The Rosenbaum Law Firm P.C. Blog

I had the pleasure of offering some comments to my friends at FiduciaryNews.com about one of my favorite subjects, participant directed brokerage accounts in 401(k) plans.

Choice can be a good thing with a 401(k) Plan, but too many choices aren’t  a good thing. The problem I find with brokerage accounts is three fold.

1)   Plan sponsors actually need to vet brokerage account providers, as well as providing investment education and/or advice to those who partake in these accounts. I don’t think any hold harmless agreements by a plan participant who invests in these account will do any good because a plan sponsor has a fiduciary duty to all plan assets. It also doesn’t help that plan participants who use brokerage accounts do worse than participants who use the plan’s core fund lineup.

2)   While most of these firms who offer brokerage accounts are professional services organizations, many tend not to offer it to all participants (which can bring up plan discrimination as it pertains to benefits, rights, or discrimination). I once belonged to a 401(k) plan where the partners had brokerage account, but associates and staff weren’t given that option.

3)   Whether it’s through litigation or regulation, I think there is a lot of unsettling fiduciary liability issues that may come up further down the pike where plan sponsors will regret offering brokerage accounts.

Just my two cents and my bias against participant directed brokerage accounts within 401(k) plans.

My latest JDSupra.com article can be found here.

So much of any industry is dedicated to marketing, because marketing can help a company sell a product or service just based on how it’s marketed. Whoever sold the pet rock is still probably laughing all the way to the bank.

In the retirement plan industry, there are quite a few marketers who can take a normal product or service that most providers offer, but make it sound more important than it really is. Sort of like Big Mac’s special sauce, which we all know to be Russian Dressing.

I remember a few years back of a third party administrator that I work with who developed this special professional services pension plan which was geared towards professional service companies that offered a pension with participant direction. All it really was, was a cash balance plan with participant direction (before PPA 2006 made participant direction in a cash balance plan impossible).

Look at the folks who offer fiduciary warranties where the provider neither serves as a fiduciary nor offers a warranty that will ever be used. As a friend of mine pointed out, the insurance providers who offers these warranties make money by insuring risk, so what does it say about those fiduciary warranties if they are free?

I can’t wait for the ERISA 3(16) or 3(38) fiduciary to call themselves a retirement plan concierge or butler to make what they do sound better for the masses.

The point is that as a retirement plan sponsor to make sure what you are getting in plan services, because a euphemism is a euphemism and that doesn’t protect you more than what contractually is being offered.

With every positive development in the retirement services industry, there is always going to be a few jokers who will take advantage of the situation to the detriment of the plan sponsors clients they are supposed to help.

Concern about fiduciary responsibility have led to certain providers in offering 401(k) fiduciary warranties where they don’t serve as fiduciaries nor do they warranty against anything you are likely to get sued on.

The proliferation of financial advisors serving as ERISA 3(21) fiduciaries and ERISA 3(38) investment managers have ked to many inexperienced or high priced providers in the space who take out a chunk of their responsibility and liability in their provider contracts. I had heard of an ERISA 3(38) investment manager calling them a limited scope 3(38) fiduciary that makes absolutely no sense when an ERISA 3(38) investment manager has discretionary control and by the nature of that control, must bear the responsibility and liability that goes with it.

The same can be said with ERISA 3(16) administrators. There are a few third party administrators (TPA) willing to offer that service and several TPAs who don’t see the value of that service. The value of the service like anything in this business is all about reasonableness, are the fees reasonable for the services provided. Someone remarked about an ERISA 3(16) administrator charging 45 basis points for their services. That’s a lot of money for something that doesn’t seem worth it. There is no reason an ERISA 3(16) administrator should make more than a TPA or more than what most ERISA 3(38) investment managers charge. I understand that there is liability that goes with be a 3(16), but the TPA and the investment manager do the bulk of the work and the purpose of a 3(16) is to assume the plan sponsor’s monitoring of these providers. Should the guard at the bank make more money that the bank manager? No, nor should the retirement plan guard (the 3(16)) make more than the folks who do the bulk of the work.

Since there are many TPAs not willing to offer the 3(16) service because they don’t see the value or the profit margin, a couple of my friends that I worked with in the TPA space a few years back and myself are considering developing an ERISA 3(16) service that does absolutely no TPA work or any investment advisory work.  The 3(16) service would be a standalone service that these TPAs who want no part of the 3(16) business can refer plan sponsors to, so they can maintain a competitive balance by recommending a 3(16) service totally independent from their role as TPA. Fees will probably be a few basis points (less than 10) or a per head charge (depending on the plan sponsor’s needs). Any interest, you know where to reach me.

As with any retirement plan service, a plan provider needs to find the good ones from the bad ones. It’s often difficult, but diligence in their fiduciary duty will let the plan sponsor make the right choice.

In my previous life (long story), I had a brother in law.  Yes, one of those. Despite similar interests, we were never friendly mainly because he had the personality approach that he didn’t care for anyone else. He wasn’t shy with his relatives; he just didn’t care for most of mine. When he was dating my sister, I had tax preparation service where I drafted income tax returns for a flat fee of $150 (it wasn’t very successful).

My sister wanted to use my tax software to complete my brother in law’s (he was the boyfriend at the time) taxes. I said that she could prepare the return as self prepared, but there was no way that I would sign the tax return. I felt the fact that he could use my tax software for free was enough; I didn’t have to sign it for it to be filed.

My point of refusing to sign the return was unpopular, but felt that it had to be taken. My view is that my time and work is valuable and if you give you something for free, it really has no value to the one receiving that free service because they feel that it’s not worth anything if they get it for free. Free services is not the same as getting a free IPad for signing up with a cable provider because people can assign a value to an IPad and have no idea the value of a service.

So when I hear plan providers giving away free services such as a free investment lineup review, I have a lot of fear that these providers are giving away something of value to plan sponsors who don’t think it has any value. A financial advisor giving away a fiduciary analysis to a potential client plan sponsor probably finds a lot of time that they gave away something for free when that plan sponsor retains their current advisor.

Believe me, I know. As you know, I do a plan review called the Retirement Plan Tune-Up for $750. While I think the price can’t be beat for the level of review, I have not made as many of these reviews as I think the markets warrants it. A year or so ago, I was contacted by a Northeast registered investment advisor who suggested we could team up on these reviews to his current or prospective clients. He asked if I could do a Plan Tune-Up for a prospective client with this first review being on the house. I did it for free and it’s been about a year and a month since I have heard from him. I gave away something of value for free and got the short end of the stick. Needless to say, that was the first and last of the free Retirement Plan Tune-Ups.

So my two cents is that any service you’re interested in giving it away for free, ask for some remuneration even if it’s negligible because it at least demonstrates to the plan sponsor that it has some value and therefore, can’t be chucked away as yesterday’s garbage.

My latest JDSupra.com article can be found here.

After Hurricane Sandy decimated our house with five feet of water downstairs, we needed to replace our hot water heater and furnace. Our plumber got us a new hot water heater, but couldn’t find a new furnace. A neighbor had a friend who was an HVAC contractor in Rockland County who could get us a furnace. This contractor claimed that his Rockland County HVAC license allowed him to work in Nassau County because they didn’t license these types of contractors. Since the goal was to get back in the house as quickly as possible, we hired him based on his word.

After this HVAC contractor stiffed us out of the air conditioner condenser as contracted, we discovered that his contractor lied.  He needed a license out here and all the work he did out in our neighborhood was illegal. Had he been licensed in Nassau County, getting the money back for the condenser wouldn’t require a small claims action.

Not hiring a licensed contractor is our poor luck and we bear the burden of that.

When you’re a retirement plan sponsor, you don’t have the luxury of lamenting about that mistake, you’re on the hook for hiring professionals who lie about their credentials because you had a fiduciary duty to check them out. If you hire a TPA who lied about their experience or a financial advisor who isn’t registered, well you’re on the hook for breaching your fiduciary liability.

The rational person in me never understand why any professional would like about their academic and professional achievements, but the rational part of me understands because so few people bother to check it out.

That’s why this industry had someone who claimed he was an independent fiduciary because he told us he was one. This fellow built a name for himself; did a heck of lot of promotion, but this fiduciary had “no clothes”. His claims about his experience were either exaggerated or fraudulent.  He probably was able to get away with a lot of his crimes for so long because no one (except for a few reporters) was able to expose his inflated and fraudulent credentials. Unfortunately for many plan participants, that came too little, too late.

I am an ERISA attorney for almost 15 years, admitted to practice in New York, but don’t take my word for it, check it here.  Even if you hire me because of my no nonsense flat fee approach to retirement plan law, you should check it out.

I am a very opinionated guy, I’m sure you have noticed. I’ve never been one to go with the flow, heck I’m a New York Mets fan and I have never watched an episode of Game of Thrones, Mad Men, or The Walking Dead. My opinion has ruffled a few feathers over the last few years, but I am who I am and I don’t think I’d have a successful practice without my opinion.

Too many people in the retirement plan industry want to think that everything is great and I’m too honest to admit that everything is fine when it’s not. So I’m going to get something off my chest and I’m sure some feathers will be ruffled.

A year ago, the Department of Labor (DOL) issued an advisory opinion that decimated the use and value of what was once termed “open” multiple employer plans (MEPs). Basically, the DOL stated that for a MEP to be considered one plan and to have one 5500 issued that would cover all adopting employers, there would have to be some sort of nexus, a connection between all adopting employers and the connection can’t be that they all use the same provider.

The reason is that the advisory opinion was issued by the DOL was that one MEP decided to seek a ruling. When I was a student in college, I took a political seminar taught by Morton Blackwell’s Leadership Institute and Morton’s #1 motto was that you never give you a burecarat a chance to say no. If you ever saw how the MEP was set up and how high the fees were, you knew that being pigs at the trough, that a bureaucrat would say no to them if given a chance.

The plan sponsor of the MEP was affectively a prop set up by the plan provider; it essentially was the financial advisor’s later ego. The fees were huge, maybe because it used an insurance company platform, maybe not. An ERISA attorney who I have tremendous respect for submitted the Plan to get it approved as an Open MEP because the plan apparently wanted it settled whether an Open MEP could be recognized as a single plan (so a single Form 5500) because some DOL officials thought otherwise.

Thanks to this MEP for trying to get DOL approval, but it ruined the MEP business for everyone. Many providers including myself who put together MEPs that did what they were supposed to do, offer limited liability and lower plan expenses were forced to rearrange their plans in order to meet the criteria set forth by the DOL in that advisory opinion.

I believe the application by this MEP was reckless because this was not the type of Open MEP that should have sought approval because its fees were exorbitantly high (the opposite of what MEPs are supposed to offer) and the plan sponsor was a subsidiary of the plan provider, it essentially was a legal fiction, a puppet company only created to serve as a plan sponsor.

Did this Advisory Opinion cause the MEP provider much harm? Not really because they are at it again. Their MEP is now a MEAP, which they call a Multiple Employer Aggregation Plan (MEAP), which pretty means a MEP with a 5500 form for each employer and the plan sponsor serving as the ERISA 3(16) administrator. The fees are as high as ever. For example, a $900,000 plan that joins the MEAP as an adopting employer pays 120 basis points plus $23 a participant. The financial advisor gets a 40 basis points trail, but luckily that is embedded in that 120 basis point asset based fee. If you are an adopting employer who has no assets, well you’re out of luck because you pay 230 basis points. Remember that doesn’t even include the expenses of the investment options under the Plan.

A leopard can’t change its spots, so a MEP that charges sky high fees just becomes a MEAP charging sky-high fees. A year later, the DOL and IRS have still not resolved the discrepancy between the two of them on whether Open MEPs can exist as they did before last year’s Advisory Opinion. Unfortunately, the MEP leopard lives on while other MEPs who charged minimal fees and were great examples of how MEPs should be were forced to dissolve. Tag, they’re still it. Actually the adopting employers are it or are they just paying it? Feel free to discuss.

Last weekend was the final game for my daughter’s second grade soccer team in Oceanside, New York, which is nice because so much of the community is involved.  It’s been a trying season since so many of us including our family were decimated by Hurricane Sandy.

While I was at the game, I noticed the Human Resources Director at my old law firm and I never forget a face. I didn’t say hello because one of my shortcomings in life is that I can hold a grudge.  My grudge stems from the law firm’s 401(k) plan. When I got there, I was asked by the firm’s managing attorney to take a look at the plan with the plan’s trustees, which are the aforementioned HR Director and a property tax partner.

The plan was in absolute shambles, again under the direction of the HR director and this property tax partner (who I had a strike against already since he’s a New York Islanders fan). The 401(k) plan had $25 million in assets and a law firm partner who claimed to be an ERISA attorney (but had nothing to do with this plan). Yet the plan had no financial advisor, no investment policy statement, no investment education given to plan participants, and no change in the fund lineup. This was a disaster of a plan and probably one of worst run plans I have ever come across, especially for that size.

I scared the two trustees into action and told them they needed to hire a financial advisor because that could help with the bulk of the plan’s problems. I gave them quite a few names that would be excellent to talk to. I was never consulted about the advisor selection and they picked an advisor that I did not recommend.

While I suggested a third party administrator change (there was an excellent TPA two floors up from our Garden City offices), they made no change. They later made a change without letting me know until it was done. I felt embarrassed and betrayed because of my 9 years of working for TPAs and I could have given insight as to which providers might be a good fit. The fact is that I like the provider and the salesperson for that provider is a friend of mine is immaterial to me, I just felt it was a slap in the face.

Part of the grudge was that I was the 401(k) expert, yet the same people (the plan trustees) who ran the plan into the ground with no background in the retirement plan business thought that they knew better than me and it was best to keep me out of the loop especially when I had my money in this plan.

I left the firm maybe 4 months later and one of my best friends in the business, the salesman for that upstairs TPA knew I wasn’t long for that place especially after than “insult”.

Retirement plan experts are there for a reason. If you are a retirement plan sponsor or another plan provider, it’s important to listen to the retirement plan experts for their input. You don’t have to take their advice, but it’s important to listen and then make the decisions based on or not based on the advice.

I should be a better person and let it go, but quite honestly, I don’t think that I was insulted in my almost 15 years as an ERISA attorney as I was when that HR director purposefully kept me out of the process that I initiated to save our 401(k) plan.

My latest newsletter geared towards retirement plan professionals can be found here.