Using 5500 Data for Offensive and Defense Business Development (Part 2): Finding Your Target

Now that the east coast is covered in snow, it’s the perfect time to continue my series on Prospecting the Federal Form 5500, this time focusing on how to find the targets you identified in the first post of this series.

With hundreds of thousands of plans out there, it can be hard to find those plans that are right for you to reach out to. Instead of spending time, effort, and even money contacting leads with little chance of conversation, you need to focus your attention on leads that would be more receptive to your approach.

WHAT ARE RED FLAGS?

Red flags are a series of indicators the experts at Judy Diamond Associates identified to aid in locating “in trouble” plans. These red flags not only identify a potential issue in a plan, they also act as tags which can be searched for. Which 19 separate Red Flags to choose from, it is easy to tailor one’s research. Included in our red flags are:

• High Average Account Balance
• Corrective Distribution Issued
• Insufficient Fidelity Bond Coverage
• Highest Admin Fees

For more on our red flags, check out Michael Iapalucci’s outstanding new series focusing on our Judy Diamond Associate’s red flags.

PLAN SCORES

Knowing how a plan stacks up against other plans in a state or industry can be critical in identifying trends in your market. Therefore, having access to tools that quickly aid in plan comparison is a must! Plan scores provide you with seven metrics by which a plan can be compared to other plans. Additionally, JDA includes an overall umbrella score for a more high-level analysis. These scores help you understand the landscape around the plan so that you are better able to develop your pitch, or guide your business development efforts.

ADVANCED SEARCH

Now that you know what your current clients look like, you can use the advanced search feature to find other companies that match! This may seem a challenge since there are over 450 fields of data in a 5500 form. There are many options including Participant or Asset Total, to specific Red Flags, to Broker or Vendor Names. However, the advanced search box allows you to quickly narrow the field of leads from hundreds of thousands to a more manageable number of perfect leads.

PERFORMANCE BENCHMARKING

Knowing how a plan performs against other plans very helpful. It is a good idea to research a plan to determine if they really are a good lead for you. Performance-based benchmarking is a great way to accomplish this. Identifying a plan that historically underperforms plans in your region or your own book of business helps you focus your attention.

THE JDA ADVANTAGE:

These are just a few of the tools within Retirement Plan Prospector Prospector Plus tool designed to bring the experience of the JDA Team to your office. These tools are easy to learn, quick to use, and, most importantly, they provide results. There is a reason our clients stay with us year after year.

While the Form 5500 is an incredible treasure trove of useful and informative data, there’s a whole other level of information that sometimes gets overlooked when talking about the 5500. The schedule of assets and the supplemental attachments to the 5500 provide a ton of insight on the plan’s structure and administration. Unfortunately, the Schedule of Assets and supplemental attachments aren’t available for every 5500, as companies that file the 5500-SF are not required to disclose that information. We’re going to walk through a typical example of a Schedule of Assets and supplemental attachments to show you how you can use this information to your advantage.

Schedule of Assets:

While you will find the Schedule of Assets at the end of a filing, it’s actually a section on the Schedule H, the schedule that has financial information for the plan. The Schedule of Assets is a part of the Schedule H Line 4 compliance questions, which have many disclosures that a company might potentially need to fill out. The most common are for Line 4j, which is the Schedule of Reportable Transactions, which is required when a plan completes a transaction worth 5% or more of the plan year-end assets, and Line 4i, which is the Schedule of Assets Held at Plan Year. The Schedule of Assets is the most interesting for an investment advisor looking to learn more about a plan. You’ll get a full breakdown of all the investment vehicles the plan is invested in and the breakdown of assets invested in each separate fund. This allows you as an advisor to look at the fund lineup for a prospective client’s plan and plan your sales pitch accordingly while making you look confident and diligent in the process.

Supplemental Filings:

The supplemental filings are usually comprised of two different sections: the independent auditor’s report and the financial statements. Both can be very useful when looking for talking points when approaching new prospective clients.

Auditor’s Report:

Typically, the auditor’s report will come back with a favorable opinion or a determination that the auditor was not provided with enough information to make an opinion. That covers a majority of the audit reports, but it’s still worth skimming through to look for any language that implies errors or fraudulent activity. If there are any severe mistakes or fraudulent activity associated with the plan, the plan sponsor will be more keen on switching to a new provider.

Financial Statements and Notes to the Financial Statements:

The financial statements will contain a lot of the same information that the Schedule H has on assets and liabilities. The notes to the financial statement, however, are much more useful. There, you’ll have a document akin to a plan summary, where you can find out all the information on participation eligibility, employer match rates, investment strategy and more. Reading through that information will allow you to make recommendations on new plan strategy with the client and prepare a custom presentation tailored to the individual client.

Judy Diamond Associates has all of the attachments to the 5500 available in our Retirement Plan Prospector and American Directory of Group Insurance Plans. Once you’ve identified a plan you’re interested in prospecting through tools, you can get the extra data you need to go above and beyond and clinch the deal.

Retirement vs. Health & Welfare when Examining 5500 Data

This article is going to focus on how the disclosure differs for two distinct industries, retirement and welfare. Sponsors fill out a different Form 5500 for these plans and may even file a separate 5500 for multiple types of retirement or welfare plans. A great example is that a Sponsor might have a defined benefit plan and a defined contribution plan. That would result in two different filings with the Department of Labor.

Despite being utilized by both retirement and welfare plans, 5500 data has a lot in common between these two distinct groups. The sponsors who file are primarily private sector employers. That means that government agencies and employers are exempt, whether it’s at the city, county, state, or federal level. There’s a gray area when it comes to non-profits. Those organizations typically file a Form 990 about their expenses and funding, but not a Form 5500. They can elect to file if they feel it is advantageous for them to do so. It’s always worth a shot to search for them!

Many Schedules are filled out by both retirement and welfare plans. The publicly disclosed Schedules are A, MB, SB, C, D, G, H, I, and R. Not every plan files each Schedule though. It depends on the services utilized by the plan, its funding, and how it’s structured. Below we discuss some of the significant differences between the two plans. Most of us are solidly working within one industry, such as retirement, so you can jump to the section that applies to you.

Retirement Plans

You may have noticed while researching prospects that a behemoth like Acme Explosives disclosed their schedule of assets, an auditor’s report, their annuity carrier and vendors like their record keeper, yet Mom & Pop Shop USA has none of that. Absolutely maddening!

What you’re seeing is the Form 5500-SF, an abbreviated version of the Form 5500. In 2009 the DOL created a short form version of the 5500 to reduce the burden on companies with under 100 participants. With the exception of the Schedule SB, filed by smaller defined benefit plans, sponsors are not required to fill out schedules.

The Schedule A

If a plan has an insurance contract, they need to complete this Schedule. It’s where a carrier and their brokers are disclosed. When disclosing annuity contracts, they fill out Part II for the value of their investments.

The Schedule C

Retirement plans often use this Schedule to list their record keepers, brokers, investment managers, accounts, and so on. Section 2 is where service codes describe what they’ve been compensated for and we can see how much they received. Retirement plans are also more likely to make use of Sections 1 and 3, where we can see if a provider was eligible for indirect compensation and the formula for it.

The Schedule H

Only plans with over 100 participants file this Schedule. It has the same financial disclosure questions as the Form 5500-SF yet many more. You’ve probably heard that these filings also have a Schedule of Assets. As of 2018, the DOL doesn’t have a standard document for this supplementary Schedule. Instead, Sponsors submit attachments which are viewed as PDFs. These are always available in the Retirement Plan Prospector tool once you are looking at the Plan Details pages.

Health & Welfare Plans

Health and welfare plans can cover a wide variety of benefits. As long as they’re ERISA-qualified, it’s likely you can find it. Unlike with retirement plans, the minimum to file is 100 participants. Note, it’s not employees, but the number of individuals in a plan. If a sponsor has under 100 participants in their plan, then they’re exempt from filing a Form 5500.

The Schedule A

Like many of the Schedules, this one can be filled out by both retirement and health and welfare plans. On welfare returns, the Schedule A is often the star. Plans with insurance policies file this schedule and report the carrier, lives covered, premiums, benefits insured, and, if applicable, the brokers who sold the policy.

The Schedule C

When a welfare plan has organizations or individuals who are not insuring benefits, yet providing services to the plan, they’re disclosed here. The most commonly filled out Section is 2, where we see provider service codes and compensation values. Typically this includes third-party administrators, consultants, ASOs, and accountants. Users who work with self-funded plans make more use of this Schedule because it provides clues as to how the plan is managing their benefits.

The Schedule H

Unlike retirement plans, this isn’t as commonly filed. Roughly 10% of the plans in American Directory of Group Insurance have this Schedule. The general rule of thumb, when a plan is unfunded, they’ll file a Schedule H.

The Early Days of Pension Plans

Private pension plans had been around in various forms since the early 1890s, but first real regulation of pension plans came with the Revenue Acts of 1921, 1926, and 1928, which included three major provisions that helped define retirement plans as we know them today. These acts allowed corporations to deduct contributions made to pension plans from their reported income, and allowed pension funds to accumulate income tax-free, and deferred taxes on the participants until the pension was distributed. These benefits were accompanied by discrimination testing and financial audit requirements.

One of catalysts that led to the enactment of ERISA was the closure of the Studebaker-Packard Corporation car manufacturing plant in South Bend, IN in 1963. The pension had promised generous benefits for the participants, but the plan was severely underfunded and wasn’t able to cover the benefits for many of the employees vested in the plan. The failure of the Studebaker pension plan, along with a high profile conviction of infamous Teamsters boss James Hoffa on pension fraud, drew a lot of attention to pension plan corruption and mismanagement and spurred talk of reform and regulation in Washington, DC.

The Introduction of ERISA

It took ten years for ERISA to come to fruition after the Studebaker pension failure. Senator Vance Hartke of Indiana (not coincidentally the state where the Studebaker plant was located) was the first to propose new legislation in 1965 that would provide for pension insurance and create the Pension Benefit Guaranty Corporation (PBGC) to collect the premiums from insured pension plans. The PBGC would pay out if a pension plan were to close and not have the funding to cover the amount owed to participants in the plan. Senator Jacob Javits was the architect of the main ERISA law, as he sponsored a number of different laws in the late 1960s that would later become key components of the final version of ERISA, with regulations touching on participation, vesting, funding, reporting, and disclosure rules for private pension plans.

Companies and labor unions both fought the passage of new regulations for pension plans, uneager to take on the challenge of more closely monitoring their pension offerings. Faced with the prospect of states enacting different sets of pension regulations that would have proved difficult for many companies who operated in multiple states to navigate, businesses warmed to the idea of national pension regulations. ERISA was passed by both houses of Congress by March 1974 and was ultimately signed into law in September 1974 by Gerald Ford.

“Who’s Who” and “What’s What”

The act gave regulating power to three agencies: the IRS, the PBGC and what is now known as the Employee Benefit Security Administration, or EBSA. As of the 2016 filing year, ERISA covers over 700,000 retirement plans and over 50 million active plan participants.

The Form 5500 was created by these three agencies to collect the disclosure information required by ERISA, and is the source of the vast majority of the data you’ll get from Judy Diamond Associates’ prospecting tools.

It is my pleasure to announce the launch of the Judy Diamond Associates official blog site. While we have always included resources and research about employee benefits in general and the Department of Labor Form 5500 in specific, we are now doubling our efforts to provide our clients and the community as a whole informative and insightful commentary related to all things 5500.

By the way, if you have not already downloaded our free 2018 401(k) Benchmark Report, please check it out by following this link.

Our goal here is to provide information that can help you gain an edge on your competition by educating you about the intricacies of the data that is available from the Form 5500. This includes not only how it can be used for prospecting but also for market sizing and protecting your business from poachers trying to steal your clients.

Some of the topics you can expect to see in future posts include:

• CPAs, the 5500 and the 80 – 120 Rule
• Limitations in the data available in the 5500 and how to get around them
• How to use Red Flags, the Plan Score and Talking Points to highlight your competitive advantage
• How bench-marking can be used during investment reviews
• And, an answer to one of the most frequently asked questions, “Who is Judy Diamond? Is there a real person behind the name?”

Those are just a few of the ideas we have in mind. If you have any questions or ideas you think would be a good topic for us to address, please contact me at the email below.