The Rosenbaum Law Firm P.C. Blog

10 years ago, if a 401(k) plan participant tried to sue their employer for  excessive plan fees or breach of fiduciary duty, they would have been laughed out of court.

While poor stock market returns and work by the Department of Labor have been essential for final implementation of retirement plan fee disclosure, one should not discount the role of court cases like DeWolfe, Bechtel, and Tibble that have made fee disclosure possible.  I’m sure many ERISA litigators on the defense would have scoffed at the chances that plan participants had in suing employers, but the last 6 or 7 years have led to major decisive victories for plan participants.

The latest victory is Tussle v. ABB, where the court held the employer breached their duties to plan participants by failing to monitor recordkeeping costs, negotiate rebates and prudently select and retain investment options. The Court awarded the participants a damages award of $13.4 million against ABB for failure to monitor recordkeeping costs and to negotiate rebates and $21.8 million for imprudent mapping of funds; it also required Fidelity to pay $1.7 million.

While Judges don’t write laws, their work in deciding cases can have a profound effect on changes in this industry and the regulations that get promulgated. So while some may criticize plaintiff ERISA litigators as ambulance chasers, their work has spurred the need for plan sponsors to concentrate more on plan expenses because they may be the “ambulance chasers’’” next victim.

I have written articles about retirement plan provisions that are good ideas and some that are bad.

Here are some provisions that dumbfound me:

1. Off calendar year 401(k) plans: While I understand companies can have non-calendar fiscal years, I have never been a big fan of off calendar year 401(k) plans where the plan year will not end on December 31^st. Why? 401(k) plans are funded mostly by participant salary deferrals and participants must have a December 31^st fiscal year for their individual taxes, so the salary deferral limits for a participant (also known as Section 402(g) limit) is on a calendar year, which will never be calculated to determine whether a participant exceeds that limit since their compensation is calculated on the off calendar plan year. Makes sense? For 401(k) plans, it just doesn’t.
2. 401(k) Plans that don’t offer an in-service distribution at normal retirement age: I believe 401(k) plans should allow an in-service distribution at age 59 ½ and if not, at least offer it at normal retirement age. Heck, it’s mostly salary deferrals and a participant should be able to tap that money when they hit 65.
3. Defined benefit plans where the only investment is life insurance: Defined benefit plans, solely developed to pay premiums on a life insurance policy within a plan never ends in a happy story in tough economic times, where the employer (usually with only owner-employees) can no longer afford the minimum contributions to the plan, which is the annual premium for life insurance. I have seen too many employers surrender policies at huge losses to them.
4. 401(k) plans with no Roth provisions: Aside from the tax aspect of it, there is no difference between pre-tax deferrals and a Roth deferrals, so aside from advising the payroll company, there is no reason why a 401(k) plan shouldn’t offer their participants the right to make pre or post tax deferrals.

The clock is ticking toward 408(b)(2) regulation implementation for fee disclosure to plan sponsors by July 1 and to plan participants for participant directed plans 60 days later.

Fee disclosure will forever change the landscape of the retirement plan industry, but it will take some time to figure out the fallout. Like a good disaster movie (thanks Irwin Allen, but no thanks for The Swarm, Beyond the Poseidon Adventure, and When Time Ran Out….) , it will take some time to figure out the winners, the losers, and the casualties.

For me, the biggest casualties will not be insurance company providers or certain third party administrators, but plan sponsors who are unaware of their duties under 408(b)(2) and 404(a)(5).  Plan sponsors are unaware that if their providers don’t provide the disclosure, they have to fire the providers and be possibly at risk of the service contract being declared as a prohibited transaction. The 404(a)(5) regulations are even scarier, because the plan sponsor is fully blamed for not providing it. How many plan sponsors will be in trouble? Quite a few, but it will take some time to figure it out.

July 1 and September 1 are like the eye of a hurricane, it’s incredibly safe because the damage is either ahead or behind as the hurricane comes through. It will take some time for plan sponsors to discover their errors and it will take some time for the Department of Labor to audit plans to determine compliance with the fee disclosure regulations. Like a good conspiracy to steal retirement plan assets,  it will take some time for non-compliance to the fee disclosure regulations to comply.

So while people are focused on the negative effect that fee disclosure may have on some plan providers, there will be far more plan sponsors that will feel the wrath of non-compliance with the fee disclosure regulations.

My latest JDSupa.com article can be found here.

If you have not heard, the self proclaimed leader of the independent ERISA fiduciary movement, Matthew Hutcheson has been indicted and arrested for fraud and theft of retirement plan assets from the multiple employer plans (MEPs) where he served as a fiduciary.

Having succeeded Matt as the Chief Fiduciary of a plan that is indirectly connected with these allegations of theft, I can state that these alleged thefts from other plans occurred more than 9 months before I succeeded him.

I would love to comment freely about this, but it would be unwise for me while there is impending civil and criminal litigation.

Matt is entitled to a presumption of innocence, but regardless of his innocence or guilt, his career as an ERISA fiduciary is certainly over. It’s a sad end for a career that had so much promise.

It is a black eye for this industry, especially for MEPs, but the lessons learned from this debacle will only improve MEPs and serve as a cautionary tale for plan sponsors considering joining a MEP or hiring an ERISA fiduciary.

My latest newsletter geared towards financial advisors can be found here.

A few weeks back, a woman who was serving as a fundraiser for the PTA for my local school was arrested for embezzlement. She has been accused of stealing $5,000 and using part of it to pay for an American Girls birthday party for her daughter. This theft was caught by an audit of the PTA’s finances.

Crimes like these to me make no sense because there is a record of this theft and these records can be audited. When I heard about the crime, I joked that she was better off robbing the bank. The joke could be considered in bad taste because I found out her husband died year ago drowning after his car landed in Hewlett Bay while trying to avoid the police after he robbed a local bank.

Every few months, I read the Department of Labor’s webpage of actions taken by the Security of Labor against plan sponsors accused of theft. Having been involved on a handful of occasions where plan sponsors and fiduciaries are accused of theft, I’m just amazed how people who are entrusted with the retirement plan assets of their employees would then abuse that trust by converting those assets for their own personal use with almost no chance that they won’t be caught because there are enough checks and balances such as a Form 5500 and competent third party administrators to help minimize that risk of theft.

I have been accused every now and then of having no empathy, but I will never understood why plan sponsors and fiduciaries commit such crimes and think they can get away with it.

My latest JDSupra.com article can be found here.

They started the do it yourself craze for home improvement, perhaps they can do the same for 401(k) plans. The Home Depot, which has a $3.7 billion 401(k) plan, has shrunk their plan administrative expenses in half over the last three years.

The plan investment lineup has 12 options, in addition to target-date funds and a self-directed brokerage window. While that maybe a lot of funds, participation rate is higher than average at 61%. The brokerage window only is used by 1% of the participants.

While people will scoff that Home Depot can have the power to cut expenses in half because they have $3.7 billion, small and medium sized employers may have the same power if they are just willing to listen to financial advisors and third party administrators who are telling them that their current providers stink.

I spoke to an advisor today who reminded me of an old client that I had at my old producing TPA. He told me he approached the human resources director at the company, telling him he was paying 75 basis points in investment advisory fees on a $20 million 401(k) plan. The human resources director couldn’t care less, but the reason was that this director would send my boss a schedule for the New York Jets and circled the games he wanted to attend. So I know this H.R. director got to see a lot of Bill Belichek and Tom Brady at Giants Stadium.

So what can Home Depot tell us? Plan sponsors can do it themselves to fix their 401(k) plan, they just need the right tools. A good financial advisor, TPA, and ERISA attorney are the right tools. Free tickets for the Jets aren’t, even Giants (go Big Blue) tickets aren’t either.

I will say it again, I think the offering of an ERISA §(3)(38) fiduciary service is one of the nice developments in the retirement plan business. While the “investment manager” definition has been in ERISA since the beginning of time, it has only been an offering for 401(k) plans over the past few years. As with anything, it’s a nice service for plans who need the help. However, it’s nice while it lasted or at least until the few lawsuits that will certainly involve it.

How am I so sure that there will be litigation surrounding the §3(38) fiduciary? Well, as with anything, a proliferation of any product or service will bring in some people into the business who don’t know what they are doing. That will be people who don’t understand the fiduciary process because they are inexperienced or companies that offer a 3(38) service at the behest of one of these insurance company or mutual fund providers. I think that any §3(38) fiduciary being touted by one of these providers as an exclusive solution  have to be worried about independence issues, whether their decisions are not tainted by the relationship with one of these providers. The moment that one of these fiduciaries makes a decision on which investments to make, based on a menu of funds that are cherry picked by an insurance company or mutual fund provider opens themselves up to a whole heap of trouble. Let’s face it, funds that are cherry picked for a specific fund lineup by a third party administrator or bundled provider aren’t usually cherry picked because they are inexpensive.  I suggest that any ERISA independent fiduciary is breaching their duty of prudence and loyalty to the plan sponsor and participants the moment that they narrow their fund selection based on suggestions by any other provider.