The Rosenbaum Law Firm P.C. Blog

Advisors ask me all the time about the role of education in participant-directed 401(k) plans. Participant-directed 401(k) plans that are governed under ERISA §404(c) offer the plan sponsors liability protection based on a participant’s gains or losses on their account when they direct their investment.

There have been so many misconceptions that plan sponsors and advisors have had concerning ERISA §404(c) plans. They had this belief that if they just give a mutual fund lineup and some Morningstar profiles to plan participants they are exempt from liability. ERISA §404(c) protection is about following a process and Morningstar profiles are just not enough education to give to plan participants. You have to provide enough information for participants to make informed investment decisions. On the flipside, education to participants doesn’t have to amount to an MBA education, especially if you don’t want to offer advice.

I think an effective education component to ERISA §404(c) plans should include enrollment meetings where the characteristics of the plan are discussed, as well as the investment options, and offering the building blocks of financial education to assist participants in getting a better understanding on how to choose investments.

Advisors who may have issues in offering education should always consider using some of the online resources out there that do offer advice for a fee.

Also, written materials such as plan highlights and some Morningstar profiles should always be distributed.

Also while many advisors dislike this, one-on-one meetings with participants should always be offered. While most participants will probably shun such meetings, they should always be offered to those who want them because as we know, every participant has a different financial goal and need. One-on-one meetings offer participants individualized attention on asset allocation and fund choices; it can be an effective means of educating plan participants more than what a general enrollment meeting can offer. It can help participants understand how retirement plan assets relate to their other assets as part of a comprehensive financial plan.

Advisors should always look at education as liability protection because offering participant education helps a plan sponsor minimize their liability under ERISA §404(c). While I always stress education as an important part of the fiduciary process, it’s not about achieving a specific result from participants directing their investments. Offering participants investment education is like the old proverb, “You can lead a horse to water, but you can’t make him drink.” So no matter how great the education component is, there is no guarantee that it will help plan participants achieve a better financial result because like they say, there is no guarantee in life, except maybe death and taxes. The participant who put all his money into a mid-cap fund because he considers it the “average of the market” may still do so even after getting an education at the enrollment meeting and through one meeting. As with most things with retirement plans, it’s about following a process and not guaranteeing a result.

The problem with starting college and dorming is that your roommate or suitemate might be a maniac. You get connected to these people through a random draw.

When starting a Pooled Employer Plan (PEP) and running it, you have the problem that these unrelated businesses from all occupations join together. It’s not a random draw, but you might have to deal with their bad habits.

The biggest problem for 401(k) plans these days is late deferrals and with so many adopting employers, you will likely end up with one. That’s a big problem. Just had an issue with an adopting employer who didn’t know his company was still deferring, so the deferrals ended up in his pocket to float a dying business. Needless to say, I made sure that things were fixed. Running a PEP, you might see yourself as being at the mercy of the adopting employers. Shape them up or end up shipping them out.

If you restrict eligibility from your retirement plan to a certain group of employees outside of the statutory exclusions (such as union employees or non-resident aliens), it might make sense to determine whether that exclusion is still proper.

Any definitions that are connected in any way with part-time employees can be a problem, especially since the SECURE Act allows long-time, part-time employees to become eligible for the deferral component in the plan. Exclusions from eligibility have to be reasonable, the days where you could exclude employees just on part-time status or by name are over.

In communications with other plan providers, clients, and potential clients, you have to be clear. There isn’t much room for miscommunication. When dealing with clients, miscommunications can lead plan sponsors to some huge mistakes.

Everything you write or say must be clear, there can’t be room for misinterpretation because the stakes are pretty high. I’ve seen too many plan sponsors that were harmed because the third-party administrator wasn’t clear on the information needed for an end-of-year census.

If you tell people what you need and what they need to know in clear language, a lot of mistakes will be avoided.

“The Bears are what we thought they were. Th-they’re what we thought they were. We played them in preseason. I mean, who the hell takes the third game of the preseason like it’s bullshit? Bullshit! We played them in the third game, everybody played three quarters… the Bears are who we thought they were! That’s why we took the damn field!’ then Arizona Cardinals Head Coach Dennis Green.

The rules of controlled groups and affiliated service group rules have one simple rule, if they’re a member of either, companies of those groups have to be tested as one.

Controlled groups, either are members or not, based on the percentages of ownership and commonality. The same can’t be said about affiliated services, it’s all fact-sensitive. Companies that work together with each other or for third parties are likely affiliated services. If they are separate, they probably aren’t. You will only know if you ask the right questions, and that’s why you need an ERISA attorney to dig through the facts.

At home, I have Verizon FIOS for TV and the Internet after having my cable provider, Optimum for about 13 years. A few years ago, I was enticed to re-sign with Optimum and their new Altice converter box/router. When it came the day of installation, the Altice system failed during installation and the installer told me that the Altice system was buggy and wouldn’t be great for another 4 months, so I canceled the installation.

As a plan provider, you can’t afford something buggy that won’t work. Whether it’s your website, an app, or any type of system where plan sponsors have an interface, you can’t afford to look bad in front of clients and other providers. You only get one chance to get it right and that’s what beta testing is all about.

As January 20th approaches, people in this business will question what a second Trump administration means for 401(k) plans. I don’t know because Donald Trump works outside the lines compared to other people in politics.

He has some tax legislation to foster, and I imagine the fiduciary rule proposed by the Biden-led Department of Labor (DOL) might be withdrawn. I also think Bitcoin might get approval by the DOL to appear on fund lineups via a spot Bitcoin exchange-traded fund. What else might happen? Your guess is as good as mine.

For 2025, the ESG rule will be history for now.

Donald Trump as President will reverse the Department of Labor’s ESG rule that allows retirement plan fiduciaries to consider environmental, social, and governance (ESG) factors in retirement plan investment decisions.

There are no guarantees in life, but that reversal is a guarantee.

Assistant Secretary of Labor and Employee Benefits Security Administration head Lisa Gomez predicted major changes to retirement security regulations and financial fiduciary standards when Donald Trump returns to the White House on January 20th.

In a public conversation at the PLANADVISER 360 Conference in Scottsdale, AZ, Gomez admitted that the Department of Labor’s retirement security rule, the new fiduciary rule, will likely not align with the new administration’s priorities.

In identifying likely changes under Trump, Gomez also pointed to the DOL’s rule on prudence and loyalty in selecting plan investments, known as the ESG rule. This rule permits plan sponsors to consider sustainability factors when advising on retirement plan investments. The rule has faced criticism and legal challenges, which Gomez partially attributes to its ESG branding.

Gomez also said she plans to step down from her role on January 20th.

I hate moving. I’ve lived in the same house now for 19 years and I dread the idea of moving I haven’t put the house up for sale. That’s why I always loathe when there has to be a change of third-party administrators (TPAs).

Many times it has to be made, for the sake of the 401(k) plan. Yet, when any change is made, you have to make sure the transition is smooth. The idea that conversion will force a 401(k) plan to get mothballed for more than a few weeks isn’t ideal, I think it would be a terrible thing for a plan that gets mothballed for 3 months. I’ve seen situations where plans have had to seek counsel because they had to go through the trouble of opening bank accounts, just to keep the plan moving.

Changing plan providers need to buy like the trade of the baton in a relay race, it can’t afford to be dropped.