Recently, one of my 401(k) plan clients for whom I serve as a fiduciary advisor was audited by the Employee Benefits Security Administration (EBSA), a division of the Department of Labor.
This employer offers your typical small 401(k) plan. They have less than 50 employees and have around $1.5 million in total assets. Most of America’s 401(k) plans are with company’s similar to this—those that are not publicly traded and experience good years and bad.
In 2017, this client had a bad year. Unbeknownst to me, the owner decided to improve his cash flow by holding on to his employee 401k contributions. This mistake eventually caught the attention of the DOL’s “shock troops,” aka EBSA. As with all late payroll contributions, EBSA auditors specifically look for this kind of problem.
As a fiduciary advisor, I did all the right things for this plan. We provided, of course, the Investment Policy Statement, our 408(b)(2) service agreement that spelled out how we were a fiduciary and what we charged for our services and advisory fees.
We offered a great, low-cost fund lineup using Fi360 as my analytical tool. Every three years, we did a no-cost benchmarking of their 401(k) plan as recommended by the DOL.
No hidden fees; everything on the up and up.
This run-in by my client with the DOL finally made me realize that, unlike the big publicly traded companies, small private employers like the one I serve will never be sued by firms like Schlichter Bogard & Denton, LLP. Managing partner Jerry Schlichter is striking fear in the hearts of any big 401(k) or 403(b) committee out there.
Just recently, health insurer Anthem paid $24 million to settle a lawsuit. Franklin Templeton settled for $14 million. Brown University settled for $3.5 million. Recently class action lawsuits have been brought against Fidelity, BlackRock and T. Rowe Price.
What do they all have in common?
Lots of cash that attracts attorneys like Schlichter. Love him or hate him, he’s the bogeyman for large 401k or 403(b) plans that poorly run by asleep-at-the-wheel benefit committees.
But all these lawsuits have revealed a common question, why aren’t the small, non-publicly traded companies being sued? How come these same successful tactics with larger companies and educational institutions not being applied to “Joe’s Plumbing” in the smaller market?
For 23 years, I’ve benchmarked micro-market plans ranging in size from $500,000 to $15 million. Many have high investment expenses, hidden insurance company wrap fees, no Investment Policy Statement and typically the owner has no idea if the advisor ever gave them the 408(b)(2) service agreement mandated by the Department of Labor in 2012.
I thought it would be a game-changer for all “real” 401k fiduciary advisors. I figured fake 401k advisors would be run out of the industry, and those doing the right thing rewarded.
I was wrong…
I benchmark about 25 401(k) plans a year for employers in and outside Oklahoma. A significant majority of them have no idea what a 408(b)(2) service agreement is or if their broker has ever provided them with one.
Many have not benchmarked or compared their 401(k) plan in many years, and many have no idea if their broker is selecting and monitoring the funds.
Because over 50% of all employee assets are being put in target-date funds, I think the biggest sin of all is small plan sponsors with no idea how or why their target-date fund is functioning as the selected QDIA.
Many decision-makers I run into know nothing about the TDF glide path or if it is managed “TO” or “THRU.” Many simply take the default TDF offered by the recordkeeper because it costs them less in hard dollar costs. Ouch.
The worst 401(k)?
In the interest of not embarrassing this employer, I’ll keep them anonymous.
Every year, I call this owner. His 401(k) is with an insurance company and an out-of-state TPA. The plan has about $3 million in assets. I offer to benchmark his plan and even suggest that I can probably improve his 401(k) with lower fees and better funds without leaving the recordkeeper and TPA. I even try to appeal to his own personal interests, noting that his own 401(k) money may benefit.
This business owner has often said “No” to other advisors that knock on his door, but will Schlichter ever visit this fellow? I think not.
Are there any consequences for small employers like this? I say no. There is no “ERISA jail” for the owner, CFO or human resources director for not getting the best deal for their employees’ money.
So, how do we and all of our state and federal institutions encourage good behavior out of these small plan sponsors? Do we encourage the DOL’s “shock troops” that audit 401k plans to go after these employers for not routinely reviewing their 401(k) plan?
Unfortunately, if we start to hit small employers with big penalties, many may simply discontinue their retirement plans.
There must be a solution—some kind of “Good Housekeeping” seal of approval from the state or feds for employers that benchmark their plan every 3 years.
Yes, there are great small-plan sponsors in America that take their jobs seriously. But, until we find a solution, many small employers in America will offer poorly run 401(k) plans to their employees.
About the author: Terrence Morgan, AIF, CPFA, is President of Ok401k, Inc., in Oklahoma City, Okla.
Disclaimer: The opinions expressed above are that of the author and do not necessarily represent those of 401k Specialist.