Getting into trouble with the DOL and the IRS maybe just bad luck

As an ERISA attorney for almost 19 years, I have seen a lot of strange things that plan sponsors have done to risk the ire of the Internal Revenue Service (IRS) and the Department of Labor (DOL). Many of these strange things could have resulted in plan disqualification and the agent from the IRS or DOL let it pass while I’ve seen plan sponsors make more innocent mistakes and pay through the nose. So sometimes it’s not what you do that counts, but the type of agent you get reviewing your mistake.

In 2001, I handled an IRS audit of a client when I was working with a third party administration (TPA) firm. The IRS agent reviewing the case notices that the owners of the company were taking out loans in excess of the $50,000 limit. That was a major error. A bigger error was the fact that these owners were shareholders of an S corporation and prior to 2002, they weren’t even allowed to take out loans. This was a major error that the prior TPA never caught. The punishment, the illicit loans were treated as taxable, deemed distributions and the company had to pay an excise tax for the value of the money loaned out to these owners. To this day, I am shocked that the agent didn’t want blood from a stone, because he was entitled to get it.

On the flip side, I had a client being audited by an IRS agent. The matching contribution was misallocated because the TPA didn’t allocate it correctly, according to the terms of the plan document they drafted. If we added all the years under review, the error was probably less than $1,000. For some reason, the agent was reviewing this thing for months and demanding that the company pay some sort of penalty. In addition, a shareholder of the company who had no salary nor ever worked for the company was not listed as a highly compensated employee. The IRS agent demanded that this owner be listed as an employee even though he was not and his listing as a highly compensated employee would have helped the client in their discrimination testing.

On the DOL end, I had a client who put in all their defined benefit plan money with a fellow by the name of Bernie Madoff. The client, for all purposes, had no investment advisor (since Bernie was busy, running other things) and no investment policy statement. The DOL agent got a promise from the client to make up all the benefits to the employees and that was that.

On the flip side, an owner of a bankrupt business who was entitled to the bulk of the assets from a defined benefit plan was being sued by the DOL because the owner’s actuary failed to produce valuation reports and distribution forms for when the owner was receiving her benefit. While she certainly breached her fiduciary duty by not watching the actuary, this happens all the time when there is a terrible TPA. Was this worth a lawsuit? Not in my mind.

Whether a plan sponsor gets their hands slapped or pay through the nose for plan errors and breaches of fiduciary duty may not depend on the offense, but the DOL or IRS agent reviewing the case. Sometimes, the plan sponsor’s fate depends on the luck of the draw.

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Stressing Value is a better proposition than stressing cost

Retirement plan providers need to look at their fees and determine what work they are doing for their retirement plan clients because like me, they may try to break down their plan expenses into a day rate and try to figure out what they actually do.

Value is one of the more important concepts in business and plan providers (thanks to the transparency of mandatory fee disclosure) are under pressure to show their value to plan sponsors. By showing value, plan providers have the power to dissuade plan sponsors from every contemplating someone else from taking their spot as a plan provider.

When I talk about the Retirement Plan Tune-Up (the legal review for plans for only $750, cheap plug here), I always talk about the client who asked me to do one for them. Plan was safe harbor 401(k) and the plan administration looked good. On this $14 million plans, broker was being paid about 60 basis points, which was pretty high for a plan of that size. When I asked for any plan education materials, investment meeting minutes, or an investment policy statement, I was told that the broker never provided them to the client. Let’s just say that based on my advice, the broker was replaced by a 3(38) fiduciary for about half the cost. Needless to say, this broker didn’t show value.

Too many retirement plan providers focus on cost and I think that’s not a great marketing plan because saying you’re cheaper isn’t going to turn a lot of heads especially when there is more discussion and concern about fiduciary liability for plan sponsors. Stressing value is a better marketing plan; it shows plan sponsors how important they are and how much liability protection for a reasonable fee by using this provider. A plan provider can always stress low cost in relation to the competition as long as they stress the value of the services provided especially because low fees is often equated with the no frills and plan sponsors can’t afford plan provider that don’t offer frills.

Showing value is one of the most important concepts in retaining clients and it’s better to market it than just saying you’re cheaper.

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Absurd Things About 401(k) Plans That Are Actually True

My latest article on can be found here.

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Understand the other side

One of the great talents that most people lack is having empathy. I think empathy is an actual talent is because understanding what other people feel is something that can certainly give you a leg up in business.

You really have to understand where clients and other plan providers are coming from and understand how your service and explanations may cause them alarm. No matter how you act in business, you have to understand that your decisions have consequences and all people have feelings. Raising fees, making excuses, adding lines of business, hiring and firing staff, these are all business decisions that can negatively impact your business.

The point here is that any business decision you make is a tactical strategic decision and you have to understand the impact that the decision will have.

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My long running issues against self-directed brokerage accounts

I used to joke that the only clients that used to ask about self directed brokerage accounts were medical practices and law firms. I stopped telling the joke when so many advisors told me that was the truth. My opinion about self directed brokerage accounts is like my view on smoking, it’s dangerous for your health and if that’s the path you want to take, so be it.

Since I work as an attorney for plan sponsors, I’ll be a little more specific. First off, most participants that opt for self directed brokerage accounts do worse than participants who utilize the investment options selected by the plan sponsors, as advised by a financial advisor. Second, I think there are compliance and liability issues for plan sponsors in offering them.

A major problem that plan sponsors have with self directed brokerage accounts is that they only want to offer it to highly compensated employees. Problem is there is something called benefits, rights, and features, meaning you can’t offer a benefit, right, or feature that discriminates in favor of highly compensated employees. A discrimination test has to be done; so only offering to highly compensated employees won’t work. Yes, I worked at a law firm where only the partners had the opportunity to do that and since I mentioned it, now you know why they didn’t invite me back to fix their plan when they had compliance issues a few years back.

My other problem that I see for the plan sponsors is that I think most plan sponsors don’t do enough to cut down their liability in offering these accounts. I think plan sponsors need to advise participants interested in their accounts about the dangers of brokerage accounts within 401(k) plans and I think they should request a hold harmless agreement for those who opt for it. I always remember the guy who tried to kill himself by jumping in front of a New York City Subway who received a settlement from the MTA for injuries he received because he survived. Plan sponsors should put guidelines and agreements in place to minimize liability.

Another issue is that self directed brokerage accounts raises fees for 401(k) plans that offer revenue sharing funds because revenue sharing will not be applicable to individual stocks, bonds, options, or ETFs offered within a self directed brokerage account. Also, a financial advisor for the plan may charge a greater amount in fees because the financial advisor cannot assess a fee against self directed brokerage accounts if they don’t serve as the financial advisor for those accounts.

All and all, I don’t think brokerage accounts are a good fit 401(k) plans.

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The Overselling of Services and they will find out

For a long time, I didn’t like to go to the dentist. It would be 4 years between cleanings and it was silly because I’m the guy who doesn’t have tooth issues because I don’t have a sweet tooth. My only issue is that I hate to floss.

So right before I got married, I decided to have my teeth cleaned because the tartar buildup was noticeable. I decided to finally use my employer provided dental insurance and get an appointment. I choose a local dentist who took my plan.

The dental technician had my teeth cleaned and remove all the tartar. She then tried to push me for further scaling and that was something not covered by my insurance. I thought it was odd that she was trying to push a service that no dentist did before and not one did after.

A few weeks ago, there was a discussion about this dentist on a Facebook group and there were dozens of complaints from former patients how they felt they were constantly being oversold services not covered under insurance and actually being sold for services that should have been covered under insurance. The dental practice started to look like a mill for insurance abuse.
As plan providers, you may feel the need to sell further services. That’s not wrong as long as those services are needed and not just an attempt to squeeze another nickel from clients. Don’t nickel and dime the clients, don’t charge for them for every little thing. Only charge what is necessary and never sell them something they don’t need. The reason is because it eventually they’ll find out you’ve been taking them for a ride.

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EBSA means Business

When I started my own practice in 2010, some critics said I was selling fear because of issues I had with fee disclosure, revenue sharing, and other fiduciary issues. History ended up proving me right.

In 2016, the Department of Labor (DOL) through their Employee Benefit Security Administration (EBSA) closed 2,002 civil investigations with 1,356 of those cases (67.7%) resulting in monetary results for plans or other corrective action.

EBSA recovered $ 777.5 million for direct payment to plans, participants and beneficiaries. Since EBSA is not just focused on civil penalties and actions, 96 people were indicted and 75 people either plead guilty or were convicted in connection with crimes revolving around retirement plans.

So the DOL is certainly cracking the whip and plan sponsors can ill afford to continue to ignore their plan.

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Stuff in a 401(k) Plan That Doesn’t Look Right

My latest article on can be found here.

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The Appearance of Impropriety

For some reason, the unincorporated village I live in has its own Sanitation District where a lot of unethical things have gone on in the past where a father and son once ruled with an iron fist. One man challenged the status quo after Hurricane Sandy destroyed many Sanitation trucks and was elected.

The new Commissioner was heralded as a reformer, but it was clear that he took advantage of an opportunity to cash in on his own. This Commissioner didn’t take his Commissioner’s stipend because it might have affected his government pension. So to supplement his own income, he decided to take a job as a fire investigator for a company that did business with the Sanitation District. He knew there were issues with that arrangement and stated that he would recuse himself from any matters regarding his employer. Instead, a year later, he actually made a motion to award his employer a contract with the Sanitation Commissioner. The Commissioner has made a laundry list of excuses because he claims it wasn’t a real conflict and he made promises to recuse himself in the past, but it doesn’t change that he awarded his employer that contract by not just voting, but my making the motion.

The point here is that there are certain things you can do as a plan sponsor that may not be a prohibited transaction or illegal, but I maintain that any suggestions of impropriety will insinuate that there is impropriety. You should avoid any type of transactions that may give you the idea that something is not on the up and up. That’s why hiring a relative as a financial advisor or using a financial advisor that works for the bank giving you a credit line are things that I suggest you avoid. Otherwise, like the Sanitation Commissioner, you’ll have a cloud that will follow you all the time.

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Know whether it’s in you

I worked 9 years as an ERISA attorney working for third party administration (TPA) firms and that was an excellent start to my career because I really learned the nuts and bolts of plan administration. There are books about ERISA and qualified plan that are great, but there is no substitute for on the job training because there are answers to plan questions and issues you’ll never find in books.

After 9 years working for TPA firms, I worked about three years for two different law firms with the hopes of becoming a law firm partner. I learned the hard way that I wasn’t cut out to be a law firm associate and I’d never make partner unless I started my own firm.

I met an old friend who was one of the best client relationship managers I ever met because he had great interactions with plan sponsors and their decision makers. One day, he tried sales and after a couple of years, he realized it wasn’t for him. It takes a good man and a good woman to realize when something you’re doing isn’t working out. It was a dream of mine to be a major league baseball player, but when I batted .000 when I was 11, I kind of knew that wasn’t the path for me.

When you are a crossroads in your career like I’ve been, remember to take stock and realize what’s working with you and what’s not.

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