Plan Sponsors Can’t Overpay for Plan Services

When I was 13 and I had my Bar Mitzvah, I plunked down about $2,000 in 1985 money for a state of the art Apple IIe with a monochrome monitor. One of the first pieces of software I bought was the top desktop publishing software known as Print Shop. I bought it through mail order (yes, there was life before Amazon.com) for about $30 and I remember that my wealthy uncle bought the very same program for my cousin for about $60. My uncle really thought nothing of the fact that he bought the very same program at double the price I paid. Sometimes people like to overpay.

When I was 13 and I had my Bar Mitzvah, I plunked down about $2,000 in 1985 money for a state of the art Apple IIe with a monochrome monitor. One of the first pieces of software I bought was the top desktop publishing software known as Print Shop. I bought it through mail order (yes, there was life before Amazon.com) for about $30 and I remember that my wealthy uncle bought the very same program for my cousin for about $60. My uncle really thought nothing of the fact that he bought the very same program at double the price I paid. Sometimes people like to overpay.

I have a mantra that I hate to pay retail. I love a good sale. Yet there are some people who thumb their nose at paying at a discount or going to an outlet store. Somehow, it isn’t right for these people to pay less.

The problem is that plan fiduciaries such as plan sponsors and trustees don’t have that luxury. With their fiduciary duty on the line, plan sponsors need to pay reasonable plan expenses for the services involved. Plan fiduciaries can only determine whether the fees they pay are reasonable by shopping their plan to other service providers. If they don’t shop around and overpay in fees, they may subject themselves to liability from plan participants. It should be noted that plan sponsors don’t have to pick the cheapest providers because often, there is a reason why some providers are cheap.

How to determine whether a plan sponsor is paying way too much? Like Justice Potter Stewart would say, I know it when I see it. I have seen the information shown on Form 5500. Whether it’s the plan sponsor paying a Big 4 accounting firm $54,000 for a limited scope audit or another plan sponsor paying a broker 60 basis points (.60%) on a $14 million 401(k) plan, there are plan sponsors seriously overpaying for services. Fee disclosure has made it easier to detect if plan sponsors are overpaying, but again, the only way to determine that is if plan sponsors survey the 401(k) marketplace to see what other plan sponsors are paying.

I have a mantra that I hate to pay retail. I love a good sale. Yet there are some people who thumb their nose at paying at a discount or going to an outlet store. Somehow, it isn’t right for these people to pay less.

The problem is that plan fiduciaries such as plan sponsors and trustees don’t have that luxury. With their fiduciary duty on the line, plan sponsors need to pay reasonable plan expenses for the services involved. Plan fiduciaries can only determine whether the fees they pay are reasonable by shopping their plan to other service providers. If they don’t shop around and overpay in fees, they may subject themselves to liability from plan participants. It should be noted that plan sponsors don’t have to pick the cheapest providers because often, there is a reason why some providers are cheap.

How to determine whether a plan sponsor is paying way too much? Like Justice Potter Stewart would say, I know it when I see it. I have seen the information shown on Form 5500. Whether it’s the plan sponsor paying a Big 4 accounting firm $54,000 for a limited scope audit or another plan sponsor paying a broker 60 basis points (.60%) on a $14 million 401(k) plan, there are plan sponsors seriously overpaying for services. Fee disclosure has made it easier to detect if plan sponsors are overpaying, but again, the only way to determine that is if plan sponsors survey the 401(k) marketplace to see what other plan sponsors are paying.

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ERISA Attorneys have to provide real value

10 years in, I’m glad I went on my own as an ERISA attorney, so I could provide value to clients, instead of being wedded to a billable hour because of a huge overhead working for a law firm. 

I have championed the use of an independent ERISA attorney for plan documents instead of relying on the attorney for the third party administration firm (TPA) or whoever is drafting plan documents for a bundled provider. I stressed the value of an attorney-client relationship and the fact that plan documents are legal documents with legal consequences.

Like with TPAs and financial advisors, there are some good ERISA attorneys and not so good ERISA attorneys. I know this from my experiences working for TPAs and working at a law firm. I will never forget reviewing the work of a California ERISA attorney and an amendment he was trying to make to his client’s matching contribution formula. The amendment was a monstrosity and I quipped to my plan conversion expert that this attorney can write the amendment, but good luck to us in administering it. So when picking an ERISA attorney for a single employer plan, pick an ERISA attorney who works with single-employer plans. So when hiring an attorney for a 401(k) plan, don’t hire an ERISA attorney who only works on union (multiemployer) plans and doesn’t know what revenue sharing is.

 Also, value is an important consideration. If a TPA is offering a pre-approved plan document for $2,000 and an attorney is creating a plan from scratch for $7,000 to $25,000 and the plan belongs to a small or medium-size employer, then I would recommend using the TPA’s services. I also recall an advisor friend of mine who advised me of an ERISA attorney who went through a plan sponsor’s entire $100,000 budget for a full fiduciary review before all the work was completed.

To me, value is such an important concept in terms of all retirement plan services, then that is why my practice is focused on flat fee billing and being competitive with the legal services of TPAs. I stress a flat fee because retirement plan sponsors need cost certainty and because of my disillusionment with working for law firms, who stressed billable hours more than anything else. I have never been a big fan of the billable hour because since billable hours are the most important criteria in judging and rewarding partners and associates; it opens itself to abuse and overbilling. I understand why medium-sized law firms need to bill by the hour, based on the overhead they carry.

 As far as my TPA experience goes, I know it has been fodder for a lot of my material, but my career would have been nothing without it. It brought me so much experience that I have never would have gotten from a law school textbook or the halls of a law firm. Working for a TPA made me think quickly on my feet, churning out plan documents quickly, come up with solutions for problems you don’t read in textbooks, and made me love the idea of flat fee billing for plan documentation. I wouldn’t have traded that experience for anything.

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LinkedIn isn’t some sort of singles dating site

Ever since I started my law practice, LinkedIn has been a very effective tool for me in growing my business. I have been rewarded with meeting so many great retirement plan professionals that have helped me over the past 10 years.

Whether I’ve connected with these professionals or they’ve connected with me, it’s always done professionally. There was never any sales pitch that comes along with an invitation. I know what a financial advisor does and they know what an ERISA attorney does. We all realized that any relationship requires trust. So I’m always shocked when I get an invitation from an advisor or an insurance salesperson that just wants to talk and sell me something or for some reason, thinks that I’ve never worked or referred work to another financial advisor.

Acting like a shifty salesperson by trying to connect with other people on LinkedIn isn’t going to work. Networking is like dating, it will take time to develop a relationship and if you go for the quick move to the basket, you’re going to end stuffed more often than not.

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DOL Relief for Late Salary Deferral Deposits

As a result of the Coronavirus pandemic, I have consistently said that plan sponsors still have their fiduciary duties to fulfill in terms of their sponsorship of the plan and their deposit of salary deferrals as soon as possible.

In EBSA Disaster Relief Notice 2020-01, The Department of Labor (DOL) issued guidance that relaxes the timely deposit of 401(k) salary deferrals: “The Department [DOL] recognizes that some employers and service providers may not be able to forward participant payments and withholdings to employee pension benefit plans within prescribed timeframes during the period beginning on March 1, 2020, and ending on the 60th day following the announced end of the National Emergency. So, the DOL won’t take enforcement action regarding a temporary delay in depositing participant salary deferrals to the plan, if the delay is solely because of the Coronavirus pandemic.

My take is those plan sponsors still should deposit deferrals as soon as possible. If they can’t, as a result solely because of the pandemic, then put a document in place that explains that just in case of a DOL audit later down the line.

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Don’t be a Schnorrer

The first time I heard the word Schnorrer, I was 7 years old and my parents took me on a trip to Mystic, Connecticut. During those days, the Connecticut Turnpike had eight toll booths from Greenwich to Mystic. It felt that every 10 miles, some toll collector was looking for a quarter. So my mother said, Connecticut is a bunch of schnorrers.

Schnorrer is a Yiddish term meaning “beggar” or “sponger”. The English usage of the word denotes a sly chiseler who will get money out of another any way he can, often through an air of entitlement. For me, a Schnorrer is essentially a cheapskate.

When it comes to retirement plans, a retirement plan sponsor or a retirement plan provider shouldn’t be a schnorrer.

A retirement plan sponsor who is a schnorrer is one who selects the lowest cost third party administration (TPA) like a payroll provider and doesn’t care that the administration of their plan is done properly or not. Plan costs should always be a consideration, but so should proper administration is a greater consideration.

For retirement plan providers who are schnorrers, I can remember a certain TPA. As a producing TPA with its own RIA practice, they had clients around the country. They charged a nice and healthy advisory fee and then the managing director of the firm who ran the day to day operation started charging for travel expenses for the client relationship managers to visit clients in assisting them with the fiduciary process. That went over like a led zeppelin. I worked for a law firm partner who had clients around the country and he was insistent that he would never charge his clients for his travel time because he felt that the client would simply want to hire counsel than was more local than to pay him for traveling.

Clients don’t want to be chiseled. They would rather pay a higher flat fee that getting inundated by petty charges.

One of the things I hated most about law firms was their chiseling of clients. It was enough that clients were charged by the hour, which only led to possible abuses of overbilling because law firms stress billable hours more than quality of service. So it’s not enough to overcharge clients for legal services, but the law firms that I was associated with also charged clients for typical office charges like FedEx or copies. When I buy a bagel with olive cream cheese at my favorite bagel store, do they charge me for napkins or a plastic knife? There is a cost for any business to do business, but does a law firm have to pass every nickel in costs to their client.

That is why my practice uses a flat fee; clients should have a fee that they have cost certainty over and with the knowledge that I am not chiseling them. When I drafted a plan document for a client yesterday for $2,000, I didn’t charge them the $8 to mail the plans or the $18 to bind the plans at Staples (my clients would tell me not to be schnorrer and buy a binding machine).

Every retirement plan provider needs to be fully compensated for the work they do. There are costs involved in doing business, but clients don’t need to see every charge added and itemized because you don’t want to be labeled a schnorrer.

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401(k) Plan Sponsor Issues During This Coronavirus Pandemic

My latest article for JDSupra.com can be found here.

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The problem with TPA Referrals

A friend of mine and I were talking about a financial advisor that we knew that had a tremendous and respectable book of 401(k) business and how he uses a well known and ineffective third-party administrator (TPA) for many of his client’s plans.

I believe that a financial advisor with a book of business should always consider the TPA they refer business to because I believe that more clients leave a financial advisor over the terrible job that a TPA did that the advisor recommended than on the actual performance of the financial advisor.

I always point as an example of an excellent financial advisor from the Mid-South who brought a certain TPA I know quite a few cases. They did a particularly poor job of administering the plan and the client was interested in adding an employee stock ownership provision to the 401(k) plan that people call a 401(k)SOP. The TPA didn’t have an idea what a  401(k)SOP was, and not only did the TPA lose the client, but so did this terrific advisor. There can be a high price for a referral made.

Referrals are an important part of the 401(k) plan business and I have been a fortunate recipient of referrals from TPAs and financial advisors nationally and it is incumbent on me to do my best because I want to do the best job possible (as a professional) and I do not want to disappoint the people that have referred me business.

A financial advisor should consider the TPA referral they make. Price should never be the only factor because with most TPAs, you do get what you pay for and a financial advisor should only use a few TPAs because one TPA can’t handle all different types of retirement plans for all different sizes. A TPA is like clothing, it has to be a proper fit for the client and financial advisor because if it doesn’t fit, the financial advisor will get quite a bit of the blame.

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401(k) Plans don’t have to be a period, they can be a comma

Too often brokers and financial advisors think about their client’s retirement plan needs and only think about the 401(k) plan. It’s understandable based on their lack of understanding of retirement plan basics, but it’s not when there is a vast selection of retirement plan consultants and ERISA attorneys who can help advise the client and the financial advisor.

A 401(k) plan is an attractive savings vehicle for plan participants and if done correctly a great employee benefit. However, there are a few plan designs such as new comparability and safe harbor design that can help augment the retirement savings of highly compensated employees. Also, other plans can be added to a 401(k) plan that can certainly add a lot more firepower to retirement savings like a cash balance plan, a defined benefit plan, or in many cases, a non-qualified deferred compensation plan.

Too often, plan advisors just don’t look beyond the 401(k) plan. This is more so when the advisor is using a bundled or payroll provider as the plan’s third-party administration (TPA) firm. Bundled or payroll provider TPA tends to be more mechanized about retirement plans, so I find they are the last ones who will try new plan designs or bring the option of adding another plan. Unbundled TPAs tend not to be boxed into the 401(k) plans, so I find that they think outside of the box more often.

401(k) plans are great plans if done correctly, but there is no reason that a plan sponsor should stop there if their pocketbooks can afford more.

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Survey shows Employers Opting for CARES Act COVID Distribution

Willis Towers Watson conducted a survey showing that a vast majority of plan sponsors are opting for the CARES Act provisions on early distributions and plan loans.

Almost two-thirds of plan sponsors (65%) have increased access to the COVI-19 in-service distributions from participants’ 401(k) accounts while 16% either plan to or are considering doing so this year. 64% are allowing participants to defer loan repayments while 48% increased the maximum amount available for plan loans under the CARES Act. Another 17% are planning or considering making either adjustment this year.

Surprisingly, only 12% of plan sponsors suspended their matching contributions, but 23% are either planning to or considering doing so this year.

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IRS Released COVID Distribution Q&A

The Internal Revenue Service (IRS)N has issued a series of an FAQ questions and answers regarding the CARES Act coronavirus-related relief for retirement plans.

The coronavirus-related distribution and loan rules generally apply only to qualified individuals. The FAQ does not expand the definition of a qualified individual (such as someone who had COVID, negative job impact because of COVID, etc) The IRS and Treasury have received and are reviewing comments requesting an expansion of the definition of “qualified individual.”

The FAQ also stated qualified individual may choose to repay all or part of the amount of a coronavirus-related distribution within three years of the date of the distribution, provided that their plan will accept such repayment. If the qualified individual does so, they may claim a refund of the tax paid for coronavirus-related distribution that they included in income prior to the repayment date by amending their tax return.

The FAQ says that if an employer does not adopt coronavirus-related distribution rules under the CARES Act, a qualified individual who receives a distribution for any other reason (e.g., termination of employment or financial hardship) still may treat the distribution as a coronavirus-related distribution on the individual’s federal income tax return.

There was also clarification on a participant’s certification that they are an affected individual for the CARES Act. The plan sponsor may rely on an individual’s certification that the individual satisfies the conditions to be a qualified individual in determining whether a distribution is a coronavirus-related distribution unless the plan sponsor has actual knowledge to the contrary. While the plan sponsor may rely on an individual’s certification in making and reporting a distribution, the individual is entitled to treat the distribution as a coronavirus-related distribution for purposes of the individual’s federal income tax return only if the individual actually meets the eligibility requirements.

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