The Rosenbaum Law Firm P.C. Blog

A good article appeared in AOL’s Wallet Pop website regarding four signs that your 401(k) plan is being managed. With a quote by Mike Alfred at Brightscope.com, the articles listed the plan charges high annual fees; the plan has major gaps in investment options; the Plan features only one family of funds; and the Plan is an insurance-based Plan.

For me, it’s hard to stop at four just like Lay’s Potato chips claimed you couldn’t eat just one chip. Some additional signs that your plan is being mismanaged include plan not having a financial advisor; participants not getting any investment education on a participant directed plan; and too many directed investment options.  That’s just a few in my mind.

My interview on Advisorone.com about developments in retirement plan law, especially Target Date Funds can be found here.

This past week, I received my 2010 end of year statement for my Vanguard rollover IRA and there was a nice surprise, they automatically switched my index mutual fund shares from their retail class to their institutional class, which has lower fees. Somehow my account hit a certain balance number to throw me into a lower fee class and it was very nice of Vanguard to do that automatically.

One of my pet peeves dealing with insurance company 401(k) platform is when certain third party administration (TPA) firms or the bundled provider themselves fail to notify 401(k) plan sponsors that their contract is up and there are less expensive alternatives out there from that very same platform.

Case in my point, my old TPA had a client on one of the more popular insurance platforms. I saw a copy of the contract that was signed in 1995 and expired in 2001 that stated that the charge to the client was 267 basis points. The only problem is that I had a copy of the contract in 2007 and the client was being charged that amount in 2007. My old employer and their broker (if he actually knew) never bothered to let the client know that 267 basis points for a daily plan with $3 million might have been a good value in 1995, but not in 2007.

That lack of a bump down in fees by my old TPA is a real problem that I have with fee disclosure that is coming to plans in July. Disclosing fees and compensation received is all well and good, but it has absolutely no value if the plan fiduciaries fail to exercise their fiduciary duty by comparing the fees they are being charged to what is offered in the retirement plan industry. A plan sponsor won’t know if 267 basis points is reasonable unless they shop their plan around on an annual basis.

Fee disclosure is great only if plan sponsors understand what it means.

My latest article in what I call the “Value Series” can be found here.

As I start revising client service agreements for my third party administration firm and registered investment advisory clients for a flat fee (cheap plug) to comply with the fee disclosure regulations, it really asks the questions with how to proceed.

As an attorney having survived two law firms, I can attest that many attorneys need to overwhelm their clients with legalese wording that only confuses the client and many times, the attorney that drafted it. I believe in writing in English, so the client and their clients understand what they are signing and what is being disclosed.

As for plan documents that I draft for a flat fee (another shameless cheap plug), I believe less is more. When it comes to complying with fee disclosure, I believe more is more with a caveat. I believe that service providers need to fully describe the fees they charge and the compensation they receive, so the clients will not claim that the service provider is committing a sleight of hand trick.

So while plan providers should be forthcoming with fee disclosure, the agreements and the disclosure should be written in a language that the plan sponsor will understand, so it will make it easier for them to understand what fees are being charged. By doing that, it allows the plan sponsor to determine whether the fees are reasonable for the services provided and making their job easier.

When it comes to consumer products and food products, we have stringent labeling requirements. Products must have the contents to support that they are Made in the USA, organic, and juice in order to put that claim on their products and there are penalties by the Food and Drug Administration and the Federal Trade Commission if those claims can’t be backed up. It’s kind of sad that there were no stringent labeling requirements for target date funds, so the nest eggs of countless participants were decimated in the last bear market.

As with many promises out there, target date funds didn’t deliver. They were supposed to be this one stop shop mutual funds that would shift its asset allocation to more fixed income as the years get closer to the target date. We can argue about what the target date really should be (retirement or death) or whether asset allocation should automatically shift on some arbitrary date or based on what is actually happening in the market.

 My biggest problem with target date funds is that they had no labeling requirements so participants were led to believe that a 2015 or 2020 had little or no equity exposure in 2008, only to suffer huge investment losses.  A 2020 fund from Vanguard could have a totally different glide path or equity mix than a 2020 fund from Fidelity. As an example, 2010 target date funds lost an average of nearly 24 percent in 2008, according to the SEC. Losses ranged from 9 percent to a whopping 41 percent. That is a 32 percent difference for participants that are supposed to be in the same boat, retiring in 2010. A comparison of target date 2015 funds conducted in 2010  by Morningstar showed that the Alliance Bernstein  2015 Retirement fund had an allocation of 71 percent stocks, 28 percent invested in bonds and 1 percent cash; and the Vanguard Target Retirement 2015 fund was 60 percent stocks, 37 percent bonds, 3 percent cash.  11% difference in the weighting of equities is rather large.

 So the target date has almost no meaning. It reminds me of when Judge Elihu Smails asked Ty Webb in Caddyshack on how he measured himself against other golfers if he didn’t keep score. Naturally, Ty said he measured himself by height. So if the 2020 in a 2020 target date funds didn’t stand for a specific equity percentage, the participant would only know what was in the fund if they read a prospectus and annual report and we know how many participants read those.

I know the SEC will be cleaning up this mess by requiring labeling that will show the equity/fixed income mix next to the fund’s name in marketing materials. That’s swell, but for the participants who were decimated in 2008, the relief comes too little too late.

We can always argue the merits of the influence of the mutual fund industry in the 401(k) business, but their handling of the target date debacle is what I think was their worst hour.

Over the years, I have come up with a lot of get rich quick schemes. Problem is most of them stink. I think the fee disclosures coming to retirement plans in July will open up a lot of new positions in the retirement plan industry, just like Sarbanes-Oxley did for audit firms.

As time goes on, there will be more demand for ERISA §3(38) fiduciaries. As plan sponsors get overwhelmed with fee disclosure, which I believe will actually increases fiduciary liability (since they now will know their fees), more and more plan sponsors will want to eliminate almost all of their fiduciary liability. Aside from terminating their retirement plans, the only way to do that is to hire a 3(38) fiduciary.

Aside from 3(38), another booming business will be retirement plan consultants. Fee disclosure is only good if plan providers are honest about the fees they charge and the compensation they receive. So the only way to make sure that the plan providers are honest and to protect a plan sponsors from having the relationship with the plan providers be considered a prohibited transaction, they may have to hire a consultant to determine whether the disclosures made by the plan providers are correct or not.

For those who understand the nature of how the 401(k) industry works, they will be quick to prosper. Companies like brightscope.com, 401(k) Rekon, and providers offering exchange traded funds are already ahead of the game.

My latest article on JDSupra can be found here.

Law school was not one of my favorite times. I think my law school concentrated more on marketing about how they were such an open place to learn, as opposed to trying to help graduates get jobs.

While I blame my law school for its career services program, ultimately the success or failure in my career depended on me. This is what I said in an article in The Atlanta Post.

My latest newsletter, geared towards financial advisors and third party administration firms can be found here.