Kicking Hitchcock Out of ERISA Plans


Alfred Hitchcock was a master of suspense. The beauty of his cinema and the reason it still captivates viewers is not what he shows you; rather, it is what he does not show you. Hitchcock left your imagination to do the dirty work. He knew that your imagination could fill in expertly placed gaps.

With his films, we simply get a bit of a start. But when there are gaps left in ERISA plans, we end up with much worse than just a start. We end up with a lawsuit. A quick troll through the Department of Labor website gives us a rundown of enforcement action. Gaps in contributions. Gaps in proper administration.

Lawyers are also looking for these gaps. They look for gaps in logic or action. This lawsuit against MassMutual is the most recent example. No one can know how the suit will end. But, like viewers with their popcorn watching a Hitchcock film, I am sure that compliance departments across the country are on edge. Their minds race to fill in the gaps left between the suit and the practices of their advisers. What other gaps are out there? Could our advisors put us on the hook if they recommended a provider employing a similar structure? Are our disclosures sufficient? Are our policies setting us up for a similar suit?

One of the gaps that continually scares me is the gap in determining the reasonableness of fees for covered service providers. As we are all aware, it is part of a fiduciary’s duty under ERISA to insure that all fees paid from plan assets are reasonable for the level of service being provided. It is commonplace to compare the fees and a checklist of services against those of other plans around the country. Honestly, that scares me. It scares me because checking to see if your answer is the same as someone else’s seems like a poor basis for reasonable. For example, you may be paying the same fee for education services; however, does this standard benchmarking evaluate the amount of education? Or the time spent working with participants on education? The same example holds true for other services as outlined in the fee disclosures mandated under 408(b)(2). I have discussed some of my concerns in another post. And this gap in what is promised and what has occurred is another Hitchcock nail-biter. As we have seen in other suits recently, the potential liability is not in the decision.  Instead, it is in the process.

So how do covered service providers eliminate these Hitchcock gaps?

First, it is important to recognize that liability that is already out there cannot be put back in the bottle. Rather, we must seek to systematically eliminate the liability going forward. Recognizing that reasonableness of fees is under scrutiny right now, you should employ a process that definitively measures committed resources relative to fees. Comparing your fees to the guy’s down the street does not insure reasonableness.

Second, employ a process to insure that you have done and are doing what you promised you would do. Comparing a list of activities performed for your clients compared to a list of services stated in 408(b)(2) disclosures is a good start. Any discrepancy between the two is a Hitchcock gap that will leave compliance sleepless and lawyers licking their chops.

Finally, employ a system to utilize exemptions in the proposed Department of Labor Fiduciary Rule. For example, the proposal exempts education from the scope of fiduciary. Use the exemption. Track your activities that fall under that provision. But remember, all of your documentation can also be used against you. As a former mentor used to say, “If you don’t want it on the front page of the Wall Street Journal, leave it out.”

In short, QPSteno can help with all of these strategies. If there is anything that I can do to help, please reach out ( Remember: With a complete plan, there is little to fear.

5 Reasons You Need an Education Policy Statement


An article was recently written for that seem to give a number of reasons that education policy statements are not catching on or shown by professionals in the qualified plans arena. Many valid concerns were voiced, but the article seemed to miss a counterpoint illustrating why it makes sense to have education guidelines (or an education policy statement). Here is a quick list of 5 reasons why this strategy is more appropriate than the article may suggest:

Fail to plan; plan to fail. This is the time of year that the retirement plan industry is in a frenzy trying to convert prospects to clients for the coming year. A culmination of closing sales funnels; this is the time of finalist presentations. Having been a part of hundreds of these presentations, I frequently heard, “We will increase participation/deferral rate”. And I always wondered, “And how exactly do you plan to drive that increase?” Without a plan for educating participants on how the plan works, why it makes sense, or other financial literacy topics, how can you realistically expect to drive those results? Or how can you demonstrate that any increase was a result of your work (reasonableness of fees?) instead of some outside factor. Doctors have plans for treatment to drive outcomes. Accountants have strategies for lowering tax liability. Teachers have plans for educating their students. Builders have blueprints. Why would you not have a plan in place for organizing education?

3:1 ROI. In the article, one of the quotes addressed presenting the business case for financial education. The individual correctly said that you would have to show an ROI that made business sense. Interestingly enough, I have sold cases using this strategy. Dr. E. Thomas Garman has done several studies on financial education and the benefits that it has to the employer. His studies found an ROI of 3:1 for financial education. He further found that the benefit to the employer was about $2,000 per employee per year. Included in that number is savings of employer paid health care costs of about $450/employee/year and increased productivity of about $350/employee/year. I have sold cases simply by passing the CFO a calculator and having him run the simple math of $2,000 x number of employees, then asking if he wanted to learn about how we could provide increase output and decreased employer costs with a target of those numbers. Guess how many told me no? None that I can recall. Because employers hate increases that come with health care renewals. And they want efficiency to maintain/improve margins. In fact, the Kansas City Fed issued a piece several years ago that had similar finds about financial education. They found increased participation, decreased use of loans, among other benefits. The business case exists.

Real Retirement Readiness. The industry is all abuzz over retirement readiness. Providers tout improvements like increasing replacement income percentages, increasing account balances, minimizing leakage, etc. The financial services industry focuses on getting participants to retirement with a pot of money that should be able to last them through retirement. That makes sense. But a quick look at lottery winners and former professional athletes reveal how short sighted that approach is. A look at those two demographics finds a staggering rate of bankruptcy. Why? Because it turns out that when you turn people loose with more money than they have ever had but no additional education on how to make it work or last, they blow through it. The GAO has most recently explored the topic here. This trend is not surprising as financial education is not widely taught in school. Very few states require that a personal finance class be offered as part of a high school curriculum-let alone be required. Let’s try an analogy: the current system is working to give keys to a Ferrari to a kid who hasn’t had driver’s education yet. He’s not even ready for keys to a Toyota Camry. I ask wouldn’t our energy be better spent making safer drivers?

Redefine Value in the Face of Auto-Everything or Face Obsolescence. As technology continues its march forward, the traditional value proposition of a financial adviser specializing in qualified plans is changing. If his value is “picking funds”, why couldn’t a plan simply purchase the fi360 software for less than it pays its adviser? If participants are automatically enrolled, or automatically escalated, or only have target date funds as a choice, what does the adviser do? It makes me think of a scene from Office Space about serving as an intermediary between customers and engineers. All of these developments have a profound impact on the traditional value proposition. In short, we are seeing a commoditization of the services provided by an adviser. Now, the Department of Labor is looking at making everyone a fiduciary (oversimplification, I know; but we all know where it is headed). There is another reason that an adviser is not as unique as he once was. And the market movements of late have another reason to redefine the adviser’s value proposition. If the markets are going to move regardless of how well you can pick funds/investments, why wouldn’t you disconnect yourself from an aspect over which you have no control?

Be on the Cutting Edge. One part of the article made me chuckle. “When’s the last time you heard a DOL auditor asking to see the education policy statement?” There was some concern in the article that an education guideline or policy statement has been around and hasn’t been embraced. True. It isn’t a new concept. But until recently, the technology has not been available to help make it as efficient or flexible as the market would like. Digital photography was around for decades before technological advances finally made it a viable alternative, and we all know how that worked out for Kodak (who owned the rights, failed to pivot, missed the opportunity, and went bankrupt). Let’s also think about how long the Investment Policy Statement was around before it was broadly requested by the DOL during an audit. Final thought on this: millennials are changing the way markets work. Continuing to sell to them the way that you sold/engaged boomers seems to be a recipe for disaster. Studies continue to show that they embrace planning more than boomers do and that they want to understand why a solution works. Some firms are starting to tailor their marketing around this fact.

As I said at the start, there are some legitimate concerns expressed in the article. But there is another side to the argument.

Trading Employee Engagement for Auto Features


The growing trend in retirement plans is toward the automatic. Auto-enrollment. Auto-escalation. Auto-rebalance. QDIAs. The benefits of these features are well documented. Studies like this one (here) show how automatic features seem to better prepare employees to replace their normal working wages than plans without these features.

But is there a trade off? Are we breeding apathy into these plans and using the apathy as the rationale for implementing these features?

Studies like one from the EBRI referenced above show that under their calculations, the employees will have better balances at retirement than those under plans without automatic features. For a moment, let’s assume that the other assumptions in those studies do not categorically disqualify them. But let’s look at the aspects that the study does not cover.

First,there is an assumption that participants will either stay in one job or maintain their accounts without cashing them in when changing jobs or take loans. In reality, we know that this happens. And it happens a lot. So much so that the Government Accountability Office mentions it in at least two separate studies (here and here). Cashing out costs employees in current taxes as well as retirement security.

Conversely, not rolling the balance to a new employer costs employers who pay recordkeepers and TPAs a per participant charge. Or it can cost the participant if those charges are passed along to the employee. There are provisions to roll smaller balances out of plans automatically, either to an IRA or a complete cash out. But are those provisions putting employees in a position to be better off in retirement than just staying in the plan? Depending on several variables, the participant may have lower expenses by staying in the plan.

Second, let’s assume that the participant gets to retirement with a bolstered balance due to automatic enrollment. I would suggest that participants who have not been properly engaged throughout the process (saving for retirement) are not appropriately trained to handle the control of such a large amount of money. While having lunch several years ago, I struck up a conversation with the man sitting next to me. Inevitably, the subject of work came up. After learning what I did, he shared with me what he had done with his retirement funds.

“I worked my whole life; I worked hard. And I did a good job saving. I retired with $150,000 in my 401k. So you know what I did? I treated myself to a new Cadillac.”

To be fair, I have no idea what other assets the man had. But it is conversations like this that leads the government to allow annuity features in retirement plans. And it causes others to wax nostalgic about how great pensions were. The reality is that people who have not been properly educated about financial matters who suddenly have access to a large pool of money tend to make bad decisions. Don’t believe me? A majority of people who win the lottery lose most of their new wealth within several years. And the same is true for professional athletes.

So the question becomes: Are we doing an unintended disservice to the participants in plans by removing steps of the process from their control? We know that financial education is not being taught in most schools. And we know that there are blind spots in participants understanding of finance. At least the old enrollment process gave us a chance to speak with the participants about how different asset classes and dollar cost averaging works. It gave them a chance to ask questions about financial subjects. If we are going to continue to automate other features of the plan, maybe some other activities could take their place. Should we be mandating that, in lieu of the standard enrollment meeting, there be some sort of financial education component? Should we redefine the educational component of 404(c) to make participants more financially savvy? As financial services professionals, what else can we do to help prepare participants for retirement?

The Iceberg of Retirement Plan Service


Everyone has seen the motivational posters with the iceberg, complete with the requisite statement about how there is so much below the surface.


This concept of an iceberg is very much like the fees conversation in the retirement plan world. We are all sick of hearing about it. We are sick of getting bashed in the press. We are sick of looking over our shoulders, waiting for an attorney to file a suit alleging that we have over charged and are on the hook for restitution to the plan. I think these suits and the negative press continue because like the tip of an iceberg, our clients only see what we do in the board room. We don’t take the time to show them the part of the iceberg that is under the water, which in this case is all of the other work that goes into a plan.

Most people outside our industry have no idea what it takes to run a plan. I am sure you have read articles about fees or studies that discuss how over-priced plans are. But no one ever discusses who is doing this work, or what steps are required to run a plan. Most of the articles I can find only talk about the cost of the investment portfolio, probably because that is the only piece of the equation that transfers from their other knowledge base. I’ll take that a step further: even a lot of people in our industry don’t know how much work goes into servicing a qualified plan. Think about other advisors in your office who don’t touch plans. Think about other professionals, like CPAs and attorneys, who ask questions leading you to believe that our craft is as foreign to them as rocket science is to most of us. Think about the last gathering that you attended where your specialty in plans came up and the person listening to you just stood there, mouth agape, when you told him what you do. It happens too often, right?

The reality is that there are a lot of moving pieces that many people, both in and out of the industry, do not understand. And that includes our clients.

Want proof (You knew that was going to come out if you are familiar with us)? Here it is: a client asks you to drop your fee, they most likely do not understand the time that goes into servicing his plan. Think about it for a minute. Most of what we know about someone else’s profession is limited to what we see them do, like the tip of the iceberg. In sports, many spectators do not understand the hours of daily practice professional athletes endure. Many of your clients probably only see the reports you provide at quarterly due diligence meetings and enrollment meetings. They see what you do when you are there with them and nothing more. Out of sight; out of mind.

We owe it to ourselves to show more. We cannot complain about being pressed for fees if we don’t educate our clients about our work. Do your clients know how much time you spend building the reports for the quarterly and annual meetings? Do they know how much time you spend answering phone calls and e-mails from participants? Do they understand the amount of time it takes to find a suitable replacement fund that will meet the standards of the Investment Policy Statement? Do they know how much work can go into ADP/ACP testing? When I sat down to write out all of the different tasks associated with servicing a plan, I was amazed. These are all real activities that take real time and real experience to manage effectively and efficiently. These are activities that you want done by a professional who is properly incented to do a good job. I have often said that I unsubscribed to Groupon because their ads were for things for which I want to pay full price- parachuting, dental work, and appendectomies. Our business should be no different. Retirement is too important to take a cheap approach.

Do our clients know how much of the service iceberg is below the surface? And let’s take that a step further: do you know all of these details? Have you put the effort into tracking the data so that you know how to price a case? Think about it from a business perspective. If you don’t know how much time you are spending on a given project, how do you know where to make your process more efficient? If you don’t know how much time a case takes to service, how do you know how many cases you can adequately service? How do you know when and where to add staff? Or software?

As we see the 408(b)2 disclosures evolve and the media continue to bash us for high fees, let’s start to give them a look at everything below the surface. We owe it to ourselves and our clients. We owe it to our profession.

Is the Education Component of 404(c) in Need of an Update?


My uncle used to be an attorney and a judge in town. I remember seeing the wall of books in his office and wondering how any one person could remember all of that material. Of course, that was 20+ years ago. Since that time there we have seen the addition of the Pension Protection Act, which itself added a staggering 900+ pages to the Code for our industry alone. And as I look at some of the laws on the books, I can’t help but wonder if there are laws that need to be updated because their application is outdated. As you can guess from the title of this post, I think that you could make a solid case for updating the education component of 404(c).

As the law stands, a fiduciary is liable for the investment decisions of the participants in their plan. However, a fiduciary can claim exemption from that liability if they meet certain qualifications, including an education component. “The participant or beneficiary is provided or has the opportunity to obtain sufficient information to make informed investment decisions with regard to investment alternatives available under the plan, and incidents of ownership appurtenant to such investments”(complete law text can be found here). In short, a participant must have enough information about the investment offerings to make a decision. Originally, this was interpreted to mean that the participant was entitled to the entire prospectus. I was originally licensed in 2000 and have yet to meet anyone who has read a prospectus voluntarily for a reason other than trying to cure insomnia. It wasn’t until Field Assistance Bulletin 2009-03 that it was determined that a one pager would be sufficient to give a participant all of the information that he needs to make an informed decision.

Let’s dig into this for a minute. Part of the assumption around this law is that there is already a process in place to scrub funds to be in line with the goals of the plan. So the assumption is that the funds themselves are good. The second presumption here is that participants need only decide which of the funds appropriately meet their investment objectives. There are numerous studies that demonstrate that with this limited amount of disclosure, participants don’t make optimal choices. Here is one example: here. Most record keepers try to help by building their enrollment kits with a risk assessment. We don’t have time here and now to get into the merits and downfalls of that approach. Stay tuned- we will dig into that in a future blog.

If we look at the current state of financial education, it is no wonder that participants are having trouble. Here are some quick facts:

  • Currently four states (Missouri, Tennessee, Utah, and Virginia) require a high school students to take a personal finance course in order to graduate;
  • Only 19 states require a course in Personal Finance be offered;
  • 24 states require that an Economics class be offered;
  • Since 2011, three states (Hawaii, Illinois, and New York) have dropped Personal Finance as a part of the K-12 standard.

Sources 1 and 2

It is fair to assume that there are a lot of children who are not getting this education at home. If these future workers and participants are unfamiliar with basic personal finance, is it realistic to believe that they have the skills required to read even a summary prospectus? Don’t take that wrong. There are a lot of good, hard-working people in this group. But they may not have the skills required to make these decisions. Let’s drive this home a little further. Many of us have the mental capability to allow us to do electrical work, but we may not have the requisite education to do it safely. I know that I don’t. But let’s go back to the assumption of a plan sponsor. All decisions for a fiduciary are held to a level of prudence. Would a prudent person assume, given the statistics above, that participants have enough finance background to appropriately assimilate the information in a sales slick to make a decision on where to invest their 401(k)? Would a prudent person force a person to make a decision knowing that person lacks the skill and knowledge to make an informed decision?

The advantage to a Fiduciary who claims exemption under 404(c) is that he is no longer liable for the investment decisions of the participants. In all aspects of the law, we have seen an evolution. Fund due diligence has myriad tools available to provide staggering insight into the benefits and shortcomings of an investment. Software packages provide robust tracking and document retention capabilities. Documents have been created to help a responsible plan fiduciary navigate through many of the decisions that he is required to make. A fiduciary is armed to the teeth when it comes to making decisions. Yet, we have, for the most part, stagnated when it comes to arming the individual from whom we are trying to shield ourselves.

It may be unrealistic to think that we could come to a consensus regarding what education should be offered. We cannot even come to a conclusion on the fiduciary standard for plans. And though I marveled at my uncle’s law books as young man, I am not in favor of adding laws or responsibility for the sake of adding them. But doesn’t the question at least deserve to be asked: are we doing ourselves a disservice by not requiring more under the educational component of 404(c)?