A Change of "Hearths"

There are few things more disruptive to the peace or clarity of a 401(k) plan than a switch in recordkeepers.

Let’s face it—change—even change for the better—is frequently disruptive to the human psyche. Most of us tend to drift into comfortable “ruts” of pattern, or perhaps habit—places where we know what to expect and, roughly anyway, when to expect it. And, at least in my experience, the more frazzled your existence, the more one pines for these oases of quiet and relative clarity.

That’s true, of course, even when the change is instigated by a regular, thoughtful, focused evaluation of the alternatives; and certainly when that change is the product of a desperate quest driven by a truly awful service relationship. But it is perhaps particularly disruptive when the change is thrust on the plan by forces outside of its control or instigation—and for the thousands of plans that have recently or are in the process of a change in recordkeepers due to industry consolidation.

Some changes are less impactful than others on the plan’s daily administration, of course. Changes that trigger a mass departure of key staff can be upsetting, and those that necessitate moving to a new processing platform even more so. Change that requires communication to participants is anathema to most plan sponsors. On the other hand, recordkeeper changes that result in additional resources, better capabilities, a clearer focus, and a stronger commitment to “the business” are not as rare as one might fear.

But—whether for good or ill—a change in recordkeepers—regardless of the motivating forces behind the move—is one of those “choices” that plan fiduciaries are expected under ERISA to evaluate as a prudent expert. And so, regardless of whether the change appears to be good, bad, or inconsequential on its face, plan fiduciaries can be expected to know:

How much your plan pays in fees. And to whom. And for what.

The essence of a recordkeeper/service evaluation is the determination that the services provided—and the fees paid for those services—are reasonable. It starts, of course, with knowing how much is being paid for those services. But you can’t know if those fees are reasonable without knowing the services they support. But this analysis also involves a determination that the services provided are appropriate.  That starts with enumerating the services you received prior to the move—and checking those against the one(s) your new arrangement provides.  

What revenue-sharing is (and where it goes).

At a high level, revenue-sharing is just the redistribution of fees paid to one provider to another. It can be a relatively straightforward matter of compensating a sub-contractor, though in retirement plans it’s generally 12(b)1 marketing/distribution fees collected by a mutual fund company and “shared” with the recordkeeper that is actually doing the “distribution” of the funds. There is a general trend away from such practices—but if they are in place, you need to know how much, to whom, and how they’re paid.

How your investment menu might change.

Changes in recordkeepers don’t always involve shifts in the investment menu offered to participants, though they can and often do. And even if they haven’t—and if you have reviewed them recently—the change in recordkeepers can be a good opportunity to reconsider/affirm your investment options to make sure not only that they are prudent, but that they (still) meet the needs of your workforce, and the objectives of your benefit program.

And you might also want to:

Document your review/decision(s)

Whatever process you are using to evaluate your plan (this doesn’t require a recordkeeper change), the goals and objectives in doing so should be written down, as should the conclusions drawn from the exercise. You might get there with a simple committee review, or perhaps something more formal—like a request for proposal (particularly if you have the time to do so ahead of the move). Indeed, odds are a formal benchmarking process or RFP will produce documentation of those conclusions/considerations as a natural outcome. But if it doesn’t, you should make the effort to make sure it does.

A change in recordkeepers is a good opportunity to reconsider your plan’s design and operations—and one that, as a prudent plan fiduciary—you’re expected to.

- Nevin E. Adams, JD

Have You Hugged Your TPA Today?

If you work with TPAs—third party administrators—you might want to avoid bugging them this week. 

As you may well know (certainly if you work with TPAs), this year, Monday (Oct. 17th) is the deadline to file Form 5500s, and for most TPAs, that’s a pretty all-consuming focus. So much so that every year on the day AFTER the Form 5500 filing deadline, John Hancock declares an annual day of recognition for TPAs. 

Now, to its credit, John Hancock goes so far as to note that National TPA Day is also a reminder to financial professionals (especially those still getting established) that partnering with TPAs may be an important pathway to success. Not that everyone feels that way, of course.

I’m talking about the disconnects in focus between retirement plan advisors and TPAs—an issue that is, perhaps, as old as ERISA itself—this “tension” between these two critical roles. Not in every case, of course—there are plenty of advisors that will tell you how many times their TPA partner has gotten them out of a real mess, and TPAs that will commend the leadership demonstrated by their advisor teammate. But that, it seems, isn’t the majority experience, though it proves it can be that. 

As it turns out, I’ve spent some time on both sides of that “divide,” and a fair amount of time able to observe both from a distance. I’ve listened to groups of TPAs gripe about advisors who “won’t stay in their lanes”—and advisors frustrated with TPAs who, when asked what time it is, insist first on explaining how a watch is made. I can remember personal experiences trying to explain complex plan design decisions with real-world implications—only to have the decision-makers decide it was time to step out for the equivalent of “brandy and cigars” with the plan advisor, leaving the decisions—undecided.   

The beauty of these times—and our associations—is that I was able to reach out on an ad hoc basis to folks that I knew could also appreciate both sides of the “debate,” and who cared enough to try and do something about it. This core group—Mary Patch, Chad Johansen, JD Carlson, Shannon Edwards, Justin Bonestroo & Amanda Iverson—have given up a LOT of their time and energy over the past many months to this undertaking. COVID helped in some ways—nobody was travelling as much, and we’re all now well accustomed to meeting virtually to solve problems. 

Our collective sense was that what makes the difference in these relationships is having a shared set of goals and expectations, alongside role clarity and confidence in the perspectives and expertise of the partner(s). We started with posts that have run on NAPA-Net on a monthly basis beginning last year (links below), came to something of a crescendo with a special TPA panel at the 2022 NAPA 401(k) Summit, and ultimately culminated in a checklist of sorts that you can find here. Think of it as a relationship pre-screener.

That checklist alone (and we’re hoping you’ll reconsider Compliance Administrator or Compliance Consultant as replacements for that awful TPA moniker) won’t solve all communication/expectation issues, but we hope it will be a solid foundation to open a dialogue. At its most basic, it should allow you to find out what services potential (or current) TPA partners provide, which are standard to their practice(s), and which are “extra.” But ultimately—and most significantly—it is designed to align expectations. 

There may well be things on this list of which you are unfamiliar—if so, this would be a good time to find out more about them, as I assure you, they are important, and SOMEBODY should be attending to them.  The core team is now working on some background explanations—if some jump out at you for a quicker explanation, please let me know. I—and indeed the entire core team—would love for you to begin using this checklist in your partner discussions—and to let us know what works—and of course, what doesn’t in the days and weeks ahead.

My undying thanks again to the core team for the love, humor, friendship and passion on this effort–– and to about a dozen advisors (you know who you are) who provided some terrific insights and perspective as the checklist neared completion. 

And ultimately to you, gentle reader, for helping us build this bridge…

- Nevin E. Adams, JD

Finding the Right TPA Partner

Bundled Versus Unbundled: 5 Myths

Resource ‘Full’?

What’s in a Name?     

Path(s) of Least Resistance

So, how many 401(k) accounts do you have?

At the moment, I have four—one from each of the employers in my career (including this one), all except the first one (that one went for law school and a house downpayment). Apparently I’m not alone. A recent survey of Plan Sponsor Council of America members found that only 18% of respondents had a single 401(k) account. Nearly as many (14.3%) had five. As it turns out, three was the most common response.

I joke that it’s just “market research”—after all, what better way to assess the quality of various retirement plan offerings than to have your own 401(k) supported by some of the best? Sure, there’s been institutional pricing at one that I’d hate to lose, access to a specific managed account platform that I value, and a really cool online platform at another—and then, in the back of my mind, is a concern that the taxability detail might get “jostled” in the process—in short, plenty of reasons to rationalize my leaving them where they are. But the truth of the matter is that moving your account remains a bit of a pain.

That has a number of implications, not the least of which is people can (and do) lose track of those “left behind” 401(k) accounts. That’s been an issue of some concern by both regulators and legislators alike—with potential remedies (or at least remedial efforts) like a “lost and found” directory. Perhaps just as significantly, the SECURE Act’s directive with regard to reporting projected retirement income numbers on participant statements won’t do anyone much good if it’s based on only one of the three or four account balances you actually have.[i]

There are other dangers[ii] in having multiple accounts—as they create multiple opportunities for hackers to access them. This is a particular concern when there’s been a change in recordkeepers (which is happening a lot these days), when you have a new account set up for you—but you don’t get around to promptly establishing a secure password (along with multi-factor authentication, personalized answers to key security questions, and electronic notifications of any changes to your account). After all, if you don’t lay claim to that account—quickly—it’s all the easier for a hacker to do so.  

Now, I’m guessing that the reality is that most people who leave their 401(k) accounts behind do so simply because it has become the easy no-action-required default (well, as long as your balance is over $5,000—if less than that, and certainly if less than $1,000, your “easy” default is likely a lump sum payment, taxed, and likely subject to premature withdrawal penalties as well. Indeed, the leakage that so many fret over—due to hardship withdrawals or loans—is fairly inconsequential. The exception, of course, is the loans that are outstanding when termination occurs—as well as the “forced” distributions at termination. A recent assessment by Alight notes that 80% of people who had an account of less than $1,000 cashed out at termination, while nearly two-thirds of those with balances between $1,000 and $5,000 did so.

Enter the Advancing Auto Portability Act of 2022, introduced by Sens. Tim Scott (R-SC) and Sherrod Brown (D-OH), provisions of which have been incorporated in the recently introduced Enhancing Americans’ Retirement Now (EARN) Act. The size of the leakage issue the legislation seeks to stem has been wildly exaggerated by some, but the Employee Benefit Research Institute credibly says auto-portability has the potential to preserve up to $1.5 trillion in retirement savings over a 40-year period. 

That’s right—just like automatic enrollment helps people get started doing the right thing, auto-portability is basically an infrastructure design that automatically helps participants—and most notably participants with small balances—and rolls those balances into an IRA, and then—if available and desirable—rolls that into their new employer’s retirement plan. But more than giving it structure, and legislative “legitimacy” (the Department of Labor lent some help in terms of a prohibited transaction exemption in 2019), the legislation provides a $500 tax credit for adopting small business employers to defray the costs of making the connections.     

Now, at the point of my job changes, it wouldn’t have taken much for me to decide to roll those balances into my new employer’s plan—but it took absolutely nothing at all for me to just leave them where they were—the path of least resistance. On the other hand, the default for those who have smaller balances—who are often just getting started doing the right thing by saving—is a default that requires that they “start over”—with a “forced” distribution, and one reduced by state and federal taxes, and likely a 10% penalty to boot. 

It's time we all had a path of least resistance that makes it easy for us to do the “right” thing. And now perhaps we do.

- Nevin E. Adams, JD

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[i] In fairness, there are already concerns that the calculation proposed by the Labor Department in response to the SECURE Act’s directive already has shortcomings. Specifically, it would assume that the participant: (1) is retiring at age 67 (the Social Security full retirement age for many workers) or the participant's actual age, if older than 67); (2) uses an interest rate that is the 10-year constant maturity Treasuries (CMT) securities yield rate for the first business day of the last month of the period to which the benefit statement relates; (3) estimates life expectancy from a gender-neutral mortality table pursuant to IRC Sec. 417(e)(3)(B)—oh, and the biggie—(4) uses the current account value—assuming no further contributions.

[ii] Another “casualty” of multiple 401(k) accounts? When a provider publishes a list of “average” 401(k) balances (and 401(k) critics pounce on those as inadequate)—well, they might not have the whole picture. 

 

Three ‘Scary’ Things That Give Plan Sponsors Chills

Halloween is the time of year when one’s thoughts turn to trick-or-treat, ghosts and goblins, and things that go bump in the night—and, for plan sponsors, and those who support them, a good time to think about the things that give us pause—that cause a chill to run down our spine… 

Things like…

Changing Providers

OK, they may not exactly be “scared” of changing providers, but it’s certainly not a process for the faint of heart—particularly with all of the competing focus priorities confronting plan sponsors on a daily basis. Industry surveys routinely point to a certain amount of regular provider “churn”—indeed, by some counts as many as 10% of the plans change providers in any given year. That said, industry surveys (and excessive fee litigation) are replete with indications that the vast majority of plans not only don’t change recordkeepers, but may not even undertake a formal review of services, fees and capabilities.

Now, any plan sponsor who has ever gone through a recordkeeping conversion knows that, however smooth the transition, and regardless how improved the experience on the new platform, moving is a lot of work. And, as with relocating your home, the longer you have been in a particular location, the harder it seems to be (there are inevitably a lot of “skeletons” in those closets). Knowing that, it’s little wonder that many plan sponsors make those changes only under a duress of sorts, forced by poor service, a lack of capabilities, (relatively) high fees—and sometimes more than one of the above. 

And that, of course, means that the transition, however badly needed or desired, will likely be rougher—and take longer—than anticipated or desired (see also 3 Things Plan Sponsors Should Know About Changing Providers). And who knows how many intentions to pursue a review have simply petered out on the altar of “not enough time” to do so?

ESG

In fairness, it’s probably not Environmental, Social & Governance (ESG) investing per se that seems to “scare” plan sponsors from offering these options, but rather concerns about their level of accountability for choosing to do so. Indeed, there’s plenty of survey data to suggest that workers, particularly younger ones, want these options. That said, workable, consistent definitions of ESG remain fluid, and perhaps as a result, the adoption rate among DC plans has been tepid—and the take-up rate among participants who have the option is even lower. Indeed, fewer than 3% of plan sponsor respondents included that option on their plan investment menu, according to the Plan Sponsor Council of America’s 63^rd Annual Survey of 401(k) and Profit Sharing Plans, and only about 0.1% of plan assets were invested in those options. Those looking for a counterpoint might note that ESG options were more common among the largest plans (those with more than 5,000 participants) and the smallest (fewer than 50 participants), where 4.2% and 4.4%, respectively, offered that option.

The hesitancy likely comes (at least in part) from confusion about how the Labor Department views these options, or more precisely the prudence of including them as a participant investment option. For a long time there had “only” been Interpretive Bulletins (IBs) (in 1994, 2008 and 2016) and, more recently, a 2018 Field Assistance Bulletin (FAB) on this subject. And while the 2016 IB was read as encouraging consideration of ESG factors (or at least not discouraging it), the 2018 FAB was widely viewed as pulling back on that stance, in the process establishing what had been called the “all things equal” standard, which meant that so long as two otherwise identical investments met all the requisite prudence standards, a fiduciary could (prudently) pick the one that (also) had ESG attributes. 

And then, roughly a year ago, the Trump administration weighed in with a proposed rule that was harshly critical of ESG (unless a “pecuniary”—that is, financial—rationale was evident)– and ultimately a final one that moved off that stance a bit, but still left room for caution. 

After first announcing that it had no intention of enforcing that rule, the Biden administration’s DOL has recently provided a (new) proposed rule that—arguably—puts these options in a more positive light. Indeed, in its current form it actually seems more supportive than the “all things equal” standard put forth by the Obama administration, though it remains a proposed rule, with comments being taken for consideration in shaping a final version.    

All of which arguably (still) leaves plan sponsors contemplating a shift to ESG with a lingering uncertainty. They may not be “scared,” but one can certainly understand a bit of as-yet-unresolved apprehension.

Lifetime Income Options

Speaking of apprehension, while DC plan fiduciaries aren’t exactly scared of retirement income, DC plans have long eschewed providing those options. That despite the unquestioned reality that participants need help structuring their income in retirement—and little doubt that a lifetime income option could help.

There are in-plan options available in the marketplace now, of course, and thus, logically, there are plan sponsors who have either derived the requisite assurances (or don’t find them necessary) or feel that the benefits and/or participant need for such options makes it worth the additional considerations. On the other hand, those industry surveys notwithstanding, for the most part participants don’t seem to be asking for the option (from anyone other than industry survey takers)—and when they do have access, mostly don’t take advantage. Let’s face it, even when DB pension plan participants have a choice, they opt for the lump sum. 

It’s ironic that programs designed to provide retirement income pay so little attention to the realization of that objective; only about half of DC plans currently provide an option for participants to establish a systematic series of periodic payments, much less an annuity or other in-plan retirement income option, and that’s despite the 2008 Safe Harbor regulation from the Labor Department regarding the selection of annuity providers under DC plans (which was designed to alleviate, though it did not eliminate, those concerns), not to mention a further attempt to close that comfort gap in 2015 (FAB 2015-02).

Proponents are even more hopeful that the SECURE Act’s provisions regarding lifetime income disclosures (though many recordkeepers already provide some version of this), enhanced portability (a serious logistical challenge if you ever want to move from a recordkeeper that provides the service to one that doesn’t, though solutions are emerging that claim to have made progress on this front) and, perhaps most importantly, an expanded fiduciary safe harbor for selection of lifetime income providers, will—finally—put those “fears” to rest. We’ll see.

The Standard

Don’t get me wrong—there are plenty of things for ERISA fiduciaries—who are, after all, personally liable not only for their actions, but those of their co-fiduciaries—to be worried about. The standards with which their conduct must comply are (as one court has put it) “the highest known to law,” and with good reason. Prudence is often associated with caution, and fiduciaries generally find more comfort in the middle of the trend “pack” than on its fringes.

That said, the standard is to act (solely) in the best interests of plan participants and beneficiaries—and even though it may be “scary” from time to time… the alternative is surely worse…

- Nevin E. Adams, JD

A Change in Providers

We really hadn’t been focused on making a change, though the subject had come up from time to time. 

In fact, considering how long we had been thinking about making a change without actually doing anything about it, the change itself felt almost accidental in its suddenness. So sudden, in fact, that, in hindsight, I found myself wondering if we were “hasty” – perhaps too hasty.

Make no mistake – we had been happy enough with our current provider, certainly at first. In fact, we had been with them for a number of years and had, over time, expanded that relationship to include a fully bundled package of services. That made certain aspects simpler, of course – though we discovered pretty quickly that the “bundle” was presented as being more seamless than it actually was. Still, net/net, we were ahead of the game financially, and certainly no worse on the delivery side; we were just a bit disappointed in the disconnect between the sale and the service levels.

And all was fine for a while – or so it seemed. Looking back, there were signs of trouble that we could have seen – if we had been looking. There were unexpected charges on the invoices, and services that we were sure had been described as being part of the bundle that turned out not to be. There was the monitoring service that was supposed to be in place that we found out wasn’t – quite by accident, and months later. Over time we cut back on the services included, but the prices just kept going up. We were, quite simply, getting less and paying more, and getting less than we thought we were paying for. And it grated on us.

In hindsight, perhaps we should have been more vocal about our discontent. I’ve wondered what might have happened if we had called up and questioned those invoice charges, or made a bigger fuss about the sporadic outages. But, in the overall scheme of things, the charges weren’t large, just not what we expected. We figured that perhaps we had been the ones to misunderstand – and didn’t want to look “stupid” by calling to complain about a charge that some fine print in some document somewhere said was perfectly legitimate. Meaning always to go check that out sometime, the time to do so never materialized. Instead, we grumbled among ourselves about how aggravating it was – and how we should do something about it… sometime.

Unfortunately, change is painful and time-consuming. The emotional and fiscal toll these changes took, while annoying, simply wasn’t enough to put change at the top of the to-do list. So, we talked about a change – and every so often asked friends and acquaintances about their experience(s). Of course, it was hard to find someone else who was in exactly the same situation – and a surprising number simply empathized with our plight, being stuck in much the same situation themselves. All of which conveyed – to us, anyway – a sense that, uncomfortable as we might be with the current service package, we were probably about as well-positioned as we could be.

Then, one day, out of the blue, an opportunity presented itself. We weren’t looking for it, as I said earlier, but the months of frustration left us open to a casual message from an enterprising salesman – one who not only knew his product, he clearly knew the problems that others like us had with our current provider.

He did more than empathize with our situation. He did not pump me for information about what I was looking for, or what I didn’t like about my current situation. Rather, he was able to speak about the features/benefits that his firm offered… and, to my ears anyway, essentially ran through the list of concerns I had – but had not articulated – with our current situation. In fact, before our conversation was done, he had pointed out to me things that his firm offered as a matter of course that the current provider hadn’t even mentioned in all the years we had been associated – things I had assumed we couldn’t get, or couldn’t get without paying a lot more.

We made the change two weeks ago – and while it’s early yet, I’m thrilled with the results.

Ultimately, our former provider set themselves up by taking our business for granted, for (apparently) caring more about attracting new customers than in attending to our concerns, and for (apparently) assuming that “quiet” meant satisfied.

Provider changes can be fraught with uncertainty, if not peril. Little wonder that it often takes a pretty serious misstep (or a consistent history of smaller missteps) on the part of an incumbent to warrant such a response. So, are your clients happy, content, and “quiet”?

Or have they just quit complaining?

- Nevin E. Adams, JD
 
Note: For the record, the provider change recounted above involves my cable company.