ASKED & ANSWERED: Mark Wayne

By Jo Mathis

Legal News

Employers who oversee employee retirement plans will want to pay attention to upcoming legislative changes. The Legal News talked to Mark Wayne, president and CEO of Freedom One Financial Group of Clarkston, the largest 401(k) adviser in the state, about what lawyers need to know.

Mathis: Your roster of clients includes six law firms. Have you discovered challenges unique to attorneys regarding their 401(k) plans?

Wayne: Law firms are relatively unique from a 401(k) standpoint because they generally have a larger number of highly compensated employees than many other industries. Highly compensated employees are considered by the IRS to be those individuals earning salaries of more than $110,000, and they are required to contribute no more than 2 percent above the average employee contribution. This particular regulatory constraint is intended to ensure that highly compensated employees do not take advantage of their 401(k) plans. Employers must evaluate their plans in the context of an annual average deferral test, an IRS compliance mandate based on company-wide contributions that compares the participation rates of different classes of employees.

Mathis: Are lawyers knowledgeable when it comes to money?

Wayne: In general, attorneys do not tend to be financially savvy, and do not have a strong understanding about 401(k) plan investment fundamentals. As a result, it is often the case that a little bit of knowledge can actually lead to problematic decision making. This makes it even more critical that employers offer outstanding education to all their employees, ensuring that they are taking a holistic big-picture approach and are on track for their future goals instead of simply making impulsive decisions based on the news of the day.

Mathis: Are any particular investments more appealing to attorneys than other professionals?

Wayne: There are always likely to be individual assets and investment opportunities that are more appealing to different income brackets and professional groups. Acting on that information is problematic, however. When firm leaders select particular investments for their attorneys' 401(k) plan contributions, it is of paramount importance that they adopt a 401(k) plan that is not discriminatory for any employees. If executive decision-makers are not careful and instead choose investment options because they are aligned with their own personal preferences or with the preferences of a select group of employees, they can expose themselves to severe liability. Many employers are not aware that they can be held personally responsible -- due to their legal fiduciary responsibilities -- for the performance of their employees' plans. By law, investments must work to benefit employees across the board. If asset classes are available that employees might not typically acquire, they may decide to pursue an unnecessarily risky or unrealistic investment. The potentially troubling financial implications of such a move are obvious, but incautious investing can also present logistical headaches as well, as difficult investment options may need to be monitored. As a rule, attorneys should avoid investment plan options that can be risky, expensive and increase the likelihood of fiduciary liability with their firms.

Mathis: What legislative changes are coming up that your clients need to know?

Wayne: This is a turbulent time, both in the industry and in the broader economic marketplace. To put it into perspective, consider the fact that there are more impactful legislative changes relating to 401(k) plans occurring today than there have been in the last 20 years. When things are changing so quickly, it is more important than ever that attorneys are provided with a clear, concise and comprehensible explanation of these changes. Important upcoming changes include the following:

1) Beginning April 1, 2012, we will see changes in the rules regarding participant fee disclosure. Under the new regulations, employers must distribute information describing plan fees. Currently, approximately 80 percent of plan participants mistakenly think that their plan is free, when that is not the case. Attorneys should prepare now and set up reviews to get comfortable with the fees since April is only a few months away.

2) Another legislative change affecting attorneys will be the new 408(b)(2) Employee Retirement Income Security Act (ERISA) full disclosure rules. The section has been beefed up to require providers to review and re-describe their services and fees to employers in much more detail.

3) Additional changes will be made to the participant advice rule. The newly revised rule will state that providers of investment options cannot get paid differently, if they want to offer advice. If providers are hired for educational purposes, there will also be additional questions that must be asked and answered regarding any potential conflicts of interest.

4) The Department of Labor was also in the process of redefining a 35-year-old rule regarding the definition of fiduciary. In response to industry feedback and commentary, the Department of Labor withdrew proposed regulations that would have redefined "fiduciary" and imposed strict new regulations regarding potential conflicts of interest. But that proposal is still being worked on, and will likely reemerge in the not-too-distant future. In the past, it was difficult for a financial plan or stock adviser to be considered a fiduciary. Potentially, with the new rules, even if you look at or are involved with a 401(k) plan in any capacity, you can be considered to be fiduciary.

Mathis: Do these changes benefit employees?

Wayne: Overall, these changes promise to be extremely beneficial for employees. With the changes, the structure and functionality of 401(k) plans is going to be made much clearer and more understandable for both employers and employees alike. Employees will be reminded of what fees they are paying and what services they are getting in return for those fees. All employers use employee assets to pay fees and employers have an obligation to ensure that the fees are reasonable relative to the services being provided. Under the new laws and regulations, fines and penalties will be involved if that is not the case. The bottom line is that these changes are likely to deliver more transparency and therefore more value for 401(k) plan participants.

Mathis: Given the volatile market and economic climate in the past few years, how can your clients know they're doing their best for their employees' retirement?

Wayne: We advise our clients to not only conduct a review of their existing 401(k) plan, but also to have an independent consultant conduct a thorough "investment process" review. Employers need to understand how to use industry benchmarks to compare and evaluate fees and fee structures, and must be willing to ask detailed and important questions about what they are getting for their money. It is a sobering and eye-opening fact that as many as 60-70 percent of the plans that come to us for the first time include poor performing or underperforming investments. An employer's willingness to blow the dust off their current plan and engage in a thorough, high-quality review is not just the best thing for employees, it can also help avoid costly penalties and unnecessary liability exposure. In the event that the Department of Labor decides to audit a plan, the first request will be to "Show us the results of your last plan investment review."

Published: Fri, Oct 21, 2011

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