The Rosenbaum Law Firm P.C. Blog

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 actually uses a payroll provider for the third party administrator (TPA) for many of his client’s plans.

As many of you know, I have a tremendous bias against payroll provider TPAs because I think they do a poor job of what they are supposed to do, actual administration. Regardless of my bias, 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 out an example of an excellent financial advisor from the Mid-South who brought my TPA quite a few cases. We 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. Rather than sending an actual ERISA attorney like me who understands the mechanics of the Plan, they sent our fearless leader who was an ERISA attorney but was more salesman in those days. Our fearless leader went down south to meet the client and proceeded to do such a poor job of presenting the concept of the 401(k)SOP that not only did we 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. 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 to 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.

Retirement plans with more than 100 participants (I won’t mention the 80/120 rule) have a requirement to get an independent audit for their Form 5500 filing. The failure to obtain an independent filing is the same consequence of making no Form 5500, so there will be harsh consequences for failing to obtain one.

As far as picking an auditing firm, it’s rather simple. Don’t pick an auditor on price, but pick an auditor based on experience. Find out how many audits they do a year and see how many auditors work on them. From experience, any auditing firm that has one auditor work more than 12-15 audits a firm is more of a mill and less of an actual auditing firm. The audit ensures that the plan is operating correctly and is in good financial condition. Paying thousands for an audit report that is suspect is the same as paying thousands of dollars for a worthless piece of paper.

Beware of referrals from third-party administration (TPA) firms unless the TPA makes more than just one firm as a referral and you have indicated that the auditing firm in question handles plans from different TPA providers.

While some companies would want an audit from a Big 4 firm, it’s not necessary. There are many accounting firms that do just as good a job, if not better than the Big 4 firms, at a better price. I recently came across one plan where a Big 4 firm charged $54,000 for a limited scope audit, which is about $40-45 K too high.

The question for the last couple of years for me is independence. Auditors of retirement plans need to be independent and should not have any financial interests in the plan or the plan sponsor that would affect their ability to render an objective, unbiased opinion about the plan.

While many plan sponsor probably doesn’t care about a nefarious situation, they will if the Department of Labor ever came around and declared that the plan sponsor’s independent audit requirement was not met, so their previous Form 5500 was considered invalid. After being socked with hundreds of thousands of dollars in penalties, they would care.

A good audit ensures the financial condition of the plan and serves as a check and balance on the other plan providers. The requirements to get an audit should never be taken lightly.

I have some simple rules to live by. I never bet on the Mets, eat Olive Garden or Red Lobster, or do business with family. Those things never end well.

Yet I have come across so many financial advisors who bemoan to me that they couldn’t get a new retirement plan client because the current broker/advisor is someone’s relative. Since when did running a 401(k) plan all of a sudden become someone’s patronage mill for family members?

Seriously, being a plan sponsor or a plan trustee is a tremendous responsibility and must act in a prudent manner. All plan providers must be screened carefully through a process involving the interview of other competing plan providers. Simply handing the role of a financial advisor to someone who is related to one of the plan’s decision makers or participants may be a breach of the fiduciary’s duty of prudence in selecting a plan advisor.

Being a plan fiduciary bears a tremendous amount of responsibility. It requires the retention of responsible plan advisors, monitoring those advisors, monitoring plan fees, shopping the Plan to determine whether plan fees are reasonable, working on an investment policy statement, review of plan investments, and ensuring participant education. So why would a plan sponsor and/or plan fiduciary by hiring a financial advisor or any type of service provider because that person is someone’s cousin? There are quite a few hundreds of thousands of financial advisors not related to anyone who will works for the plan sponsor, so I would recommend hiring someone who is not related to anyone connected with the plan sponsor.

For fair disclosure purposes, I am not the ERISA attorney for any plan where the plan fiduciaries or participants are related to me.

A safe harbor matching contribution should have the same eligibility as deferrals if you want that safe harbor protection of satisfying Top Heavy and the ADP/ACP test. A plan sponsor just reached out to me about their plan where they changed their deferral eligibility to 90 days while keeping the eligibility for the match at age 21 and one year of service.  The problem is the plan is now top heavy and the third-party administrator (TPA) just discovered it’s been top-heavy for years, ever since they made the change.

I was surprised that the TPA messed up so much because the plan document I use, won’t even let me offer those parameters where the deferrals and the safe harbor match have different eligibility conditions.  Now, the plan sponsor is going to pay up and is looking at the TPA to blame.

Just something you should know.

With the Department of Labor (DOL) focusing on cybersecurity, I think it’s prudent for plan sponsors to put policies in place to cover it. On a DOL audit, I’m sure the auditor investigating your plan, will ask for it.

What your policy should cover:

1. Access controls and identity management for online systems
2. The processes for responding to a cybersecurity breach
3. A due diligence process for reviewing the cybersecurity protocols of plan providers
4. Cybersecurity awareness training for staff
5. The encryption of sensitive information transmitted, stored, or in transit.

Back in the day, the question of theft of plan assets, usually indicated theft by the plan sponsor or plan provider (hello, Matt Hutcheson). These days, with access to 401(k) retirement distributions so easy, cyber theft is the biggest concern when it comes to the theft of plan assets.

A new ERISA lawsuit has been filed in federal court in New York, against the Colgate-Palmolive employee relations committee, plan recordkeeper Alight Solutions, and custodian BNY Mellon for their parts in operating the company’s defined contribution retirement plan and the theft of a participant’s $750,000 account balance.

The plaintiff is a former global director for customer marketing at Colgate-Palmolive, who has alleged that thieves have ripped off her entire account balance. The lawsuit claims that the plan providers missed several red flags.

The red flag was that within the span of fewer than two months, a person claiming to be the participant changed the participant’s phone number, email address, mailing address, and bank account information, and then requested an immediate cash distribution of the participant’s entire $750,000 plan account

In August 2020, the plaintiff claims she attempted to access her 401(k) account online to review the balance but she was blocked and the website informed her that she was entering an incorrect username ID and password. She then contacted the Colgate-Palmolive Benefits Information Center to request access and information about her plan account, according to the lawsuit.

The participant claimed that she was informed that the entire balance of her plan account, totaling $751,430.53, had been distributed from the plan in a single taxable lump sum, even though at no point had she authorized or received any such distribution to an individual with an address and bank account in Las Vegas, Nevada in March 2020, while the participant lived overseas.

When I left a job, the first thing I did was execute my rollover form to move my 401(k) balance to an IRA rollover.

While research from Pew will show that fees for an IRA account are higher because of fund costs (buying retail instead of a 401(k) plan having the ability to buy institutional), the fact is that you want to be in control of your own money.

Recently I’ve had to work through a Department of Labor situation with an orphan plan for a company that terminated 6 years ago where participants have their money in funds that may not be the right investment now. Even if your plan sponsor is still in business, communication with former participants is still poor and access to your money in my mind, is better than dealing with a former employer, that you left, for one reason or another.

Surveys are great, but you can’t put a price on having a peaceful mind, or knowing where your retirement money is.

Empower, announced has achieved $62 billion in retirement plan sales in 2022. The AUA figure represents funded and committed organic sales.

As of June 30, 2022, Empower has earned more than 2,000 new client mandates.

Empower’s advisor-sold business, which encompasses plans with up to $50 million in assets, has added some 1,400 plans since the start of 2022.

The new sales also represent the acquisitions of the Mass Mutual and Prudential retirement plan businesses in December 2020 and April 2022, respectively.

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

I have always had a problem with target date funds (TDFs). It had to do with glide paths and the fact that there was no uniformity as it pertained to what should be in a 2025 fund or any fund for that matter.

The Morningstar Center for Retirement & Policy Studies found that target-date fund plan sponsors may expose individual investors to increased risk by not tailoring plan glide paths to their behavior.

The center reports that 58% of defined-contribution plan assets are invested in off-the-shelf TDFs, many of which are designed for participants to stay in the plan through their retirement, even when they are likely to roll their money out of the plan at retirement.

While TDFs are a great idea, there are just too many issues that still remain.