My latest article for JDSupra.com can be found here.
I always jokingly say that the reason I try to avoid hiring employees is that I once was an employee too. However, part of the problem is that I worked for many employers who didn’t understand their role and the role of their employees.
Too many employers don’t have the ability to censor themselves especially when it comes to the sometimes disgust of running a business and employee really don’t want to hear that.
If you’re complaining about billing and the employees know you’re going on a luxurious trip in the not too distant future, employees don’t want to hear your complaints.
If it’s snowing badly and employees can’t get in because of traffic or public transportation issues, employees don’t want to hear how if you came in the morning, you should too because an owner has more dedication to showing up.
Employees don’t want to hear about how you had to use your credit card to pay something for the client when you’re throwing a lavish wedding for your son.
Too many employers think their employees want to know everything and they really don’t want to hear your complaints. Trust me, I was an employee once too.
Many larger third party administration (TPAs) firms, especially those owned by insurance companies are feeling the heat and they’ve been feeling the heat of competition ever since everyone had to fully disclose fees thanks to fee disclosure regulation.
So many of these providers are pushing services offered by other providers especially in the §3(21) and 3(38) space of financial advisory firms. Everyone knows how much I like ERISA §3(21) and 3(38) fiduciaries, but I find a problem with this push. These TPA firms tend to only push the service of one provider and I’m all for choice for the plan sponsor to select the provider they’re most comfortable with.
The TPAs think they’re adding something special to their service, but I think they’re adding a headache because in my mind, slowly pushing the service of another provider may unwittingly make the TPA a fiduciary no matter how much they may disclaim in the contract with their plan sponsors. The TPA by wedding themselves to just one fiduciary provider partner, they are marrying themselves to a provider that may cost them clients if they don’t do a credible job.
I like choice and anytime a client ask me for a referral, I give them at least 3 choices so that they can make a decision on their own. I recommend TPAs to offer fiduciary services from more than one advisory firm. Nobody asked me, but my opinion is out there.
In sports and in business, you are only as good as the team that you are on. I have been on some good teams and not so good teams, so I know that sometimes I was only as good as an ERISA attorney if my fellow employees were good as well.
So I am often surprised how financial advisors are not conscious of the team they need to help their clients or are very ho-hum about the team they select.
While financial advisors don’t need to become experts in retirement plan design and administration, I believe that the changes in the retirement plan business requires financial advisors to have more of a background in retirement plan issues. So while financial advisors don’t have the time to learn about plan design or fiduciary liability issues, they need to work with the experts that do such as a third party administration (TPA) firm and an ERISA attorney.
A big part of my practice is working with financial advisors (for free) in developing a team approach in working with their clients and potential clients. That approach always requires the use of a good TPA and the use of a TPA will depend on location, cost, plan type, and plan size.
Plan sponsors and their financial advisors for the most part; don’t know the value of a good TPA until they replace a bad TPA. A good TPA will administer and record keep the plan correctly, which will eliminate potential fiduciary liability and plan sanction/disqualification. In addition, the most important function of a good TPA is plan design. Plan design to me is an art, or a game like Chess. It’s also like logic in 9th grade math. Too often, a payroll provider or a bundled provider or the not so good unbundled TPAs treat retirement plans as if they came off an assembly line.
In my mind, there is no cookie cutter approach to retirement plans in their design and in their plan documents. Every plan sponsors has different employee populations, needs, and financial resources. An ERISA attorney and/or a good TPA will sit down with the client review their needs for a new plan or to improve an existing plan. Based on the information collected, the ERISA attorney and/ or the TPA will develop a retirement plan design that will fit the needs of that specific client. That design may be a safe harbor plan, new comparability plan design, or the use of another plan like a defined benefit plan or a cash balance plan. Through 13 years in the business, I have seen retirement plans maximize contributions for their employees and/or correct administrative errors by the use of a good TPA.
I have had a client for 8 years now and it was as a result of a meeting that a financial advisor brought me in for, for a potential client he was trying to recruit. The plan was being administered by a payroll company. The plan failed the deferral and matching discrimination tests by a wide margin. The owner of the company was getting a refund of $10,500 of her $12,000 deferral at that time. A review of the test by the payroll TPA was that the plan could have corrected the failed discrimination test by adding a $7,500 qualified non-elective contribution. Even though it was there on the testing information, no one bothered to highlight to that company. Needless to say, the client paid the $7,500 corrective contribution, avoided all the refunds to the highly compensated employees, and implemented a safe harbor plan design the very next year, This client has been the client of the financial advisor and myself ever since (she thinks we are geniuses) because of this team approach.
I have seen financial advisors grow business with the use of a good TPA and I have seen advisors lose business because of referring clients to a bad one. Like I said, you are only as good as your team, so finding the right ERISA attorney and TPA is beneficial for helping a financial advisor grown and retain their business.
If you’re a retirement plan sponsor, why should you care about plan design? Retirement plan design is one of the most underappreciated facets of the retirement plan business and it really should be appreciated. The reason why it should be appreciated is because it can help you maximize and better utilize employer contributions, which are used for tax deductions.
If you’re a plan sponsor with ample resources to make contributions to yourself an your highly compensated employees, a good plan design can allow you and your highly compensated employees to get more in employer contributions than you could if you had a third party administrator (TPA) that didn’t understand the beauty and science of plan design.
Sometimes plan design isn’t enough to maximize employer contributions and sometimes you may need another retirement plan like a cash balance plan or defined benefit plan to work with your 401(k) plan to do the trick.
So when you look for a TPA to hire, someone who is an expert at retirement plan design is someone you need.
People hate dentists. I get it, having gone years at times without getting a checkup. Since I take care of my teeth, cavities weren’t a problem. I just hated the whole scaling process and the x-rays where I was gagging by shoving film in my mouth.
Plan sponsors have the fear of ERISA attorneys and the reason why is the unlimited power to bill by the hour. ERISA attorneys that work at larger firms have a propensity to bill a lot because of the economies of law firms with large overhead. That’s why I flat fee bill almost everything I do.
Aside from the quick commercial about my firm and reasonable fees, the other reason that plan sponsors should get over the fear of ERISA attorneys because of the trouble that ERISA attorneys get plan sponsors out of by helping them maintain the tax qualification of the Plan and complying with ERISA. Too often plan sponsors call ERISA attorneys when it’s just too late to avoid penalties and sanctions.
I remember as a kid that there was move to use margarine because of the cholesterol that was in butter. Who can forget those talking Parkay carton commercials? Of course, we later learn that many margarines had high amounts of trans fats, which is just as bad as cholesterol. For the past 45 years, we’re still having a similar debate with sugar vs. artificial sweeteners.
In the retirement plan business, we don’t deal with margarine and NutraSweet, but we have been talking a lot about fees. Plan administration fees have been the talk of the retirement plan business for the past 7-8 years and continued focus thank to the fee disclosure regulations put forth by the Department of Labor. The obsession about fees can be a problem when the discussion about selecting and or replacing plan providers is based solely on fees. Fees are really about reasonableness and paying reasonable plan expenses for the services provided. It’s not about picking the cheapest provider.
Focusing too much on fees means there is less focus on finding the right providers and a good chunk of the time, the best provider candidate for the plan isn’t the cheapest. I see to often, plan sponsors picking a cheap third party administrator that is short on competence, which leads to higher compliances costs later when penalties are tacked on for incompetent administration.
You need to hire the best provider you can, not the cheapest. Just make sure the fees are reasonable for the services provided.
Fees should always be a concern but focusing too much on fees is like eating margarine with high trans fat because it’s as unhealthy as butter without the taste.
A few weeks back, I signed up my daughter with a new summer camp after she was at her previous camp for six years. Honestly, it was five good years at that previous camp and one not so great year. The one thing I’m happy about the camp change is that I no longer have to pay for a camp being run by not so nice people. Since my daughter liked the camp, I got to finally decide that I didn’t want to be in any type of business relationship with the family that runs the camp.
That family was all about fleecing the parents of their campers. They were charging high camp rates while they slowly cut back on the trips and activities because of declining enrollment and increasing family members on payroll. The thing that always ticked me off the most was what I called their “fake charity”. They would raise money to send underprivileged kids to attend their camp, so essentially they were soliciting contributions to put money in their pocket since those camp spots weren’t being given away for free. They wont advertise it, but any contributions for this fake charity isn’t tax deductible since they make a profit off these camp spots.
The point here is that if you’re unhappy in the way that you’re being treated or don’t like the providers you’re with because they rub you the wrong way, there are plenty of retirement plan providers out there to choose from. You don’t have to be miserable in dealing with plan providers if those plan providers are making you miserable.
There are plenty of good plan providers who won’t make you miserable or treat you like your business isn’t worth anything to them.
If you start a retirement plan provider practice, it can be frustrating. Like I always say about thing in my life, “If it wasn’t a struggle, it wasn’t any fun”. Building a retirement plan practice isn’t easy because a stash of clients isn’t going to fall into your lap. When it comes to building a practice, the one thing you can never yield to is disillusionment.
I was disillusioned many times in life; I think my three years at law school was 6 months of hope followed by 2 ½ years of disillusionment. I let some of the bad things that happened to me there really affect me and I did it to the detriment of my grades and friendships in law school.
Getting clients isn’t easy and some of the most frustrating people you meet are potential clients who will accept the fact that they are being ripped off by their current providers and still won’t give you the time of day.
It’s ok to be disillusioned at times, but don’t let it paralyze you or sidetrack you in building your practice.
I always say that the only reason I ever had any success is my ambition and will to persevere. I’m not the smartest or the best, I just will never quit. 7pu years after starting my own practice, it’s still a struggle and like I stated in the first paragraph, it has been a lot of fun.