By Deb Castellani, CFA and Bill Conrad, September 26, 2019
Times have changed...Forty years ago, the 401(k) market was born. For the first time businesses of all shapes and sizes were able to provide retirement benefits to their staff. Overnight, small and medium sized business owners went from running their own businesses to basically running an investment company where the clients were they employees. The Department of Labor didn't give business owners (aka plan sponsors) an owner’s manual, but business owners were now responsible for selecting assets, administration tasks, overseeing providers, educating participants, making loans, and having the oversight of 2 or 3 regulators among other things in addition to running their businesses.
Not only did companies have a great new benefit, but the investment world had a new service that they could offer aka sell. Before there 401(k) plans, the companies offering retirement plans were mostly Fortune 500 type or government entities offering defined benefit pension plans. These plans operated with structured committees and larger well-established Registered Investment Advisors, banks or multi-state insurance companies (aka fiduciary providers).
Over these next 40 years, the 401(k) market grew from 0 to 95 million individual pension plans in over 600,000 401(k) plans. During this same time the Department of Labor and the IRS provided limited guidance and limited oversight to the plan sponsors.
Well that was until 2011 when 5 lawsuits were filed on one day by one law firm. The Department of Labor took notice and began to issue new regulations. With over $5 trillion in 401(k) plan assets which is more than double Social Security, the politicians and IRS also took notice. And now, the SEC has jumped in as well.
New regulations started being created to target the service provider and not only look at the plan sponsor. This shift helped the Department of Labor to notice that the some of the service providers may have been more concerned about sales and income and less concerned about helping the plan sponsor provide the best services they could for the participants.
Today's retirement plan landscape is different than it was in 1980. Now there are two (2) basic types of service providers. One is compliance-minded. They understand ERISA and not only make sure they are following the regulations, but they also help plan sponsors with their regulatory requirements. In other words they help plan sponsors be good fiduciaries.
The second type of service provider Is one that sees 401(k) plans as a sales opportunity. They see it as the ability to earn an ever-increasing paycheck every couple of weeks when contributions are made. They think 401(k)s are easy. They don't realize the complexities of ERISA. They don't realize ERISA is over 200,000 words and 460 pages. Instead of helping the plan sponsor be a better fiduciary, their actions sometimes cause the plan sponsor to breach their fiduciary duty. Not because of any malintent, but often simply because these service providers don't understand ERISA rules and regulations the plan sponsor must abide by – thus putting themselves, the plan sponsors and the participants at risk.
For compliance-minded service providers this creates a marketing goldmine. It allows them to set themselves apart in ways that they could never do in the past.
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