The Rosenbaum Law Firm P.C. Blog

As a retirement plan provider, you meet a potential client and you just do so well in the meeting that you think there should be no way that you’re going to lose this prospect. Yet you get the call that a competing provider got the job and you’re just shocked that you lost to that person.

Sometimes you lose because of all the decision-makers you talk to, it might be one decision-maker that felt the need they had to exercise control. They weren’t concerned with picking the best provider for the plan sponsor, they were just interested in flexing their muscle and picking whom they wanted to pick.

When I hear about a plan provider flabbergasted that they weren’t selected in a process they thought they won, I always relate a story where I say I was the most insulted in the 22 years of being an ERISA attorney and it shows you the essence of someone wanting to be in control.

I’ve told a story quite a few times and including it in that Kindle book a few dozen of you bought. I was working at that semi-prestigious law firm as an associate and I was asked by the human resources director to look at our 401(k) plan.

Our 401(k) plan despite having an ERISA practice had one of the worst plans I’ve seen. The human resources director was a plan trustee and decision-maker except it didn’t appear she decided in 10 years because the plan had no financial advisor, no investment policy statement, no review of fees, no education to plan participants, and no change of investments for 10 years.

I told her the first thing she should do is find a new financial advisor. With my many contacts in the business, I gave her a list of 2-3 advisors to contact. Of course, she hired the advisor that a bundled provider representative in the area (who I recommended the human resources director speak to) recommended.

The human resources director and the new financial advisor told me up and down that they were happy with the current third-party administrator (TPA) and I was fine with that. The Fidelity representative was there when needed, I thought. Anyway, the human resources director finally discovered the plan had revenue sharing and flipped out. So without consulting me or contacting me, they went through a process to replace the TPA with the advisor making recommendations. Well, they selected a bundled insurance company provider as a TPA and it certainly wasn’t Fidelity despite the representative’s help in getting the advisor that gig.

I was offended because I thought being the in-house 401(k) expert, I should have been consulted because I believe you should always get an insight from the expert.

I got the last laugh many years ago when another trustee from the law firm called me years after I left, asking to help the plan go through a huge error caused by that insurance company TPA. I was all ready to go in and help fix the mess of that 401(k) plan again until the human resources director (after having been lambasted over this for the last 11 years by me) put an end to it. Again, sometimes it’s all about someone wanting to exercise control whether they are the right person to have control and regardless of whether they make the right choice or not.

As someone in the non-fungible token world (3 Guys NFT), I don’t understand why people will spend thousands and thousands of dollars on virtual trading cards or digital moments instead of something in physical form. But I’m a kid from Brooklyn, born in the 70s who started collecting baseball cards in 1979. It is not for me to understand why people will buy lots of money for digital items, but people are doing it and I want to take advantage of it.

Same with new ideas and situations in the retirement plan business, I would always from industry leaders who would scoff at new trends in the industry such as ERISA fiduciary services. How many third-party administrators do I know who jokes about ERISA 3(16) administration and had zero interest in offering it, that are now offering it?

We are all shaped by our experiences and the times we grew up in, but we should never let that be a chain that forces us to thumb our nose and trends in the industry that will leave us behind if we’re stubborn to change.

The original Highlander is kind of a silly movie, with the tagline “there can be only one.” I do like the fact that Sean Connery is in it and the fact I was in the crowd at the Pro Wrestling USA card at the Brendan Byrne Arena used for the beginning of the movie (and no, Christopher Lambert wasn’t there).

As far as there can be only one, I find the same thing about Pooled Employer Plans (PEPs). While everyone is getting a PEP the way that Oprah Winfrey would hand out free stuff to her audience, I will claim that 90-95% of PEPs will fail because I am convinced that most of them won’t get much in assets. There are way too many PEPs for the demand. The demand is there, but I just think there is a glut out there because every provider who wanted their own PEP, started one. The PEP start-up process is long and exhausting, I have one that had been in the works for 11 months. It takes forever (or feels like it) in setting it up, as most providers have had a tough time drafting agreements and getting things ready.

Again, it’s like with any fad or phenomenon, there is a lot of demand and without people, realizing way too much supply.

A few months back, I was working with a 401(k) plan sponsor on a big Voluntary Compliance Program (VCP) issue. The issue was simple, the latest plan restatement (since 2019) improperly included bonuses to the definition of compensation, which was inconsistent with the terms of previous plan documents.

Rather than amending the plan going forward and self-correcting with qualified non-elective contributions (to make up for missed deferral opportunities) and makeup employer profit-sharing contributions for the bonuses, I decided to roll the dice. I asked the Internal Revenue Service (IRS) through the VCP application, whether they would accept a retroactive amendment to exclude bonuses. I wasn’t 100 percent certain that the IRS would approve it, but they did. I reasoned that when it comes to correcting issues, you never know whether something will be approved unless you ask. I always find that people aren’t mind readers and you need to just simply ask. Thanks to just asking, the plan sponsor limited how much they needed to spend to correct the problem, they didn’t have to outlay more in contributions to fix the problem.e to outlay more in contributions to fix the problem.

NFTs or non-fungible tokens is an interesting development where people can buy digital art or trading cards that are not physical, but exist in a blockchain.

Based on an idea I had and derived from the relationships developed through. That 401(k) Conference, I am the co-owner of 3 Guys NFT, developing crypto trading cards of players from yesteryear. Our first subjects are Dwight Gooden and Rudy Ruettiger.

The trading cards can be purchased at https://opensea.io/accounts/3GuysNFT

Kimberly-Clark Corp. is the latest defendant in a proposed class action Employee Retirement Income Security Act (ERISA) lawsuit. The complaint alleges that Kimberly-Clark breached its fiduciary duties by authorizing the plan to pay unreasonably high fees for retirement plan services.

The 401(k) has more than 16,000 participants and assets of approximately $4 billion. The lawsuit claims Kimberly-Clark’s plan provider arrangement involves “cobbled together services from many providers, which often leads to a duplication of services and higher fees with no additional benefit to plan participants.” The complaint listed 10 covered service providers for the plan, which seems to be quite a lot.

According to the complaint, from the years 2015 to 2019, the average annual administration fees were at least $78 per participant. The lawsuit claims that the fees should $30 per participant, if not lower.

My latest article on JDSupra.com can be found here

My latest newsletter can be found here.

When the Internal Revenue Service develops a laundry list of the things that they will focus on, when it comes to retirement plans, we need to listen.

The IRS Tax Exempt and Government Entities Compliance Governance Board has approved the following to be prioritized and resourced, primarily through plan audits.

• Review worker classifications to ensure that employees are not misclassified and retirement plans satisfy coverage requirements. Misclassification as employees as a non-employee or leased employee has always been an issue.
• Review small tax-exempt organizations that sponsor retirement plans with a focus on plan investments and whether there are any prohibited transactions between the plan and its participants.
• Review one-participant plans to determine if there are operational or qualification failures, income and excise tax adjustments, or plan document violations, especially Solo 401(k) plans.
• Review required minimum distributions in large defined benefit plans to ensure compliance with Internal Revenue Code Section (IRC Sec.) 401(a)(9). I have seen way too many plans failing to satisfy the required minimum distribution for their owners, who work past age 70 ½ or 72.
• Determine if earned income and plan allocations are correct for self-employed individuals, particularly those that file Schedule C, Profit or Loss from Business (Sole Proprietorship). Again, another huge issue for Solo 401(k) plans and other small proprietor plans.
• Review participant loans to ensure compliance with rules under IRC Sec. 72(p). Too many loans out there that participants might have defaulted or loan provisions that violate the Code section.

Solo 401(k) plans are a great benefit for sole proprietors. I know, I have one. The problem is they are on the Internal Revenue Service’s (IRS’) radar.

The IRS’s Tax Exempt and Government Entities division has identified one-participant 401(k) plans as among its current audit initiatives. Why? They’re usually run with very little administration and assistance to these solo 401(k) plan sponsors. Solo 401(k) plans are subject to the same rules and requirements as any other 401(k) plan, but they aren’t run that way.

Some solo 401(k) plans have huge compliance issues, such as not covering employees for coverage (which means they should have non-Solo 401(k) plan in place). Some solo 401(k) plans don’t file a Form 5500, even though they have to when $250,000 or more are in the plan. There could be a violation of the plan sponsor exceeding the contribution and deduction limits, as well as controlled group/affiliated service group rules. So expect solo 401(k) plans that are. Not in compliance to be audited in the near future.