defined benefit plans because they were no longer a bigger bang for the buck, thanks to these limits.

So imagine what this latest proposal will do to 401(k) plans. People who forget history are soon doomed to repeat it.  Employers will terminate 401(k) plans if their top paid people have their benefits limited and the employers are forced to calculate and enforce that limit. We have a retirement plan crisis and any proposal that has the intended or unintended effect of having lower paid people saving for retirement plans must be stopped.

PBS Frontline’s report on 401(k) plans entitled “The Retirement Gamble” was a pretty sobering report about the problems and issues regarding these plans in providing benefits to plan participants for retirement.

While people note that the report came from an anti-401(k) bias, their skewed vision can be shown by the title of the program. Let’s face it, having a report that states that a 401(k) plan is a great opportunity for both employers and participants to have a retirement plan isn’t going to get a lot of eyeballs.  It’s easier to point out the problems and offer very little solutions on how to cure them.

While some 401(k) industry groups railed against the program, the program did raise some serious concerns against the very same people who help sponsor and benefit these trade groups.

If the head of the investment arm of one of the nation’s largest banks can’t tell you why he thinks a broker is better than a registered investment advisor or why actively managed is better than an index funds, let’s stop blaming the Frontline reporter for a biased report.

I have never been a part of any company or any industry that likes to take criticism.  Nobody wants to be told that they aren’t doing a great job. The retirement plan industry needs to look itself and concentrate on what they are doing right and try to fix what they are not doing right.  If the people in the industry try to pretend that nothing is wrong with the 401(k) plan industry, then they are only fooling themselves.

There needs to be some sort of standard where a financial advisor doesn’t get a bigger trail by pushing a specific fund. There needs to be a simple disclosure of all plan expenses and fees just like the menu at In N Out. The biggest shame about the program is that the biggest problem in the 401(k) plan business isn’t the mutual fund companies; it’s the lack of any good investment education and/or advice for plan participants. The biggest problem affecting 401(k) plan is that it put the investment decisions in the hands of the people who have the least amount of background or sophistication to make those decisions, the plan participant. While the Frontline program seemed to have a bias for index investing, I am convinced that an all index lineup on a plan menu will do little good for plan participants who have no idea how to invest. Only until just recently, did the Department of Labor allow plan providers to offer investment advice and only a few providers will offer it because of the hurdles that the Labor Department put in place for providers to jump over in offering advice.

I tend to see the 401(k) plan business as the glass that’s half full. Sure there is still a lot of conflict of interest out there and fee disclosures that aren’t so transparent and poor education for plan participants. The fact is that despite all the criticism, no one has come up with a better idea than a 401(k) plan. Let’s face it, defined benefit plans aren’t coming back, so it’s time we try to fix what we have.

Another thing that the program did gloss over is that plan sponsors and plan participants need to share the blame to the troubles of the industry. Too many plan sponsors have a set it and forget mentality about their plans. While competing plan providers tell them about their fiduciary responsibility and the high fees/lousy service that they are getting from their current providers, many plan sponsors have a what me worry mentality. In addition, when participants defer part of their salary in a 401(k) plan, they need to have responsibility in identifying what they are investing in and asking the right questions about their plan. They have a responsibility to themselves, a responsibility to save for retirement because if they don’t care about their financial goals, it will be hard to find someone who will.

A good chunk of what’s wrong with the 401(k) industry is that we have too many apathetic plan sponsors and plan participants. I’m not trying to make excuses for the jokers who charged too much and gave so little, but there is a larger group put there that needs to share the blame for the ills of the industry.

When it comes to oral or written communications, it’s important that you play to your audience. Any communication that is above or below the audience’s comprehension is going to be a missed opportunity to communicate your message.

When it comes to 401(k) plan meetings with plan participants for enrollment or reenrollment, fact is that most of them suck.

The greatest education I ever received wasn’t at law school and it wasn’t working as an ERISA attorney for 9 years working for third party administration firms. My greatest education was being involved in student politics and journalism at the State University of New York at Stony Brook (which is now called Stony Brook University).

One of the simplest lessons I learned was from Ron Nehring, who has been a friend of mine for over 20 years and he basically told me that the goal of any organization in recruiting new members is getting them involved. I joined Ron’s political organization because they got me interested, got me involved, and kept on contacting me about other events. The Jewish students organization that I was going to be heavily involved had a barbecue the weekend before freshman year started. I arrived 15 minutes late and there wasn’t anymore food available. I was offered a bagel and people who certainly weren’t Jewish were enjoying a nice Kosher hot dog or hamburger. Needless to say, I didn’t get involved much there.

The point is that most 401(k) plan meetings suck because they really aren’t geared towards plan participants. The advisor conducting the meeting is giving the basics of investments and plan features that isn’t interesting or inspiring. The meetings tend to be really dry when they don’t have to be.  I’ve been at funerals that have been more livelier than enrollment meetings.

How would I liven up an enrollment meeting?

1)   Raffle off a $25 gift card at every enrollment meeting. People like free stuff and if they know then can win something by attending, they will. Of course, have the raffle at the end of the meeting, so it ends on a good note.

2)   Presentations need to be clear and crisp. Less is more. Powerpoint presentations and slide handouts shouldn’t be overloaded on details. Illustrate the important points.

3)   Add humor and cultural references. With apologies to my former managing attorney who wouldn’t know good marketing if it was standing behind her, adding humor and cultural references goes a long way. My articles aren’t widely read because of my rugged good looks or lack thereof. They are widely read because the humor and cultural references engage the reader into reading what should be a dry topic, i.e, the ins and outs of retirement plan sponsorship.

4)   Break it down. Again, my writings are written in easy to understand English, not what I call ERISAese. The easier for plan participants to understand what you’re saying, the more likely they will remember what you’re saying.

5)   Keep it short. Spend more than a half hour or hour, you will lose your audience. Again, less is more.

My latest article on JDSupra can be found here.

Being a plan sponsor is a tough job and the amount of paperwork that goes with it can be overwhelming. The paperwork includes plan documents, summary plan descriptions, amendment, valuations, trusts statements, and payroll.

The fact is that as a plan fiduciary, plan sponsors need to keep good records. It’s important to have correct records when you need to pay former plan participants out, but they need to protect themselves. I have seen too many plan sponsors get into trouble with plan compliance or audits by the Internal Revenue Service or Labor Department because they no longer have copies of the documents they once had.

While spaces for document file cabinets are usually at a minimum, there is a friend out there than can help you avoid losing necessary plan documents and that’s a scanner.

Saving all the necessary plan documents and valuation reports through scanning them as a pdf can help plan sponsors avoid losing documents and save on the need for space of filing cabinets. While plan sponsors should maintain original copies of all plan documents, they can scan the rest. A good scanner won’t set you back and plan sponsors probably have that option with their copier.

Plan sponsors should scan all their plan files as they come in and label them in any easy to understood manner. Creating specific directories on the network for specific plan years is also a great way to keep these things organized.

Something as simple as a scanner can help a plan sponsor exercise their duty as plan fiduciaries.

Any industry needs to identify threats to its existence and develop a course of action to defeat that threat. The music industry is a shell of its former self. While they were awarding large contracts to artists like Janet Jackson and R.E.M. in the late 1990’s, they failed to see the threat of mp3 files to their business of selling compact discs. While they had every right to pursue a legal action against Napster for copyright infringement, they needed to develop a legal service for the delivery of mp3 files to those willing to pay. So instead of capitalizing on the idea of an mp3 service, they let a struggling computer company in to develop their own service called ITunes and the rest is history: ITunes led to the IPod, IPhone, and IPad and the music business is a sell of its former self.

Whether you are a Republican or a Democrat, you understand that we have a tremendous national debt problem and the problem will get worse over time. President Barack Obama’s 2014 proposed budget includes a provision that would cap how much people could keep in tax-preferred retirement accounts at $3 million.

The retirement plan industry is predicated on people savings for retirement. Clearly, the upper middle class and upper class save more for retirement than the other half. Clearly, any caps will have a deterrent effect on wealthy people saving for retirement. Whether you have the idea to soak the rich or not, any cap on retirement savings will have a negative effect on the retirement plan industry, especially those who bill on plan assets such as financial advisors, custodians, mutual fund companies, and third party administrators.

While we need a plan to trim our deficit, a raid on the retirement accounts of some of our wealthier plan participants is only going to imperil our bottom line.  The cap is a threat to our livelihood in this industry.

My latest JDSupra.com article can be found here.