In the movie Caddyshack, Ted Knight’s character Judge Elihu Smails was dumbfounded that Chevy Chase’s character; Ty Webb didn’t keep score on the golf course. Judge Smails asked Ty that if he didn’t keep score, how did he measure himself against other golfers? Ty replied simply: “by height.”
I was on the phone this afternoon with a financial advisor who is trying to get into the 401(k) business. In addition to being an ERISA attorney, I have always dedicated myself into helping financial advisors get a footing in this industry (without a cheesy legal bill sent in the mail) as my way of paying it forward and based on my experience of helping advisors out when I was an attorney for a certain third party administration (TPA) firm.
The advisor was using one of those commercial retirement plan databases and cold calling potential clients. This advisor was targeting plan in the $1million and up range within a certain radius around his practice. In addition to telling him to focus his search to plans that were in the $1 million to $10 million range that were with a bundled provider, I told him that before any potential client meetings, he should ask me to review the plan’s Form 5500.
As you may know, the Form 5500 is the tax return filed by a qualified retirement plan. It tells you some important information like the type of plan, number of participants, and asset size. Thanks to the transition to fee disclosure, there is now more information regarding plan expenses.
A lot of companies that have created retirement plan benchmarking tools for plan sponsors and advisors to use rely on Form 5500 for a basis of their benchmarking. Some are highly critical of that practice because of the lag in the public release of Form 5500. Only thanks to electronic filing, do we now have a look at the Form 5500 for the 2009 plan year. So a Form 5500 doesn’t have current plan information, it’s yesterday’s news that you get to read tomorrow.
I have yet to find a plan benchmarking provider maintain that a Form 5500 is the provenance of a retirement plan. A Form 5500 doesn’t give you the up to date information for the plan or its current fund lineup or whether there are plan administration or document errors. So a Form 5500 is just a small snapshot of a plan and only when you meet a plan sponsor and review their plan documents, asset statements, and valuation reports, do you get the full picture of the plan.
The Form 5500 can be a conversation starter with a plan sponsor and the conversation can end pretty quickly if the information on the Form 5500 is stale if there is a change of a retirement plan provider or the company has suffered a loss of participants.
However, Form 5500 can show a chock full of nuggets of information that can show how poor a plan was at the time of the 5500’s filing. I recently had a client where I did my Retirement Plan Tune-Up review (for $750, cheap plug). The 5500 noted that the broker was getting about 60 basis points on a $14 million. That was a lot of dough for a plan that size. I asked the plan sponsor whether they had a copy of an investment policy statement or provided education to plan participants, so they can limit their liability under ERISA §404(c) for a participant directed plan. The broker didn’t help them in that area; he only helped himself in pocketing 60 basis points. Two days later after having a phone call with the shareholders of the company, the broker was fired.
I looked at a 5500 form for a prospective client for a financial advisor in the Midwest and noticed that the plan sponsor was charged $54,000 for a limited scope audit for their required plan audit, which was about $40,000 too much.
Ask my old bosses at a certain TPA who had to retire in disgrace because they were listed as the trustees on the Form 5500 of an auditing firm that they referred work to and audited most of their clients that required plan audits (violating the independent audit requirement that plan audit required plans must meet). So ask them whether a Form 5500 can reveal some damaging information.
A Form 5500 can be evidence that a plan is paying too much in fees, it’s not proof. Proof can only come from a full review. It’s a conversation starter and not an ender. It is a great way to prospect clients, but it is not the full proof mechanism to get clients. Unlike golfer’s height, a 5500 is a measure of a retirement plan, not the definitive measure. Like what they show on C.S.I., a Form 5500 is just a little evidence that a retirement plan is not in shape.