Brokers Eat Their Own

For the 401(k) plan to succeed it must look more like a pension plan and less like a casino. Plan sponsors need to provide the proper fiduciary oversight to offer a retirement plan which will lead to successful retirements. This oversight should include service providers willing to serve as ERISA 3(38) Investment Managers in writing. If improvements are not made soon the 401(k) plan could become the next “Obamacare”.

Outdoor Security Barriers - Ameriprise Financi...
Outdoor Security Barriers – Ameriprise Financial Center (Photo credit: Zach K)

Ameriprise is a large holding company that provides a broad range of financial planning services. The lawsuit seeks class action status and was filed by three current and four former participants in the Ameriprise 401(k) plan. One of the primary allegations involves the selection of funds managed by a subsidiary of Ameriprise. The complaint states that the plan was the first investor in these funds, which had no performance history. Plan assets of approximately $500 million a year were invested in these funds, commencing in 1995. Plaintiffs allege the funds performed poorly, underperforming their benchmarks, and accused Ameriprise of generating excessive fees from these investments. Ameriprise moved to dismiss the complaint.The District Court denied the motion to dismiss the claim relating to these funds, stating: “Plaintiffs in this case plausibly allege that Defendants selected Ameriprise affiliated funds, such as RiverSource mutual funds and non-mutual funds managed by ATC, to benefit themselves at the expense of participants.” Counsel for the class representatives, Jerome Schlichter, of the St. Louis law firm of Schlichter, Bogard and Denton, stated: “Ameriprise certainly should know that their in house funds were poor choices for retirement assets.”

This decision gives plaintiffs the opportunity to proceed with their case. It is not a finding of wrongdoing by Ameriprise. Nevertheless, it is illustrative of the cavalier attitude of plan sponsors. They are supposed to act as fiduciaries to plan participants by selecting investment options that are in the best interest of the participants. In my opinion, any plan that does not offer globally diversified portfolios of low management fee index funds should be deemed to violate this duty. Until the Courts adopt that position, lawyers will go after the low hanging fruit, and attack only the most egregious violations. The Ameriprise case fits well into this category. It’s worse because it involves a large player in the advisory business placing its own interests above those of its employees.

The industry is so rife with greed that it eats its own.

This is another reason the 401(k) plans provided by brokerage firms and insurance companies do not benefit the plan participants and their beneficiaries. We need a more pension fund like plan with providers willing to serve as ERISA 3(38) Investments Managers in writing.

Please comment or call to discuss how this affects you and your retirement.

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Is There a “Mini-Me” ERISA Section 3(38) Investment Manager?

401(k) plan providers are excellent marketers. They will use the ERISA 3(38) Investment Manager provision to sell more plans. Unfortunately for plan sponsors and participants the devil is in the details. In most cases most of this is marketing hype and they have no intention of assuming this liability.

English: Metropolitan Life Bldg., Manhattan, N...
English: Metropolitan Life Bldg., Manhattan, New York City, in 1911. (Photo credit: Wikipedia)

Certain providers also assert that they can be a 3(38) fiduciary at the level of a plan’s trading platform. In this kind of arrangement, it’s typical, for example, that a registered investment company (RIA) or a trust company offers 3(38) investment manager services to a plan sponsor via a tri-party agreement among the RIA/trust company, the plan sponsor, and the plan’s record-keeper. At the platform level, the plan sponsor agrees to use the services of a 3(38) to prescreen and assess the investment universe, sharply narrowing the list of prudent investment options to be made available to the plan. However, a 3(38) at the platform level doesn’t select the investment options that will actually appear on the plan’s investment menu. That duty is still left to the plan sponsor (or possibly another ERISA 3(38) that’s charged specifically with selecting, monitoring, and replacing the investment options on the plan menu). Many major record-keepers provide this kind of arrangement.But such providers ordinarily would not agree to be a 3(38) investment manager at the plan level (although some of these providers do carry out the discretionary selection/monitoring/replacing duties concerning the specific investment options on a plan’s investment menu). They assert in their agreements with plan sponsors that the sponsors retain the ultimate fiduciary responsibility to determine what particular investment options will actually be offered on a plan’s investment menu. As such, the sponsor would retain fiduciary responsibility (and liability) for the selection, monitoring, and replacement of the plan’s investment options. For example, if a plan sponsor placed an S&P 500 Index fund and a money market fund on the platform, a provider such as a trust company would retain fiduciary responsibility for the underlying holdings in the S&P 500 fund, but it wouldn’t be responsible for, say, the failure of the plan sponsor to provide sufficient investment options to permit participants to create a diversified portfolio.

Be careful what you ask for, you might get it. Many selling retirement plans will tell you what you want to hear. In most cases the devil is in the details.

Please comment or call to discuss what is really in your 401(k) plan contract.

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Cash-back reward 401(k) system builds retirement savings

English: Employees Retirement System of Texas
English: Employees Retirement System of Texas (Photo credit: Wikipedia)

There needs to be a way to incentivize employees to save more for retirement. This option may help them save while doing the thing they love most, spending. There needs to be more and more automatic features in the 401(k) plan platform for it to succeed. Plan sponsors should investigate this and other options to promote saving.

Under the SaverNation plan, employees would be able to get retirement savings cash back on purchases made at more than 500 merchants’ websites.Participants could take part by logging onto a centralized SaverNation website and making the purchases, which would then pass from 1 percent to 25 percent of the cost back into their retirement account. Multiple or repeat purchases would only end up feeding more cash into their accounts.

The system is already being used by investment managers across the country, who’ve been able to use the simple nature and easy logic of SaverNation’s retirement savings benefits to offer as an add-on to employee systems.

“Here’s an easy way for employers to improve their employees’ financial lives,” said ERISA attorney Ary Rosenbaum, who’s included the system as an automatic feature of the open MEPs he’s been sponsoring in Florida.

“It also offers real value to sponsors. For example, encouraging the rank and file to get in the habit of saving while they spend can directly lead to higher annual contribution limits for highly compensated employees in plans failing testing.”

This is a great option for plan sponsors to encourage their employees to save for retirement. It is worth investigating for all plan sponsors.

Please comment or call to discuss how this might work at your company.

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The unspoken fear of every 401(k) plan sponsor

Many small to mid sized plan sponsors are unaware of their risks and responsibilities with regard to their 401(k) plan. Many believe their service provider is taking care of them. This assumption can prove to be very dangerous for the plan sponsor. Your service provder should be willing to agree, in writing, to take the ERISA 3(38) investment manager status on your plan.

The seal of the United States Department of Labor
The seal of the United States Department of Labor (Photo credit: Wikipedia)

Sure, plan sponsors can find information from the Department of Labor, and they can certainly buy books on the subject (including one I wrote), the depressing truth is that these instructions only apply to the narrow actions of the plan sponsor.Unfortunately, the 401(k) plan sponsor is held liable for the actions of every vendor, and – here’s the really difficult part – it’s hard to know what fiduciary rules (if any) apply to which service providers. That’s because at least three different fiduciary standards exist: the tradition trust law variety; the ever-evolving SEC form; and, the much-maligned ERISA version.

The fact services providers can offer one, two or even all three forms of fiduciary standard (as well as a fourth non-fiduciary standard) can only increase the personal risk of every 401(k) plan sponsor, who generally spend their waking hours trying to produce more widgets, not staying up-to-date on the latest in the fiduciary industry.

Many plan sponsors do not understand the fiduciary responsibilities and risks they carry when sponsoring a qualified retirement plan for their employees. Many believe their service providers have taken care of everything. This is far from the truth and the federal government continues to make it worse.

Please comment or call to discuss how this affects you and your company.

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DOL Issues Clarification to Participant Fee Disclosure Guidance

The DOL sees the danger of allowing plan participants choose their own investments. It’s a matter of protectin g the future you from the current you.

Investment percent gdp
Investment percent gdp (Photo credit: Wikipedia)

The new FAB modifies and replaces Q&A 30 with a new Q&A 39, which says:

Q39: A plan offers an investment platform that includes a brokerage window, self-directed brokerage account, or similar plan arrangement. The fiduciary did not designate any of the funds on the platform or available through the brokerage window, self-directed brokerage account, or similar plan arrangement as “designated investment alternatives” under the plan. Is the platform or the brokerage window, self-directed brokerage account, or similar plan arrangement a designated investment alternative for purposes of the regulation?

A39. No. Whether an investment alternative is a “designated investment alternative” (DIA) for purposes of the regulation depends on whether it is specifically identified as available under the plan. The regulation does not require that a plan have a particular number of DIAs, and nothing in this Bulletin prohibits the use of a platform or a brokerage window, self-directed brokerage account, or similar plan arrangement in an individual account plan. The Bulletin also does not change the 404(c) regulation or the requirements for relief from fiduciary liability under section 404(c) of ERISA or address the application of ERISA’s general fiduciary requirements to SEPs or SIMPLE IRA plans. Nonetheless, in the case of a 401(k) or other individual account plan covered under the regulation, a plan fiduciary’s failure to designate investment alternatives, for example, to avoid investment disclosures under the regulation, raises questions under ERISA section 404(a)’s general statutory fiduciary duties of prudence and loyalty. Also, fiduciaries of such plans with platforms or brokerage windows, self-directed brokerage accounts, or similar plan arrangements that enable participants and beneficiaries to select investments beyond those designated by the plan are still bound by ERISA section 404(a)’s statutory duties of prudence and loyalty to participants and beneficiaries who use the platform or the brokerage window, self-directed brokerage account, or similar plan arrangement, including taking into account the nature and quality of services provided in connection with the platform or the brokerage window, self-directed brokerage account, or similar plan arrangement.

Remember if you offer a brokerage window to anyone in your plan it must be an option for everyone in the plan. be very careful in offering this option. Remember we must protect the future you from the current you.

Please comment or call to discuss how this affects you and you plan.

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More Oversight for 401(k) Brokerage Windows

Many plan sponsors have indulged some of their employees by offering a brokerage window. Some sponsors believe that with the help of their broker they can beat the market with a brokerage window. This option like all others must be available to all with exclusivity allowed. This opens the plan sponsor to fidcuairy risks they may or may not be aware. The plan sponsor has a duty to monitor the accounts and avoid any imprudent investments.

NEW YORK, NY - NOVEMBER 01:  A man walks throu...
NEW YORK, NY - NOVEMBER 01: A man walks through the office building where MF Global Holdings Ltd have offices in Manhattan on November 1, 2011 in New York City. The brokerage firm, run by former New Jersey governor and Goldman Sachs boss Jon Corzine, has filed for bankruptcy in another developing financial scandal. (Image credit: Getty Images via @daylife)

The DOL’s recent guidance discussing brokerage windows also suggests that failing to designate a “manageable” number of alternatives may be imprudent and raises questions about the extent to which an employer must monitor window alternatives to fulfill its legal obligations. This has ignited a debate over whether employers must monitor only the availability of a brokerage window or some actual investment alternatives available through the window. For now, the DOL simply says, you can’t “set it and forget it.”Given the practical challenges of obtaining information about window alternatives, it’s questionable whether employers can continue to offer a brokerage window without substantial risk unless the DOL changes or clarifies its position. Until then, if you have a brokerage window it’s important to consult your ERISA counsel to determine how and when to start collecting fee information and to understand the fiduciary implications of continuing to offer the window.In many cases, it will be appropriate to start gathering information now and formulating a plan for the eventual additional disclosures required. If you’re contemplating adding a brokerage window arrangement, you may want to consider delaying that decision until the DOL position on these issues becomes more clear.

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Why Low Employee Fees Are So Important to the Success of Your 401(k)

Investment percent gdp
Investment percent gdp (Photo credit: Wikipedia)

Proper plan design will greatly enhance your 401(k) plan. Plan sponsors would be wise to engage a professional fiduciary to manage their company plan. More specifically hire an ERISA 3(38) investment manager to select, monitor and replace the investments in their plan. This investment manager will agree, in writing , to be responsible and accountable for all the investments in the plan. The plan sponsor will realize reduced workload, substantially less fiduciary liability and a better plan. The plan participants will be provided a prudent low cost portfolio.

To optimize the value of a 401(k) plan, employers need to focus on three important tenets: run the plan in the best interest of employees; use investments that diversify risk and minimize the potential for a large loss; and above all, keep fees as low as reasonably possible.One percent or less in fees can make a big difference in how much is ultimately saved for retirement

To the dismay of many financial representatives – who make a living managing other people’s money – low-cost investments are routinely and historically outperforming higher-cost investments.  Yet 401(k) plans, especially those designed for small- and mid-size firms, often carry added costs to employees.  These often add up to two percent or more when packaged with fund expense ratios, loads, wrappers, record-keeping and management fees.  In fact, the difference between one and two percent in fees can cost employers and their employees tens, if not hundreds, of thousands of dollars in savings over a career.

If business owners are willing to pay the administrative expenses, a plan cost of less than 1% is easily attainable. The 401(k) plan as a benefit for employment will continue to become more and more valuable.

Please comment or call to discuss how this affects you and your company retirement plan.

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A Great Way To Improve Your Company Sponsored 401(k) Plan

Reduce the number of investment options.

This is possibly the best way to improve the performance and participation in your plan.  Many plan sponsors and their service providers believe that if they include a large amount of investment options in their plan, employees save more.  They also are mistaken in believing that they reduce their fiduciary risk by including a large amount of fund options.  This is far from the truth. The truth is that the more options available the more confused the participant becomes.  This confusion results in paralysis and nothing is done. Even worse the participant looks at all the options choosing the best performing funds over the short term.  This lack of diversification will hurt performance and the ability of participants to successfully retire.

Markowitz-Portfolio Theory, Investment Portfol...
Markowitz-Portfolio Theory, Investment Portfolio Management (Photo credit: Wikipedia)

A better approach would be to offer risk adjusted globally diversified model portfolios.  Your plan would then resemble a pension fund like plan. This takes the investment choices and allocation out of the participant hands and into the hands of an investment professional. Most plan participants either never review their portfolio mix or rebalance to the proper allocation or they will over trade.  Neither path will result in favorable outcomes.  In fact over trading is the most detrimental to a portfolio.  There is an old saying ‘your portfolio is like a bar of soap the more you touch it the smaller it gets’.

Ideally plan sponsors should consider hiring an ERISA 3(38) Investment Manager.  This arrangement must be in writing.  It will transfer the responsibility and fiduciary risk for investment choices to the ERISA 3(38).

The investment manager will build the model portfolios and be accountable for the proper investment.  The implementation of the plan would involve automatically investing in a model portfolio based on the employee’s age.  Once this is complete the employee has three options:


I.        Remain in the assigned portfolio


II.        Complete a risk assessment to determine the proper portfolio


III.        Opt out of the model portfolios and choose their own fund mix


Studies have revealed that most participants will remain in the assigned portfolio and will save more with less anxiety.

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Making sure you get the plan services you bargained for.

Plan sponsors must be certain what there adviser is aying is in the contract. You must read even the small print. If you want to advoid this exercise hire an independent fiduciary professional to assist you. Many service providers will use a number of ‘marketing gimmicks’ to get your business.

Fiduciary Building
Fiduciary Building (Photo credit: burt_frogblast)

People can promise you the moon, but they may deliver far less. That is why despite the promises made by your plan providers; you should always read their contract to determine whether they are actually delivering you what they promised.A few weeks back, an advisor looking at a prospective client showed me their agreement with their current ERISA §3(38) fiduciary. The only problem is that there was nothing in the contract that suggested that the fiduciary was an ERISA §3(38) fiduciary or was exercising discretionary authority over the fiduciary process. So for all intensive purposes, the provider may be providing the service, but the contract says differently.  So imagine if the plan sponsor has to sue the fiduciary for a breach of fiduciary duty and realize that the contract doesn’t protect them because the contract never claimed they were getting that 3(38) service.

So rather than taking the plan provider’s word, I recommend all plan sponsors to read those contracts to make sure they got what they bargained for. Otherwise, it’s another breach of fiduciary duty.

Enough said.

Please comment or call to discuss.

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  • Retirement Plan Fee Disclosure Regulations: Top Ten Steps Plan Sponsors Can Take To Meet the 401(k) Fee Disclosure Rules (
  • DOL Cracks Down on Retirement Plan Advisors for Fiduciary Negligence (
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Re-enrollment Effective in Boosting 401(k) Participation

Of all the changes a plan sponsor can make to improve participation and improve their employees’ ability to retire adding auto enrollment and auto escalation will be the most effective. Most plan participants are looking to their employer for guidance. You, the employer, have significant influence on how your employees save for retirement.

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Because many 401(k) plans were started before the advent of target-date funds, lifestyle funds or managed accounts, many long-term participants did not have an opportunity to select those funds when they entered the plans, he said.“There is evidence that once participants have made their initial elections, they make few, if any, changes— the so-called inertia effect. As a result, a re-enrollment process causes participants to revisit their investment preferences and their objectives and to decide whether to accept the default into QDIAs,” he said.

Re-enrollment improves participant investing, but fiduciaries also receive important protections if they follow the default process as outlined in the DOL regulation. For participants who default, plan fiduciaries are responsible for investing their money and may be liable if they don’t use QDIAs. Also, according to the report, fiduciaries are only protected from imprudent participant investment decisions if the plan complies with the requirements of ERISA 404(c).

Auto enrollment and auto escalation are the best methods to increase plan participation and help more Americans successfully retire. I propose that we convert the 401(k) plan into more of a pension fund like plan. Turning over the plan to professionals will add discipline and success.

Please comment or call to discuss how your company 401(k) plan can be improved for all.

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