The Rosenbaum Law Firm P.C. Blog

They say change is good. Some changes are good, and some changes have growing pains. I’m a big fan of retirement plan coverage, so allowing long-term, part employees to defer will be a good thing while maintaining full-time service requirements for employer contributions.

The change will have growing pains, with many plan providers and plan sponsors not being ready for the change. That may mean missed deferral opportunities and corrections that need to be made. It will take some time to sort things out, but I think it will be a good thing for the retirement plan business.

It sounded like a great idea at the time. An alumni association for a student organization was being formed and with my expertise in fundraising, I was asked to be on the fundraising committee.

The committee had one meeting and got bogged down when two non-lawyers were arguing with me about selling clothing with our student organization logo on it and whether it constitutes unrelated business income (it does not), We have never had a meeting since.

A retirement plan committee is all about running a prudent process for your retirement plan. It needs to be there, it needs to work, and it can’t get bogged down in minutia.

When drafting new 401(k) plans, I always recommend allowing for a loan provision. I know there are quite a few plan providers who don’t want any provisions that allow “leakage” of retirement assets, but I believe that when times are tough, plan participants should have access through a loan that they can repay.

As far as loans go, I only want one loan outstanding at a time. If participants want a loan, fine, but let’s just have one crack at it. A 401(k) plan shouldn’t turn into a payday loan-type operation. However, the real reason that I’m against multiple loans is the difficulty in recordkeeping. Recordkeeping multiple plan loans can be an absolute headache especially when it comes to recordkeeping repayments. I’ve seen too many situations where errors in recordkeeping let one or more loans go into default and become a deemed distribution or a prohibited transaction when not dealt with correctly.

If you ask for trouble, you’ll get it and I think that plan sponsors offering multiple plan loans are asking for it by allowing multiple loans that can only lead to a headache.

My latest article for JDSupra.com can be found here.

Employee Fiduciary, LLC has launched a new calculator to demonstrate the future value of 401(k) fees. This tool is designed to show retirement savers how much they can increase their savings in retirement by lowering their 401(k) fees today.

The calculator, available now will show users a view of how fees can impact their retirement.

These are hectic times, so we always look to what participants do in the 401(k) plans to see what the industry is up to. While salary deferrals in 401(k) plans have remained consistent, participants have increasingly been withdrawing their retirement savings through hardships or loans.

According to Fidelity Investments’ 2023 third quarter shows that 2.3% of workers took hardship withdrawal, up from 1.8% in the third quarter 2022.

In Q3, 2.8% of participants took a loan from their 401(k) plans, which is the same as Q2 and up from 2.4% in Q3 2022.

The percentage of participants with a loan outstanding has increased slightly to 17.6%, up from 17.2% last quarter and 16.8% in Q3 2022.

Similarly, in-service withdrawals—where an individual may choose an in-service withdrawal rather than a loan if they prefer to assume taxes and penalties and not have to repay the amount they withdraw—inched up in Q3, rising to 3.2% of participants, up from 2.7% from a year ago.

It’s amazing sometimes how people are blind to conflicts of interest that are as clear as day. In my local hamlet, the Library Board hired a School District board member as their attorney even though there is a financial relationship between the Library and the School District. The attorney for the VolunteeFirefighterer District was hired as the Library’s director of community activities (the position is now paid) while the Library board is stuffed with his cronies that he either got elected or appointed. In addition, his wife was a Board member until the time he was hired. Some people are ethically challenged.

As a retirement plan provider, you need to understand where there is a conflict of interest if someone you know hires you. Whether it’s a family member, golf club, church, or bank where you serve as an advisory board member, you need to identify any potential conflicts of interest.

While a plan provider needs to understand the prohibited transaction rules under ERISA and the Internal Revenue Code, a plan provider should also identify the non-retirement plan rules on conflicts of interest. For example, if you are on a private school committee and you are hired as the school’s retirement plan advisor, you may not have an issue with the prohibited transaction rules, but you may have a problem with the school’s rules on conflicts.

Nepotism is as bad as cronyism, so getting hired as a retirement plan advisor because you’re related to a decision maker is also a potential problem. It might be Kosher with ERISA and the Internal Revenue Code, but it may not pass muster with the courts and/or the Department of Labor under review.

Just because something might be OK with retirement plan rules, it may not be good for the organization or person that did the hiring. Like I always say: the appearance of impropriety is reason enough to avoid a situation.

I’m the guy who will travel to a Target further from my home because the Target in Farmingdale is far better than Westbury and Valley Stream and people think I’m crazy to travel 15 minutes more for a better-run store with better clearance sales. When my family has had medical issues, we travel to the best doctor out there whether it’s in the same town or New York City, which has some of the best medical care in the world.

So I’m still shocked when plan sponsors want plan providers who are local. Shopping locally for pizza or food makes sense, but technology requiring your plan providers to be local is silly.

Thanks to technology, the plan provider across the country can virtually be in any meeting you need them to attend. As an ERISA 3(16) plan administrator with clients around the country, I’m always there when my clients need me even if they are in San Francisco. The Internet has made the world smaller, so there is no need to hire a plan provider that is local. Since you can have online meetings and constant email messages, there are no requirements that your providers be local. Find the best plan provider out there, whether they’re in town or thousands of miles away.

In real estate, it’s all about location, location, location. When it comes to plan providers, it’s about competence and reasonable fees.

The warranty in the electronics business is gravy for the retailers who sell it. You’ll be surprised how many people pay $20 to get a warranty on a $100 Blu-Ray player. When Best Buy was going national, they advertised how they wouldn’t sell warranties and then realized that they couldn’t turn down all that free money, so they started offering it.

A warranty is like insurance, so you should only insure those things that have a high-cost replacement. You insure your health, your life, your house, your car, and some appliances worth insuring.

This isn’t another diatribe about the fiduciary warranty that insurance companies give away for free even though their main business is insuring risk for a fee.

This is about plan sponsors who don’t insure their risk by buying fiduciary liability insurance or buying a plan service that could review their plan expenses and/or their plan document/administration.

Fiduciary liability insurance helps protect plan sponsors who find themselves also appearing as defendants in a lawsuit filed by an aggrieved plan participant in a town near you. I had clients sued in a class action lawsuit where the insurance company paid $900,000 for a $1 million legal fee (there was a $100,000 deductible) and this plan sponsor won their case.

So many plan sponsors don’t want to pay for a plan review that can help them identify plan issues they wouldn’t ordinarily find unless they were converting to a new provider. I have a plan review called the Retirement Plan Tune-Up for $750 and I can probably count on one hand how many I do a year. When I talk to plan sponsors and advisors, they seem interested but they treat a plan review like a trip to the dentist; something that they will avoid until it’s too late.

Spending some shekels on a fiduciary liability policy and a plan review is certainly well worth it to avoid greater harm later.

For plans that require an independent audit, the point of the audit is to determine the financial health of the plan to pay benefits to participants. One aspect is looking at the terms of the plan document, and making sure it’s consistent with plan administration. I have filed many voluntary compliance program applications, as a result of what an auditor finds.

So If a plan auditor has been working on a plan for years and finally discovers that the definition of compensation in the plan document is inconsistent from administration, it might be time to get a new auditor.