Here's why so many workers are suing employers over 401(k) plans

Here's why so many workers are suing employers over 401(k) plans

Russ Wiles | Arizona Republic |  

You would think most investors are fairly happy with their results, 10 years into a rising stock market and with solid gains delivered by bonds, too. But that apparently isn't the case at a lot of 401(k) workplace retirement plans.

Unhappiness over high fees, inappropriate investment options and other issues have led to a spike in lawsuits in recent years, according to a study by the Center for Retirement Research at Boston College. The flip side is that many 401(k) programs have gotten better in recent years, partly because of increased litigation risk.

These trends affect nearly two in three adult workers with money invested in 401(k)-style plans, which have replaced traditional pensions as retirement mainstays in the workplace. The plans feature tax-saving benefits and allow workers to contribute money automatically from each paycheck. Many employers offer matching funds to encourage further saving.

But unlike traditional pension plans, where managers hired by employers call the shots, workers in 401(k) plans must make investment decisions on their own (although some companies provide guidance). Poor investment choices, high fees, a lack of transparency and other problems can lead to subpar results and dissatisfaction.

Backlog of cases -- 60% pending

Not surprisingly, 401(k) lawsuits, which are typically class-action cases, jumped when the economy soured and the stock market tanked roughly a decade ago.

From eight lawsuits filed against employers in 2006, the numbers surged to 18 in 2007 and 107 in 2008,  before declining for the next five years, according to the Boston College report authored by George Mellman and Geoffrey Sanzenbacher.

But since bottoming at just two lawsuits in 2013, litigation has risen again, with 56 suits in 2016 and 51 in 2017, the two most recent years tracked.

Of the roughly 430 cases evaluated by the Boston College, 60% are still pending, 20% were dismissed/closed, 16% were settled/decided, and 4% are on appeal. In an interview, Sanzenbacher said he sensed the trend of increased 401(k) litigation is continuing, though the researchers haven't included more recent numbers.

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The Secure Act

The SECURE (Setting Every Community Up for Retirement) Act passed the House recently and is pending in the Senate. There are a number of provisions of the act: some good, some bad, and some could go either way.

 

Tax Credit for Companies Starting a New Plan  (they got it right!)

 Reducing taxes while helping your employees save for retirement. A good deal for all!

 The act would increase the business tax credit for small businesses starting a new retirement plan from the current cap of $500 up to a limit of $5,000 in certain circumstances. This has the potential to encourage more small businesses to offer retirement plans. The credit is the lower of $5,000 for first 3 years or $250 times the number of non-highly compensated employees (making under $125,000 and not a 5% owner of the business). BidMoni estimates that employers can start plans for as little as $500 based on 401(k) marketplace data. This provision is certainly a win for over 1 million businesses (and their employees) without a 401(k) plan.

 

Multiple Employer Plans (MEP) ( can be good but buyer beware)

 The act has a provision that allows unrelated small employers to band together in an open multiple employer plan. This means companies that are completely unrelated can now join forces to share administrative costs and other savings. Currently employers in an MEP must have something in common such as being in the same industry, the same geographic region, etc.

 Allowing small plans to band together for more favorable pricing sounds like a no-brainer, but MEPs are not new to the defined contribution industry and aren’t without drawbacks. One includes limitations on plan design flexibility for individual companies in the MEP arrangement.

So, where have we seen MEPs before? Who remembers this New York Times article regarding the retirement plans offered to many teachers around the country? Non-ERISA plans (State Government, k-12, Universities) have had access to MEPs for decades. They not only failed to drive down costs, many are paying higher fees because of them. Let’s hope this provision doesn’t turn into the same marketing ploy that ended up taking advantage of our nation’s educators. Even with an MEP option, it’s imperative for employers and advisors to shop their options in order to evaluate the best service provider for their plan.

 

Annuity Provisions  ( fail)

 Here’s where it gets ugly. This provision pushes to continually offer annuities within a 401(k) plan as if the plan participants don’t have access to a lifetime income option anywhere else.

Almost every bank, insurance agent, broker dealer, and even RIA offer annuities. With so many different outlets available outside of a 401(k) to purchase an annuity, why would there be any justifiable need to build them into 401(k)s and waive fiduciary liability for the plan sponsors? This just seems irresponsible.

 If participants in a 401(k) want to put their money into an annuity, there are no obstacles in their way and no shortage of opportunities for them to do so without having to build it onto their plan. Employees can set up an annuity in multiple situations: upon retirement from their company, if they quit working for their company, or when they turn 59 ½ while still working.

 On the whole, employees would look to draw lifetime income after they no longer work, not while they’re still on the clock and saving for retirement. Something is amiss with forcing this into these plans. Not to mention, most 401(k)s at a plan level are already annuity platforms sold by insurance companies. The 401(k) industry doesn’t lack annuities, it actually needs far less of them.

 I applaud Congress for addressing the retirement crisis and there are potential benefits to some of these provisions but more transparency and attention to detail is needed to ensure the best interest of employees is truly at the forefront of this legislation

Fidelity Responds to Allegations of Secret Kickback Payments

Recently, Fidelity found themselves making headlines for reasons they probably wish they weren't.  They are currently facing investigations and multiple lawsuits regarding their fee arrangements with the various investment managers offered via the Fidelity FundsNetwork platform.

 

Is Fidelity a fiduciary?

 

Does Fidelity's fee practice meet ERISA's strict reporting guidelines?

 

What do you think?

 

      

 

Fidelity says it's entitled to alleged 'secret payments' in 401(k) plans
Given the thin margins in the retirement business, firm says it was justified in cutting deals with money managers to boost profits


Jul 9, 2019 @ 2:51 pm

By Greg Iacurci
  
Fidelity Investments said it is legally entitled to payments it receives in connection with 401(k) investments and that the collection of such fees has become necessary for record keepers given the prevailing economics of the industry.

 
Fidelity, the largest record keeper of workplace retirement plans, made these claims in a filing asking a federal court to dismiss a lawsuit alleging the fees caused the Boston-based firm to profit at the expense of customers' retirement savings and breached its fiduciary duty.

 

A participant in T-Mobile USA Inc.'s 401(k) plan, Andre W. Wong, sued Fidelity in February, claiming that mutual funds and other investment products offered through Fidelity's FundsNetwork platform are required by the firm to pay "kickbacks" if revenue-sharing payments made to Fidelity fall below a certain level.

 

Those payments, Mr. Wong argued, increase investment costs for participants and weren't properly disclosed. Other plan participants have since filed similar class-action lawsuits against Fidelity.

 

Addressing their consolidated complaints, Fidelity said plaintiffs "try to dress up their claims by repeatedly referencing 'secret payments' or 'secret kickback payments.'"

 
However, the fee is nothing more than an "arm's length" payment negotiated with certain money managers, and such compensation negotiations don't mean Fidelity is acting as a fiduciary, the firm said. Fidelity negotiated its "infrastructure fees" with asset managers on the FundsNetwork platform in 2017.

 

In addition to legal reasons, there are "practical" justifications to reject the notion that Fidelity has fiduciary status, the company said, due to squeezed profits among record keepers.

 

"As is clear from the public record, retirement plan service providers operate at increasingly thin margins, and to continue in business they must negotiate arrangements that allow them some amount of profit," Fidelity said in the filing, made July 1 in the U.S. District Court of the District of Massachusetts.

 

"If plaintiffs' view of fiduciary status were correct, then service providers like Fidelity could not profit from the services they provide to plans: They could not charge the plans anything more than cost," it added. "If that were the case, there would be no service providers left in business."

 

More of these sorts of fee arrangements are cropping up between record keepers and asset managers. Empower Retirement, for example, last year launched a platform called Empower Select, requiring mutual-fund providers to pay for fund distribution, which also helps Empower offer the product to small and midsized 401(k) plans at a reduced price point. The platform has some requirements around use of in-house investments, advisers said.

 
Principal Financial launched a product in May that also requires clients to use some proprietary funds.

 

Such moves are largely in response to fee compression, advisers said. Median record-keeping fees have fallen by half over the past decade — to $59 per participant in 2017 from $118 in 2006, according to consulting firm NEPC.

 

Further, plan sponsors and their advisers have shifted away from using record keepers' in-house investments due to fiduciary concerns, depriving the firms of more revenue.

 

"I think the pendulum has swung so far one way, starting a number of years ago with the move away from proprietary products, I think it's swinging back the other way," said Brady Dall, an adviser at 401(k) Advisors Intermountain.

 

Fidelity has been targeted in other fee lawsuits in the past. One, for example, alleged the firm took payments from managed account provider Financial Engines. That suit was ultimately dismissed.

 

The firm also gained attention last year for charging some employers a fee on 401(k) assets held in Vanguard Group investment funds, which some advisers felt was meant to push clients to adopt its own funds more readily.

 

Webinar Replay: Stress Free 401(k) Prospecting

00:00     Intro/Finovate Announcement
02:25     Subscription Options
03:00     401(k) Prospector
04:05     Example 1:  GE 401(k) Overview Page
05:00     Connecting to GE HR Manager on LinkedIn
10:30     Example 2:  Norfolk Hardware 401(k) Overview Page
11:30     Connecting to Norfolk Hardware HR Manager on LinkedIn
13:30     LinkedIn Messaging Ideas
 
 

BidMoni to Demonstrate FiduciaryShield at FinovateFall 2019

BidMoni has been selected as a product demonstrator for FinovateFall 2019 to demonstrate the many ways FiduciaryShield is changing how advisors engage the 401(k) market.

Finovate showcases the top tech innovations and provides a unique insight into the future of the fintech industry.

CEO Stephen Daigle will be providing a live demonstration of FiduciaryShield within the 7-minute Finovate format.

We will showcase how FiduciaryShield connects advisors with 401(k) plan decision makers via LinkedIn and maximizes their social influence while prospecting for new business.

We will also demonstrate the benefits of our independent RFP platform and how it improves advisor workflows and client outcomes with a simple and transparent user interface.

FinovateFall 2019 will be held in New York City from September 23-25.  For more information about Finovate visit their website at https://finance.knect365.com/finovatefall/

5 Ways FiduciaryShield Helps Advisors Win 401(k) Plans

FiduciaryShield launched in 2018 to support the fiduciary requirements of those managing employer sponsored retirement plans.  We are excited to launch our newest product feature – 401(k) Prospector.  Registering with FiduciaryShield gives advisors access to unparalleled technology designed to support the full lifecycle of 401(k) plan management. From plan prospecting --> plan proposal --> plan onboarding --> plan monitoring – the tools you need to win more 401(k) plans are all here. 

401(k) Prospector 

We launched 401(k) Prospector this year as a tool to help advisors identify potential 401(k) business opportunities.  401(k) Prospector highlights all plans filing an annual Form 5500 within 10 miles of an advisor's office.  A national plan search can also be conducted by either the employer name or plan name.  Our database contains information on over 800,000 plans helping advisors identify important plan information such as total plan assets, total participants, and key plan contacts.  Plan contacts are even identified on LinkedIn, giving advisors another opportunity to connect. 

Retirement Plan Wellness Reports 

Retirement Plan Wellness Reports are designed to help advisors identify fiduciary risk factors through annual Form 5500 filings.  Wellness Reports empower advisors to be fiduciary experts by helping to identify more than 20 ERISA-specific fiduciary risk factors on a plan by plan basis.  Advisors can easily identify important changes in plan demographics that may trigger the need for a plan fiduciary to review plan fees or conduct a competitive request for proposal. 

Competitive Proposal Requests 

FiduciaryShield offers a competitive request for proposal platform allowing advisors to request proposals from more than 20 active recordkeepers.  Recordkeepers who receive a proposal request through FiduciaryShield are aware they are bidding on a competitive opportunity, approved by the employer, and have agreed to customize their proposal responses within seven days of the request being submitted.  

Transparent Analysis 

Proposals submitted by recordkeepers through FiduciaryShield are presented to advisors in a simple and transparent format, allowing advisors to easily compare proposals side by side.  Leveraging FiduciaryShield’s technology allows advisors to present a visually compelling comparison of a plans features, investment offerings, and fees. 

Document Procedures & Monitor Providers 

ERISA requires plan fiduciaries to put proper controls in place which support both monitoring service providers and documenting fiduciary procedures.  All requests for proposal, proposal responses, forms, and reports are documented to help meet ERISA regulations.  FiduciaryShield also automates quarterly and annual plan monitoring reports to help advisors and plan sponsors meet their ongoing requirement to monitor providers.   

 

Plan Sponsor Guide to Choosing Form 5500

Under the provisions of ERISA, most 401(k) plans are required to annually file a Form 5500.  Although many plan sponsors have this prepared for them by a retirement plan service provider, they should be familiar with the requirements.  Understanding these requirements can help plan sponsors monitor plan service providers – an important fiduciary responsibility. 

Currently the federal government offers three versions of the Form 5500.  Which form a plan should use is generally based on the plan's participant count.

Form 5500-EZ

Required for “solo 401(k) plans” which covers a business owner and their spouse.

Form 5500-SF

Required for “small 401(k) plans” which covers plans with less than 100 participants on the first day of the plan year that meet the following requirements: 

  1. The plan satisfies DOL independent audit waiver requirements 
  2. The plan is 100% invested in “eligible plan assets” with readily determinable fairvalue (e.g., mutual funds, variable annuities) 
  3. The plan holds no employer securities

Form 5500

Required for “large 401(k) plans” which covers plans with more than 100 participants and small 401(k) plans that don’t meet the Form 5500-EZ or SF filing requirements. 

Plans that meet the requirements to file Form 5500 must also file certain schedules and/or attachments as seen below.

 

The 80-120 Rule

There is one exception to the Form 5500 filings known as the “80-120 participant rule”.  This allows any plan which filed in the previous year as a “small plan” and still has under 120 participants to continue to file as a “small plan”.  But if the number of eligible plan participants reaches 121 by the first day of a plan year, it is no longer subject to the “80-120 participant rule”. 

This is an important provision for plan sponsors to understand because all 401(k) plans that filed a Form 5500 as a “large plan” are required to be audited annually by an independent, external accounting firm.  An audit requirement can add thousands of dollars to the cost of filing a Form 5500.  Strategies, such as cashing out small account balances related to terminated plan participants, can typically be leveraged to mitigate a plan’s participant count avoiding this requirement and additional cost. 

Avoid These Penalties

A failure to properly report an annual Form 5500 can increase the likelihood of a Department of Labor audit and/or substantial financial penalties levied against the employer.  Employers that file a late Form 5500 are subject to the following penalties: 

  1. The IRS penalty for filing a late 5500 is $25 per day, up to a maximum of $15,000. 

  2. The DOL penalty for filing a late 5500 is indexed for inflation and can run up to $1,100 each day, with no maximum. 

Many employers faced with these penalties often don’t even realize they’ve missed a filing until they’ve been contacted by the IRS or DOL.  Of course, by that time, significant penalties will have already accrued.

The DOL does offer a program for employers who have not yet been notified to voluntarily report a late or missing Form 5500.  Through the DOL’s Delinquent Filer Voluntary Compliance Program (DFVCP) the maximum penalty for a single late Form 5500 is $750 for “small plans” and $2,000 for “large plans”.  The DFVCP also includes a “per plan” cap of $1,500 for “small plans” and $4,000 for “large plans”. 

More information about the filing requirements are provided by the DOL’s Reporting and Disclosure Guide for Employee Benefit Plans.

Remember that DOL Fiduciary Rule?

In the months that have passed since the death of the revised DOL Fiduciary Rule I can’t help but feel there was one key element seemingly lost in the discussion - why the changes were being considered in the first place. 

Back in 2015 The White House Council of Economic Advisors released a report detailing evidence that conflicted investment advice costs investors, on average, 1 percentage point lower annual returns on their retirement savings or $17 billion per year. 

Yet, here we are, barreling towards 2019 and those facts remain unchanged.   

So, as concerned (and frankly fed up) citizens we decided to do something about it. 

Our team has been working hard to create a platform that allows employers to request competitive retirement plan bids directly from top retirement plan providers.    

No conflicted advice.  No pay to play. No hidden fees. 

FiduciaryShield delivers a layer of transparency to a process that has seemed to be made intentionally complex by many service providers. Employers can easily compare their current plan’s features and fees to the proposed plans’ features and fees side by side and make an informed decision, conflict of interest free. 

Choosing a retirement plan that puts more of your employees’ money to work for them has never been easier. 401(k) plans were created for the sole benefit of hard-working Americans saving their hard-earned dollars towards a future retirement.  It’s about time we got back to that. 

Financial Advisors: Are you who you say you are?

In our society an individual's success is often viewed through a lens that, for many, has a significant focus on an individual's income. Within the financial services industry the lens used to judge success is particularly narrow, mainly focused on:  increasing assets under management, increasing revenue, and ultimately increasing income. 

As a result, the most successful financial advisors are typically tremendously talented sales people.  Their communication skills, usually never better than when they are pursuing a potential client, allow them to explain and simplify complex financial problems with ease. 

Yet one of the most common complaints that I hear from retirement plan participants and plan sponsors is that they never see or hear from their financial advisor. 

I think that may be because financial advisors find themselves caught between their commitment to service existing clients and chasing the annual trophy of success by narrowing their focus towards gathering assets and increasing their income. 

In order to achieve lasting and meaningful success in the retirement plan space, advisors must commit to a service model after landing an employer's plan. 

The Department of Labor has created a roadmap of success for financial advisors looking to build their practice in the retirement plan space.  Financial advisors may play any of the following roles depending on the needs of the plan sponsor: 

  • Plan Design & Provider Selection – Plan sponsors are fiduciaries and as such are required to choose a plan using a prudent process.  Many plan sponsors will look for a financial advisor to make recommendations about different providers, fees, and investment options.  The DOL also expects that the plan sponsor will conduct a competitive request for proposal for plan services every 3-5 years. 
  • 3(38) Investment Manager – As a 3(38), a financial advisor has legal discretion to make plan changes.  A financial advisor with this role has also taken on the role of a fiduciary. 
  • 3(21) Investment Manager – As a 3(21), a financial advisor makes recommendations to the plan sponsor but does not have discretion to make changes on their own.  A financial advisor in this role is also considered a fiduciary. 
  • Employee Education – Plan sponsors are required by the DOL to provide education regarding the plan to participants.  This is typically the main role of a financial advisor who is servicing a retirement plan. 

Advisors should be able to clearly articulate the roles that they are fulfilling for the plan sponsor and what their compensation will be for that service. 

One of the effects of the DOL’s years long public review of the fiduciary rule is that many plan sponsors are putting plan fees under a microscope while reviewing the role of their financial advisor. 

FiduciaryShield was created for plan sponsors and advisors to simplify the process of achieving many of the fiduciary requirements of managing a retirement plan.   

If you are responsible for any of the following:  

  • Conducting a competitive RFP  
  • Analyzing service provider proposals 
  • Fee benchmarking 
  • Investment benchmarking 

Please visit https://fiduciaryshield.bidmoni.com for more information about leveraging the power of FiduciaryShield to better service your clients and win more retirement plan business.