The Rosenbaum Law Firm P.C. Blog

A federal judge in San Diego rejected Qualcomm Inc.’s motion to dismiss a lawsuit by a 401(k) plan participant over forfeitures.

The key issue here is whether Qualcomm could use forfeitures to reduce employer contributions.

The Internal Revenue Code allows 401(k) plans to use forfeitures to reduce employer contributions to the plan or reduce plan expenses. Qualcomm chose to reduce employer contributions, according to Antonio Perez-Cruet vs. Qualcomm Inc. et al.

The plaintiff, a former employee sued in October 2023 claiming ERISA’s guidelines say plan executives’ fiduciary duty is to reduce plan expenses. The plaintiff claims that ERISA trumps the IRS.

With a motion to dismiss rejected, a settlement is quite possible.

A lawsuit against TIAA’s cross-selling a managed account service will proceed after their motion to dismiss was denied by a federal district court judge in New York.

John Carfora, Sandra Putnam, and Joan Gonzales sued TIAA in the U.S. Southern District Court of New York alleging that TIAA breached its fiduciary duties to participants ERISA for cross-selling their adviser-managed account service known as Portfolio Advisor, which comes at a higher cost than remaining in the plan that these participants were in.

The plaintiffs were participants in different university-defined contribution plans serviced by TIAA, but aren’t suing the schools for breach of fiduciary duty.

U.S. District Court Judge Katherine Polk Failla denied TIAA’s motion to dismiss and stated that the lawsuit shows “in great detail the systematic efforts on TIAA’s part to drive members from their ERISA plans and into TIAA-sponsored offerings, with little upside to those participants.”

The lawsuit claims that TIAA placed participants into individual model portfolios that often included TIAA-affiliated funds, which had higher fees than if they kept their assets in the employer-sponsored plan. The lawsuit also alleged TIAA advisers cold-called participants by offering free financial planning services but with the undisclosed intent of moving participants to the managed account offerings.

Vestwell announced the expanded distribution of J.P. Morgan Asset Management’s Everyday 401(k), as well as the expansion of the Everyday 401(k)’s capabilities, including allowing financial advisors to serve as a 3(38) investment manager in the workplace retirement plan.

J.P. Morgan’s workplace savings platform for small businesses will continue to be offered through JPMorgan Chase business banking and will now be available to financial advisors, jointly distributed with Vestwell.

Small employer plans like a SEP or a SIMPLE-IRA are great opportunities for small businesses to save for retirement because of the no administration costs. However, like clothing for kids, there will be a time when these plans no longer fit.

When do they no longer fit? When you start adding employees that aren’t owners or related to owners these plans allow no disparity in employer contributions. So if you want a 15% employer contribution, you have to give it to the employees who have been there for a year full-time. There is also no salary deferral component in a SEP and a limited one for SIMPLEs, so the bulk of the retirement plan contributions are what you’re going to fund.

So that’s why you need to look into something that’s a better fit like a 401(k) plan or one that’s in conjunction with a cash balance plan. So you need to know when the SEP no longer fits.

ERISA requires disclosure of certain plan documents to participants including a summary plan description, statements, and notices. The problem is what do you do with people who aren’t participants such as potential employees?

If you’re scared about providing an SPD to a potential employee, maybe you should worry about what’s in your SPD. As for other information, you have to measure risk vs. offending the person requesting the information. You just don’t want to land in trouble by disclosing too much information and you also don’t want to offend those asking for information by just saying no especially if the goal is to hire them. There are certain things I wouldn’t disclose such as plan provider contracts and anything about plan governance.

The retirement plan business is all about trust. It’s built on trust and trust takes time.

So when an advisor calls me up and asks if I can refer them clients, it’s a faux pas on their part because they aren’t interested in building any kind of relationship with me, they just want to sell, sell, sell, kind of like the Dukes at the end of Trading Places.

I don’t get many direct clients from plan sponsors, it’s mainly through referrals from advisors and third-party administrators with plan sponsors in trouble. Even if I do have a client who needs a financial advisor, am I going to refer them to people I trust and work with, or someone who just cold-called me?

I believe one of the most important games I play is game theory, I try to deduce what the other side will do, in any given situation. With my game theory, I can’t imagine any advisor who isn’t just going to give me clients without some relationship-building. Yet so many advisors out there, think that I’ll just give them clients out of the blue.

I always say that the world would be better off, just if every human being would realize that there are other human beings out there. The person who plays on their phone without an earpiece, the person who won’t return the shopping cart to the corral, and the person who is a pig parker, would serve humanity better, just by understanding that there are other people out there.

Every act you make in whatever you do can react. I learned that when I offended a third-party administrator (TPA) by taking my client’s side over a billing issue. The problem is that the TPA referred me, but the plan sponsor was a client. Lets just say, I never got a referral from that TPA again.

Everything you do, no minor the job, can react, and sometimes it’s not going to be positive. So when I pulled a Larry David because the camp photographer was taking pictures, mostly of her ugly children, I lost a friendship out of it, because a friend of mine was a friend of this photographer. These are the breaks.

Years ago, I was the Executive Editor of my law school’s news magazine. In one of my final issues, a friend of mine wrote an article that was serious, but funny at times. His bone of contention was over professor evaluations and how they were given before the final exam, so it was before we got our grades. This author contended that evaluations should be given after we got our grades because the grade turned his view of a specific professor based on the grade. In his critique, he said a grade turned him from wanting to say hello to a professor on the street into not wanting to take a leak on them if their rear end was on fire. It was a really funny article because it was so truthful, a grade most of the time would tell us whether we would enjoy the class or not.

When it comes to retirement plans, I often find that plan sponsors only start to understand the competency of their third-party administrator (TPA) during the de-conversion process. The de-conversion process is what it says is the de-converting of a retirement plan from a TPA during a change of providers. I often liken the de-conversion process to moving your residence because it can be a harrowing experience.

Why is de-converting so harrowing? It can be based on the competency over the TPA you are leaving, as well as the plan sponsor’s diligence in their role as a plan fiduciary. For a plan that has reviewed their TPA’s work by themselves the use of a third party or a plan being handled by a competent TPA, it isn’t so harrowing. For a plan sponsor that doesn’t know the ADP test from ADP, the payroll company, it can be. The reason why it can be so harrowing because if there is no review of the TPA’s work, the de-conversion process is the only time that a plan sponsor will beware whether there are any compliance issues that need to be fixed. So often, I have worked with clients who didn’t know they should have failed their Top Heavy test because the TPA did it wrong or realized they were being overcharged for services. Again, there are so many competent TPAs that offer such a seamless transition during the conversion process; it’s almost so clean that you can eat off the floor. However, there are too many times when plan sponsors get a little shock as to the compliance problems they are now forced to fix as a new TPA will not like to assume the administration of a plan with so many issues.

That being said, to avoid the shock of the conversion process, I recommend that a plan sponsor have an administrative review of their plan annually. Whether it’s the use of my Retirement Plan Tune-Up for $750 or whether it’s someone else’s independent review, I always say the devil you know is better than the one you don’t know. say the evil you know is better than the evil you don’t.

I am still shocked at how often I find participant-directed 401(k) plans without a financial advisor. While I understand how solo 401(k) plans don’t have an advisor because individuals think they can do it on their own. I have a solo 401(k) and I handle my investments. I always say that the moment that I add an employee, I am going to hire a financial advisor and there is an easy reason why.

I am often amazed that in the age of the Internet, there are still travel agents around in business because the Internet has allowed us to book trips and hotel rooms with a simple click button. In the old days, unless you had the travel agent software, you couldn’t do it on your own. Thanks to the internet, we can invest on our own, and buying and selling securities can be done with the click of a mouse as well. While many people think that the usefulness of a financial advisor has gone the way of a travel agent, I respectfully disagree.

When it comes to participant-directed 401(k) plans, the main role of a financial advisor, in my opinion, isn’t picking mutual funds as a broad range of investments as required under a Section ERISA 404(c) Plan. I believe that with all due respect to Commander Montgomery Scott from Star Trek III, a monkey, and two trainees can pick a mutual fund lineup to meet that broad range requirement.

I think the value of a financial advisor is having them a part of the fiduciary process, drafting an investment policy statement, reviewing the current fund lineup, and most of all, employee education.

I worked at a semi-prestigious (sorry, Lois) law firm on Long Island and there was no financial advisor on the 401(k) plan for a review of the mutual funds for 10 years. I knew we needed one when someone on the office staff stated that he only invested in the mid-cap mutual funds because “it represented the middle of the market.” That is why you have s financial advisor.

Even 401(k) plans that offer index funds or exchange-traded funds need a financial advisor because while index investing beats most of the active funds consistently, participants still need investment education to make an informed decision that will get the plan sponsor ERISA §404(c) protection. Index funds and ETFs are great, but what about asset allocation and risk tolerance? Index funds and ETFs won’t solve those issues on their own. So even a plan offering only a passive approach needs a financial advisor.

The moment I hire an employee will force me to hire a financial advisor for my plan because, despite my knowledge of 401(k) plans and investments, I don’t have the background or training to review funds and offer education. I stick to what I know, so I stay out of trouble.

When it comes to health and fitness, you constantly hear studies about what foods fight or cause cancer. Of course, those studies are then debunked. I remember how oat bran was cited to cut down on cholesterol and how margarine was better than butter. Plus I have heard how coffee can prolong life or kill you. I joked that one study will suggest that constantly eating broccoli will cause cancer too.

I blogged once about how the paranoia in me figures that a plan provider that quickly cuts down their fee might have been overcharging the client, to begin with. People tend to think I have a bias against plan providers such as third-party administration (TPA) firms and I certainly don’t because I see the overwhelming value of a good TPA.

With fee disclosure regulations around for 8 years and constant news articles about 401(k) fees, I think the fascination and concentration on fees could be detrimental if that is the major or sole criteria in selection plan providers.

401(k) plan sponsors, as plan fiduciaries have important responsibilities. These responsibilities include: acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them; carrying out their duties prudently; following the plan documents (unless inconsistent with ERISA); diversifying plan investments, and paying only reasonable plan expenses.

While paying unreasonable plan expenses is a breach of fiduciary duty, picking providers solely or mainly because they are low in fees can also breach a fiduciary duty. Retirement plan sponsors also have a duty of prudence as one of their fiduciary duties. Prudence is about the process of making fiduciary decisions. Prudence requires the plan fiduciaries to document decisions and the basis for those decisions. So in hiring any plan provider, a fiduciary should survey several potential providers. By doing so, a fiduciary can document the process and make a meaningful comparison and selection.

Governmental contracts are typically decided by the lowest bidder. Sometimes it works, but lots of times it doesn’t. The same thing goes with selecting plan providers. There are many low-cost providers out there and some do a very good job and some do not. Some low-cost TPAs may be good if there is a limited amount of work on a 401(k) plan with a safe harbor design and terrible if the plan requires a discrimination test.

Paying only reasonable expenses is not the same as paying low expenses. Plan provider expenses are less about cost and more about value. A financial advisor charging 15 basis points providing no help in the fiduciary process such as developing an investment policy statement, reviewing investment options, and educating participants in a participant-directed 401(k) plan is less reasonable than paying another advisor 50 basis points to serve as an ERISA §3(38) fiduciary. Why? The advisor charging 15 basis points is increasing the plan sponsor’s liability as a fiduciary because they are doing nothing while the ERISA §3(38) fiduciary is assuming almost all of that liability. Reasonableness is not about cost, it’s about the value of the services provided. A TPA that can help develop a plan design that maximizes contribution for highly compensated employees through a safe harbor/new comparability or a cash balance design is a better value than a TPA who only knows a 401(k) plan with comp-to-comp allocation.

Plan sponsors need to focus on the competency of plan providers, the services they offer, and the value they provide. Concentrating on how much a provider charges may cost more in the long run if that provider offers incompetent services. I have seen too many plan sponsors forced into the Internal Revenue Service correction programs to fix the errors of plan providers that were picked solely on cost.