The Rosenbaum Law Firm P.C. Blog

Bonuses are something I don’t know much about since the only bonus I got was $300 three months after I started as an ERISA attorney. What I do know about bonuses is my role as an ERISA attorney and I have to say from experience that it is necessary to be included in the definition of compensation because otherwise, it invites error.

A small cottage industry of my practice is submitting plans to the Internal Revenue Service as part of the voluntary compliance program and a huge part of that, deals with plans excluding bonuses from the definition of compensation for the purposes of salary deferrals and employer contributions, even though the plan document says otherwise or vice versa where the include it, but the plan definition excludes it.

I come from the belief that you should “keep it simple, stupid.” That is why I think you should just offer deferrals and employer contributions on bonuses, just my two cents.

I’m still amazed when I find participant-directed 401(k) plans without a financial advisor. While I understand how solo 401(k) plans don’t have an advisor because individuals think they can do it on their own, it makes no sense when you have an employee. I have a solo 401(k) and I handle my investments. I always say that the moment that I add an employee, I am going to hire a financial advisor and there is an easy reason why.

I am often amazed that in the age of the internet that there are still travel agents around in business because the internet has allowed us to book trips and hotel rooms with a simple click button. In the old days, unless you had the travel agent software, you couldn’t do it on their own. Thanks to the internet, we can invest on our own, and buying and selling securities can be done with the click of a mouse as well. While many people think that the usefulness of a financial advisor has gone the way of a travel agent, I respectfully disagree.

When it comes to participant-directed 401(k) plans, the main role of a financial advisor in my opinion isn’t picking mutual funds as a broad range of investments. While I love financial advisors, I believe that with all due respect to Commander Montgomery Scott from Star Trek III, that a monkey and two trainees can pick a mutual fund lineup.

I think the value of financial advisors is having them a part of the fiduciary process, drafting an investment policy statement, reviewing the current fund lineup, and most of all, employee education.

I worked at a semi-prestigious (sorry, Lois) law firm on Long Island and there was no financial advisor on the 401(k) plan for a review of the mutual funds for 10 years. I knew we needed one when someone on the office staff stated that he only invested in the mid-cap mutual funds because “it represented the middle of the market.” That is why you have s financial advisor.

Even 401(k) plans that offer index funds or exchange-traded funds need a financial advisor because while index investing beats most of the active funds consistently, participants still need investment education to make an informed decision that will get the plan sponsor ERISA §404(c) protection. Index funds and ETFs are great, but what about cost, asset allocation, and risk tolerance? Index funds and ETFs won’t solve those issues on their own. So even a plan offering only a passive approach needs a financial advisor.

The moment I hire an employee will force me to hire a financial advisor for my plan because, despite my knowledge of 401(k) plans and investments, I don’t have the background or training to review funds and offer education. I stick to what I know, so I stay out of trouble.

You don’t have time, I get it.

So I will be developing a YouTube series of 8–10-minute videos by myself, or with other plan providers on how you can help your retirement plan business.

The first video can be found here: https://youtu.be/0jZ1UQJZzGo

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

One of the problems with being a plan sponsor is trying to make sure that when it comes to the interaction and work of plan providers that the “ball” isn’t dropped. The problem for the plan sponsor, most of the time, they don’t know there is an actual “ball”.

The “ball” that seems to get dropped a lot is when plan sponsors haven’t updated in quite some time. I have seen this problem more often these days and I’m surprised by that. Every 5-6, years, a plan sponsor has to update their plan documents and every year or two has to execute an ancillary plan amendment. Some will say that this Internal Revenue Service requirements are to fee us ERISA attorneys, but it’s also to make sure that the plan document had the language to conform to current law.

Too many times, you have a third-party administrator (TPA) who rarely looks at the plan document to make sure whether it’s up to date because most of the plan provisions are listed on the recordkeeping software. I once joked at some of the TPAs that I worked at, that if you wanted to hide something from a plan administrator, you should hide it in the plan document file (thanks to Chris Rock for inspiring the joke).

There are so many reasons that a plan sponsor doesn’t get the plan document updated such as when the TPA doesn’t draft plan documents or assumes another plan provider (such as an ERISA attorney) has the responsibility.

Part of the problem is that the plan sponsors don’t keep all the copies of all of their plan documents, so there is mass confusion whether a particular restatement or amendment was done because there have been a few TPA changes over time.

Regardless of who is to blame, it’s always the plan sponsor’s blame. A plan sponsor should keep copies of all their plans and consistently ask their TPA or ERISA attorney whether their plan documents are up to date. Heck, my Retirement Plan Tune-Up plan review (cheap plug here) does a pretty job of that.

Regardless, the plan sponsors need to know about the plan document “ball” and that it shouldn’t be dropped.

Most defined contribution plans such as a 401(k) plan must be restated by July 31, 2022, make sure the ball isn’t dropped.

If you ever want to know what the top mutual funds were 3-5 years ago, you can look at the mutual fund lineup of many 401(k) plans today.

While it may sound like a joke, it isn’t. Too many 401(k) plans don’t have a financial advisor or don’t have a competent financial advisor who helps them manage the fiduciary process in pruning the mutual funds that were yesterday’s winners.

I’ve been in this business long enough to remember when everyone wanted to be In Janus Twenty and every other Janus fund out there (which back in 1998-2000, pretty much had the same investments in each fund) as well as when American Funds was the big deal.

As anyone with some financial sense can tell you, very few actively managed funds stay on top forever. Actually, no actively managed stays on top forever, Heck, I remember when Legg Mason Value Trust beat the S&P 500 for about 15 years before coming down back to Earth pretty hard.

A great way to minimize liability is to develop an investment policy statement that dictates which mutual funds to hold, which mutual funds to fold, which mutual funds to walk away, and which mutual funds to run from. Not having such a policy statement or not following that statement can be a huge billboard for a participant to sue you.

That is why as a plan sponsor, it’s important to have financial advisors to guide through the process of selecting funds to make sure that yesterday’s top mutual funds are not in today’s fund lineup.

The purpose of an audit of Form 5500 is to make sure that plan sponsors voluntarily comply with the Internal Revenue Code and ERISA. Sometimes, an Internal Revenue Service (IRS) or Department of Labor (DOL) audit is done randomly and you get the unlucky pick when you’re chosen.

However, a good deal of the time, it’s because of an answer you made on Form 5500, a tax form where you answered under penalties of perjury. If you answered that you made late deferrals, don’t have the necessary bond, or committed a prohibited transaction, you may expect that letter within the next 1-3 years. Even if you don’t get audited, a late deferral deposit may get a notice from the DOL that they don’t have an application from you for their Voluntary Fiduciary Compliance Program.

Thalidomide was supposed to be the wonder drug that helped women manage morning sickness until they discovered it caused birth defects. Asbestos was supposed to be the ultimate fire-resistant material that was later found out to cause mesothelioma when produced or when disturbed. When companies decided to ditch defined benefit pension plans for a cheaper alternative in the 401(k) plan, they also had a hidden danger with a 401(k) plan, but it doesn’t have to be that way. If managed correctly, a 401(k) plan is an effective retirement plan for the employer and employees. If not, it’s a retirement plan thalidomide except the plan sponsor doesn’t know the danger.

The switch from defined benefit plans to 401(k) plan switches the burden of funding retirement from the employer to the employee. If the plan is participant-directed, it also switched the selection of investments from employers aided by financial advisors to the folks who have the least amount of background to make these tough decisions, the plan participants. Too many plan sponsors don’t educate their plan participants to make informed investment decisions and too many plan sponsors don’t have a proficient investment advisor to guide them through the financial process. It doesn’t have to be this way. Getting investment advisors who know what they’re doing and getting participants enough investment education/advice isn’t hard, but too many plan sponsors are too lazy to manage. But it doesn’t have to be this way.

Defined benefit plans have pretty straightforward fees. You know how much annual administration is and you don’t have that luxury with participant-directed 401(k) plans that have multiple fees that can confuse anyone including retirement plan professionals. Too many plan sponsors have been sued because the 401(k) plan fees are too high since plan sponsors have a fiduciary to pay reasonable fees. But it doesn’t have to be this way. Plan sponsors can benchmark their fees to see if they are reasonable, actually, they have no choice; they have that duty.

401(k) plans don’t have to be a hidden danger; all they need is a plan sponsor who understands their pitfalls and wants to avoid the liability that goes with it. That’s the tallest order.

The best way to keep clients is to look at what you’re doing as a plan provider and what is out there in the marketplace.

If you are a third-party administrator (TPA) and the competition is having much success offering ERISA §3(16) administration, you might have to offer it yourself or allow a third party offers it (cheap plug here for my Austin 3(16) service).

If you are a broker and you have registered investment advisors touting their fiduciary status or a §3(21) or 3(38) service, it might be a good idea to partner up with someone who can offer it.

The worst thing you can do is scoff at what is out there. Saying a §3(38) service is just marketing is missing the point and just attacking the service because you are losing clients to providers that offer isn’t going to get those clients back in the door.

It’s so easy to attack others, but you need to look within if you are losing clients to the competition.

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