Check the provider’s credentials

After Hurricane Sandy decimated my house with five feet of water downstairs, I needed to replace our hot water heater and furnace. My 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 a 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. Matt Hutcheson is still sitting in federal prison for his crimes. 

I am an ERISA attorney for almost 22 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.

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Being aggressive could be a bad idea

Many years ago, I was contacted by a bank that had an issue. For 20 years, they didn’t include bonuses as part of their plan’s compensation, even though it was supposed to be included. I told them that the only option was an application to the Internal Revenue Service’s Voluntary Compliance Program. The bank found an ERISA attorney that said they could merely self-correct. Based on the number of years and participants, it’s impossible. They could try to self-correct, but G-d helps them if they were going to be audited.

There will be many plan providers that will act aggressively for their clients, but they fly too close to the sun. Being too aggressive is fine until the Internal Revenue Service or the Department of Labor thinks differently.

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The problem with flat fee billing

When I was a law firm associate, my most painful part was filling out my timesheet. Trying to fill it out before I’d get in trouble with the powers that be was the worst part of the month.

There has to be a better way to bill for a living, but the law firm structure is based on the billable hour to support its bloated overhead even it does more harm to their clients.

When I started my own law practice, my goal was to move away from the billable hour because I thought and still think that clients want to know bottom line how much my work is going to cost them and not have sticker shock when they see my bill at the end of the month. Since I didn’t have a large overhead, a flat fee for me was the best place to go especially since my legal work working for third party administrators was a flat fee.

For many plan providers especially financial advisors, remuneration was based on assets. Registered investment advisors would get paid their flat level and the broker would usually resort to the different trails that mutual funds pay. Is there a better way to be paid? A lot of advisors are pushing for a flat fee or other alternative arrangements such as per participant charge.

For the provider offering it, their flat fee must be an accurate assessment of their work with a profit margin or they’ll cut their throats. A lot of thinking and math has to go into quantify a flat fee when the advisor has always charged an asset-based fee. For the plan sponsors, a flat fee is a great fee to digest and understand, but they have to be wary whether they are paying more than the advisor charging that old asset-based fee. It can be a double-edged sword for everyone involved if one or more parties aren’t careful. I’ve seen way too many advisors who charge a too reasonable flat fee and learn to regret it because they price themselves too low for the work involved.

While I charge a flat fee, I’d be hard-pressed to find a law firm attorney (not a TPA attorney who has no attorney-client relationship) who charges less (especially by the billable hour), but all plan sponsors must determine whether my fees are reasonable too. Plan sponsors can’t take my word for it, their fiduciary duty depends on them to not take my word.

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Will in-person enrollment meetings be a thing of the past?

The COVID-19 pandemic has certainly put the kibosh on a lot of things in the retirement plan industry such as some of my regional conferences that were scheduled in Houston, St. Louis, and Minneapolis. There have been some changes put forth by the pandemic that are temporary (such as working from home) and I think there are some changes that are going to be permanent.

One of the positive aspects of the pandemic was the ability of the industry to adjust, without any major disruptions. One thing that stood is how online meeting tools such as Zoom and Webexhave made things for all of us in meeting our clients and other providers. I believe that while in-person enrollment meetings won’t go the way of disco, but I believe that many providers will push for online meetings after the pandemic concludes because of the cost and time savings through online meetings. Saving in time and travel may benefit plan sponsors in the long run, especially if a plan provider charges the plan sponsor with travel costs. While in-person meetings have that personal touch, plan sponsors and plan providers may opt to continue with online meetings for the savings it comes with.

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The State Auto-Enroll IRA Plans are a good thing

Colorado is just another state that is offering a payroll deduction IRA program, forcing businesses to offer this program if they have five or more employees. I’m in favor of anything that offers increased retirement plan coverage.

Over 40% of private employees in Colorado don’t have access to a retirement plan at work, so this is a good thing. While many plan providers don’t want to compete against the government in the retirement plan space, I believe that many Colorado employers would rather join a multiple employer plan, a pooled employer plan, or their own single-employer plan because of the fear of having the state government involved in the retirement plan business. In states like Colorado, I believe this is an opportunity to get employers who would never get a plan, forced to start one because they don’t want to be enrolled in this state program. When it comes to retirement, I believe that many employers just have. The negative view of government and retirement savings, knowing full well the status of Social Security.

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Matrix sued, but there is a vantage to the story

Matrix Trust Co. is being sued in a 401(k) class-action lawsuit by a Minnesota engineering firm that alleges that Matrix took millions of dollars from retirement plan accounts.MBA Engineering alleges that Matrix Trust unlawfully retained potentially hundreds of millions of dollars in 12b-1 fees, non-float cash interest, and float cash interest from more than 60,0000 customers through nondisclosure and concealment.

The plaintiff claims that Matrix did not disclose that customers’ assets were earning non-float and float cash interest, no disclosure whether they were earning 12(b)-1 fees and by how much, and that Matrix retained that money as compensation. Matrix vehemently denies any wrongdoing.

It should be noted that this is the same MBA Engineering that sued Vantage Benefits, claiming that they stole $2.3 million in retirement assets from the participants in the company’s plans. Jeff Richie and his wife have pleaded guilty to charges of embezzlement ad I question whether this lawsuit against Matrix has anything to do with what happened with Vantage since Matrix was the custodian of these plans and this might be a workaround that.

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Retirement Plan Advisors Advantage

My latest newsletter for plan providers can be found here.

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Well, I was right about auto enrollment

People are flawed, except for saints and Popes. One of my many flaws is that I enjoy being right. I love predicting things and being right (such as the end of revenue sharing, and a former employer going out of business within 5 years by closing up within 2). But I will admit when I’m dead wrong (Apple opening up their stores wasn’t a bad idea and Amazon could sell stuff beyond books, CDs, and DVDs). One thing I was right about was automatic enrollment.

When I first heard of automatic enrollment, it was called a negative election and it was only recognized through some Internal Revenue Service guidance to a specific plan sponsor in around 1999. I hated it and the reason I hated it was because I saw it as something out of the Communist Soviet Union (I was an old red baiter). The negative election was a gimmick for a plan sponsor to goose up their deferral rates for non-highly compensated employees because the guidance and zero fiduciary protection because the 401(k) plan was an ERISA 404(c) plan meant that any negative election money was doomed to cash or stable value since the participant never directed their investments. My view of the negative election changed with the implementation of automatic enrollment in the Internal Revenue Code as part of the Pension Protection Act of 2006. I felt that the reliance on a Qualified Default Investment Alternative for fiduciary protection meant that participants automatically enrolled could have an account balance that just wouldn’t sit in cash or cash equivalent. As a highly opinionated ERISA attorney for a producing third-party administrator (TPA), I reached out to my bosses and some of the other decision-makers on why we should let our clients know why auto-enrollment was important. I felt it was an effective way to increase participation and to increase assets under management. I jokingly say that until this day, I never received a response to my email.

Studies have consistently shown that adding automatic enrollment to the plan increases participation in the plan and increases the retirement savings of plan participants. It’s more than a gimmick to help with testing, it’s an effective way to get employees involved in saving for retirement that they never would have done on their own.

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It’s not 95%

Obi-Wan Kenobi once said that only Siths deal in absolutes. Having an ERISA expert saying publicly that there is a 95% that the recently proposed new, new Fiduciary rule (or is it new, new, new?) will be implemented, it’s not an absolute, but it’s certainly inaccurate. I would say that there is a 95% chance that the new new rule will be implemented when there is a 95% shot that President Trump will be re-elected. Even my old Professor from Stony Brook, Helmut Norpoth, only thinks that there is a 91% chance that Trump will be re-elected and he has a pretty good track record on Presidential predictions.

 The point here is that any type of discussion regarding proposed regulations or proposed legislation is that there is so much depending on politics. If Hillary Clinton would have been elected in 2016 like almost everyone predicted (not Norpoth), the Obama era rule would have been implemented and this discussion here would have been moot. This new new rule will live or die based on a certain Presidential election this November. I’m not 95% certain who is winning in November, so I’m not 95% sure about any proposed regulations being implemented after November.

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Don’t forget that the RMD Rules are different for 2020

While the 4 Questions during the Passover holiday asks why this night is different than all other nights, the Internal Revenue Service (IRS) has reminded us that this year for required minimum distributions (RMDs) are different than all other years.

On July 17th, the IRS reminded us of the change in 2020, thanks to the CARES Act. The CARES Act waives RMDs during 2020 for IRAs and retirement plans, including beneficiaries with inherited accounts. This waiver includes RMDs for individuals who turned age 70½ in 2019 and took their first RMD in 2020.

No distributions from a defined contribution plan or IRA made in 2020 are considered RMDs. The distribution that would have been an RMD (if this was any other year) rather is an eligible rollover distribution and can be rolled back into the same plan, if the plan allows that, or to any other plan or IRA that may accept eligible rollovers.

The IRS also reminded us that an IRA owner or beneficiary who already received their RMD in 2020 and who wants to repay the distribution to the distributing IRA must do so no later than Aug. 31, 2020, to avoid paying taxes on that distribution.

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