The Rosenbaum Law Firm P.C. Blog

It happened three years ago and I still can’t make sense of it. Where I come from, we call it chutzpah. The third-party administrator (TPA) of a 401(k) plan that I was serving as an ERISA §3(16) administrator overpaid the ERISA §3(38) fiduciary, 4 times what they were supposed to pay (paying the annual basis point each quarter, rather than just a quarter of the annual basis point fee). Rather than returning the overpayment (as I did when the TPA paid me the advisor’s fee one quarter), they wanted me to reimburse the plan. I told the §3(38) advisor that the simplest solution was to return the fee, but this advisor switched firms. Rather than taking my advice, the advisor went to the plan sponsor, to have the plan sponsor send me an e-mail, demanding I should pay for this fee overpayment. I simply replied that it was a prohibited transaction for the advisor as a fiduciary to accept a fee higher than they were contracted for and it was a prohibited transaction for the plan sponsor to pay it. I don’t make threats, but I told the advisor and plan sponsor that if the overpayment wasn’t returned, there was going to be a complaint made to the Department of Labor.

If you are a plan provider and you receive an overpayment, you simply just can’t put the money in your pocket and call it a day. You can’t get paid more than you are contractually entitled to, especially if you serve in a fiduciary capacity. If you’re a TPA, you still can’t do that. An overpayment is not manna from heaven, it’s likely coming out of the pockets of plan participants that you swore to serve.

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

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

The news comes trickling in for 401(k) plan providers and plan sponsors beating back class action lawsuits.

Many plan providers win their case as defendants because the plan participants fail to convince a judge that the provider serves in a fiduciary capacity. Plan sponsors often win, just because the plan participants showed that a certain decision like using revenue sharing funds was a clear breach of the sponsor’s fiduciary duty.

While plan providers and plan sponsors win their case, they have still lost. The news about them winning is far less public than the news about them getting sued in the first place. In addition, the cost of litigation is burdensome even if the providers and sponsors have fiduciary liability insurance.

There is no champagne celebration for winning a case on summary judgment because of the huge cost in publicity, time, and cost. Even if the plan provider and plan sponsor did nothing wrong, something they did suggest that there was impropriety that an ERISA litigator was good enough in order to commence litigation.

So if a plan provider and plan sponsor have won their case, they’ve really won a hollow victory.

Over the past 11 years as a solo ERISA practitioner, I always get asked if that’s all I do. It’s not some kind of insult, but a question on whether I also do financial advisory work and/or third party administration work. The answer is no and I stick to what I do.

Over the years, I’ve seen plan providers get into trouble by offering advice that they are not experts in. Unless they have an ERISA attorney on staff, a TPA is not a lawyer and an ERISA lawyer is certainly no financial advisor. My wife and I always chuckle when non-attorneys give legal advice and I’m sure other providers would chuckle if I gave financial and/or plan administration advice.

You should stick to what you know. It will save you and your client, a giant headache.

I first started paying for my own vehicle when I got my first job as an ERISA attorney, It was a brand new 1998 Toyota Camry. I was looking for car insurance and the best rate was through an insurance company that my father’s business partner used for the business.

I’ve used the same car insurance company since then, 6 different cars. They were great at paying claims, namely, the two vehicles totaled during Hurricane Sandy. Over the past few years, I’ve seen my rates go up while my cars got older. I never got a call from the agent about the increase in rates or what I can do to lower them. So I shopped around and found insurance that will cost me $150 less a month. That’s good money.

The point here is that when you have clients, you just can’t sit around and ignore the fees that they’re paying. I’m not saying you should lower your fees, I’m saying that you should always have a discussion with clients about fees and when assets can lower the percentage of assets that pay fees. You just can’t stand pat and do nothing, further incentivizing plan sponsors to look elsewhere. In every relationship I’ve ever handed that ended, the blame always rests on a lack of communication. People and clients like to know that they are appreciated and that their continued loyalty isn’t taken for granted. The best way to show they are not being taken advantage of is by not ignoring the fees they pay.

The Department of Labor (DOL) finally proposed a rule that would allow plan fiduciaries to consider climate change and other environmental, social and governance factors when selecting investments and exercising shareholder rights.

The proposal, states “that climate change and other ESG factors are often material and that in many instances fiduciaries … should consider climate change and other ESG factors in the assessment of investment risks and returns.”

The new proposal includes specific language about ESG factors—as well as other “collateral benefits” such as social good—serving as a tiebreaker when a fiduciary is selecting between economically indistinguishable investment options. In short, the proposal approves this practice.

Any article that states that revenue sharing has been declining in 401(k) plans is stating the obvious. Like with a dying business or organization, you can see it a mile away. Revenue sharing has been dying since the day that the Department of Labor (DOL) implemented fee disclosure regulations.

While people point out that the end was a result of so many class-action lawsuits especially the ABB/Fidelity lawsuit, I believe that fee disclosures killed it. The reason I think it killed it, was because fee disclosure finally lifted the veil on a big secret, how much certain third-party administrators (TPAs) pocketed in revenue sharing. I grew up in the business when TPAs would tell plan sponsors that using exchange-traded funds or index funds was more expensive because they ignored the costs of revenue sharing and the expense ratios of revenue sharing paying funds.

Revenue sharing payments will never be fully eliminated, but I believe it will be the 8 track tape of the retirement business.

The snowball effect is a term for a process that starts from something that is small and builds upon itself, becoming larger and also perhaps potentially dangerous or disastrous. The idea is that an avalanche can be started by a single, rolling snowball, hence the term.

When it comes to retirement plans, we have a snowball effect. The effect is usually when the plan sponsor has a plan problem and decides to either try to fix it on their own or lean on legal counsel with absolutely no training in ERISA.

I have seen too many plan sponsors pay tons of penalties and excise tax to correct problems that could have cost them a lot less if they were represented by ERISA counsel.

I remember being contacted a few years ago by a financial advisor whose client’s plan was disqualified by the Internal Revenue Service and was asked if I could possibly represent them in negotiating down any other Internal Revenue Service penalties. I told the advisor I should have been called a lot earlier because the transgression shouldn’t have led to the plan being disqualified if they had some decent ERISA counsel.

Too many plan sponsors think they can handle an audit or inquiry or investigation on their own and they’re wrong unless they are a third-party administrator or ERISA counsel.

In the past, I have been able to negotiate penalties down for failures to file Form 5500 on time when plan sponsors not represented by counsel have paid through the nose in penalties. Too often plan sponsors are so more interested in saving on legal fees, that they end up cutting their nose to spite their face by paying more in penalties.

ERISA counsel has the experience to handle the government and I have found deference by IRS and DOL auditors in dealing with professionals who understand the ramifications of the situation, which often leads to a better resolution.

Using counsel who has no ERISA experience is a mistake as well, like hiring a dentist to do a colonoscopy. ERISA is a different animal than what most attorneys handle and I have found there is no room for lawyers who want to dabble in ERISA because it’s not something you can dabble in.

Once a plan sponsor gets that initial inquiry, they need to contact ERISA counsel and their TPA to draft an action plan on how to handle it because often the IRS and the DOL may use an audit to investigate a major complaint. Having a lack of experience in handling a governmental audit can make things so much worse.

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