Clash of the Titans… The 401(k) MEP
If you follow my Blog, and thousands do according to my Google Analytics, you know I dislike, passionately, Principal Financial Services and their group of companies. I have never worked for them, and have never met anyone that does work for them. I dislike them because they stole one-half, or approximately $250,000 of my retirement savings. First of all, they DID steal the money. It was not the 2008 financial meltdown, it wasn’t poor fiduciary decisions by my employer. Then Principal President and CEO Larry Zimpleman schemed and collaborated with other Principal management and board members, and possibly top executives of other commercial real estate development companies, to steal billions of dollars of investor’s money starting in 2006, until he and CEO James McCaughan met with then SEC chairwoman Mary Schapiro on February 25th, 2010 to discuss options. When the SEC Chairperson has a meeting with two CEO’s and the Chief Compliance Officer of a leading financial institution, I doubt they are discussing their grandchildren…. I tried through the FOIA to get a copy, but apparently no record of this meeting exists.
Clash of the Titans… The 401(k) MEP
But this post is not about my issue… it’s about what is good, or not so good, for small to mid-sized companies that want to offer a 401(k) to their employees. If you ask the professionals, they seem to have a profound difference of opinion. Highly respected and knowledgeable Chris Carosa, a weekly columnist for Benefits Pro, an online magazine for businesses that support benefits for their employees. Chris believes plan participants (aka employees) and Human resource staffers will love the MEP 401(k) program. He says so in this article recently published in Benefits Pro, . You may have to subscribe to read the publication, but it is a good read and well worth the time. Chris closes his article with a question, “Better results for employees. Better results for employers. What’s not to love about 401(k) MEPs?”
In 2013, Chris Carosa interviewed Greg Carpenter, author of the popular blog The Frugal Fiduciary. During his interview, published on this link, industry veteran Carpenter draws a line against too much 401(k) paternalism. His firm, Employee Fiduciary, works with hundreds of advisors, third party administrators, and plan sponsors. Mr. Carpenter states that all follow best practices and make a positive difference for plan participants, exclusively with small business 401k plans… “We are seeing best of class plans for small employers all over the country that rival and outperform the large plans. Take a step back and look at the long-term trends for our industry. Costs, access, education and investment quality continue to trend positively. It may seem like slow progress, but it is happening.”
In a blog post published December 10, 2014, in The Frugal Fiduciary, Carpenter also expressed his opinion on 401(k) MEP’s. He commented that...”
We have two highly respected, knowledgeable, and professionals expressing opposite views on a subject that impacts millions of 401(k) investors. How can that happen, and as an investor, which side do you take? If these guys cannot agree on what is best for small to medium sized 401(k) plans, who can? The problem is that they are both right. The extent of due diligence on behalf of your plan administrator will determine the end results. When a firm like Employee Fiduciary includes the word “Fiduciary” in their name, you can rest assured they , first of all, ARE fiduciaries, and they will serve YOUR best interest, and not their own, at all times. If they fail, you as a Plan sponsor, have legal recourse. With firms like Employee Fiduciary handling your best interest, MEP’s are not for you.
The reason MEP’s can be useful for many small to medium 401(k) plans, is due to the fact they are managed by professionals that will also represent your best interest. They remove not only the record-keeping responsibility from the smaller plan sponsors, but also the fiduciary responsibility. In this article published in 2012 by BenefitLink.com, the fiduciary relationship of MEP’s are discussed at length, and is a good read as well. An ERISA Advisory Opinion 2012-04A had just been released by the Employee Benefits Security Administration (EBSA) that analyzed MEP’s and concluded they are to be considered fiduciaries. The opinion states the MEP investment trust is an entity that holds plan assets, and as a result the trustee or others who control the trust are ERISA fiduciaries of all the underlying plans, because they control the assets of those plans. In the rubric of the service provider fee disclosure regulations, they perform “Services provided as a fiduciary to an investment contract, product, or entity that holds plan assets … and in which the covered plan has a direct equity investment.”
So based on this opinion, then all service providers should be considered fiduciaries, right? Wrong, because first you must actually define what a “plan asset” is before drawing such a conclusion. If your plan is annuity-based, then the employee payroll deduction deposited with Principal Life Insurance company, for example, becomes a “plan asset” owned by Principal, and NOT the employee. Because the plan asset is owned by Principal, even though it is YOUR money, under ERISA Principal is not a fiduciary, and the plan does not even fall under ERISA regulations, but rather enforcement is based on common law. Principal is not a fiduciary because they have now taken ownership of your money under the contract law of “successors and assigns,” which is a part of the Annuity Agreement reached by your employer with Principal.
Unfortunately, there exists within the industry financial institutions like Principal Financial Services that take advantage of employers of smaller businesses that want to provide their employees with a 401(k) plan. As long as the Securities and Exchange Commission (SEC) allows companies like Principal to prey on smaller employers, there will be a need for 401(k) MEP’s where those plans can benefit from a higher level of quality service. While individual states have regulatory authority over insurance companies domiciled in their states, few insurance commissioners can enforce the regulations because these companies are also large employers and have political connections with elected state officials. I cannot imagine the Iowa State Commissioner disciplining Principal for violations, when they employ 10,000 Iowa residents and have personal contact with state politicians. It just will not happen, and for that reason, Principal breaks the rules with complete impunity. The SEC can, however, enforce regulations of non-registered securities which Principal typically sells in private transactions to themselves, for the 401(k) separate accounts they service.
Key ingredient for success…
The key ingredient for the success of the smaller 401(k) plans offered by employers rests in knowing all there is to know about your service provider. First and foremost, is your service provider aka plan provider, a fiduciary? If you have nothing in writing to support a “yes” answer, then you, as an employer, had better do some homework. Be pro-active, as if the money you are investing was your own, because unless you can find evidence to support the fact you are NOT the fiduciary, the Department of Labor will consider you to be so, and ERISA law will control the decisions you make. If you agree to the language typically found in Group Variable Annuity contracts offered by insurance companies like Principal Life Insurance Company, you will be financially liable for Principal’s mistakes, whether those “mistakes” are fraudulent or tort based.
If you have the knowledge and confidence to self-manage your 401(k) plan on behalf of your employees, by all means go with a firm like Employee Fiduciary for your 401(k) needs. If, on the other hand, you and other management personnel in your firm are totally ignorant of such matters, or the time simply does not permit you or other managers to focus on the plan even for one day a month, then the 401(k) MEP may be the right answer. Both opinions offered by the professionals mentioned in this post have merit. There is no right or wrong. Use your gut and move forward with a plan… Principal is not a fiduciary, nor are most other insurance companies, unless they offer plans that are not annuity based. Demand, in writing, a statement from the service provider specifically stating they are a fiduciary under your 401(k) plan, and they will always have the “best interest” of your employees first and foremost in their plan offerings.