The Rosenbaum Law Firm P.C. Blog

As an ERISA attorney, my retainer agreements are pretty straight and clear. Governed by the laws that govern attorney behavior, I have no choice. Yet, Third Party Administrators (TPAs) don’t have guidelines to live by.

While fee disclosures have made fees a little more clear, they haven’t done that much for contracts for TPA services. TPAs should offer clear contracts for their services, as well as some formulas for fees that they may not be able to easily calculate, such as deconversion fees and other ancillary work. They also need to be clear on what services they will provide and when, as when they will get paid.

One of the biggest disputes is when a client fires their TPA and there is a discrepancy on what work still needs to be done and what is being charged.

First, there was the call for an Investment Policy Statement (IPS). Then advisors were touting the need for an Education Policy Statement (EPS). What next?

The problem with these statements is they’re not just creeds, these are hoops that an advisor has set up, that a plan sponsor has to jump through. These are policies that the plan sponsor voluntarily put in place and they have to follow them. The problem is if they don’t, it’s a breach of their fiduciary process.

Sometimes, volunteering things isn’t a wise move for plan sponsors, so I ask advisors and other providers to ponder whether these additional statements are worth it.

It is a well-known fact that I don’t like Target Date Funds (TDFs). It springs from the market meltdown in 2008-2009 when it was realized that during a bear market, certain 2015-2020 funds had a huge exposure to equity.

Plus there was no equity exposure consistency between different fund family’s TDFs, even if they had the same year on the fund title. Another reason I hate TDFs is because of the glide path, people live a lot longer these days than their retirement date.

The whole idea behind TDFs is that it is a one-stop shop investment. It’s supposed to be for participants who get confused about asset allocation or as the qualified default investment. Yet a recent John Hancock study shows that 25% of all 401(k) investors invest in other funds besides their TDF investment. That a lot of people doing things wrong and defeats the whole purpose of a TDF.

Failure to file Form 5500 is costly as the Department of Labor (DOL) and Internal Revenue Service (IRS) has jurisdiction over the form and can set forth separate penalties.

For penalties assessed after January 15, 2021, the DOL per day penalty for failure to properly Form 5500 has increased from $2,233 to $2,259, with no maximum. In addition to the DOL penalties, the IRS can also assess a penalty for late filers up to $250 a day, up to a maximum penalty of $150,000 per plan year.

That is why plan sponsors with late 550s should file through the DOL’s Delinquent Filer Voluntary Compliance Program (DFVCP).

The DOL penalties under DFVCP are reduced from $2,259 per day to $10 per day. Penalties for small plans (generally under 100 participants) are capped at $750 for a single late Form 5500 and $1,500 for multiple years per plan. Penalties for large plans (generally 100 employees and over) are capped at $2,000 for a single late Form 5500 and $4,000 for multiple years per plan.

When you’re big enough, you are a target for a 401(k)lawsuit. The American National Red Cross has become another target for its 401(k) plan.

The lawsuit says the American Red Cross breached their fiduciary duties by (1) failing to review the plan’s investment portfolio with due care to ensure that each investment option was prudent, in terms of cost; (2) maintaining certain funds in the plan even though cheaper options were available; and (3) failing to control the plan’s recordkeeping costs.

The participant fees in the Red Cross plan ranged from $126.89 in 2015 to $207.67 in 2019., while similarly sized plans charged $40 a head.

The lawsuit claims that the plan has engaged in a rebranding process in which it contracts with providers of collective investment trusts (CIT)s to offer each provider’s CIT bearing the Red Cross name with the only difference being an additional cost.

I like the idea of states enacting mandated employer State IRA programs, I just don’t like State Employer Mandated IRAs. It doesn’t make sense or does it.

I like the idea of states requiring employers to provide retirement plan coverage to their employees and I believe that it will only spur employers to forsake the use of a mandated IRA for a 401(k) plan that will provide more benefits for employees and get the hands of the state out of employees’ retirement savings.

If you start a retirement plan provider practice, it can be frustrating. Like I always say about things in my life, “If it wasn’t a struggle, it wasn’t any fun”. Building a retirement plan practice isn’t easy because a stash of clients isn’t going to fall into your lap. When it comes to building a practice, the one thing you can never yield to is disillusionment.

I was disillusioned many times in life; I think my three years at law school were 6 months of hope followed by 2 ½ years of disillusionment. I let some of the bad things that happened to me there really affect me and I did it to the detriment of my grades and friendships in law school.

Getting clients isn’t easy and some of the most frustrating people you meet are potential clients who will accept the fact that they are being ripped off by their current providers and still won’t give you the time of day.

It’s ok to be disillusioned at times, but don’t let it paralyze you or sidetrack you in building your practice.

I always say that the only reason I ever had any success is my ambition and will to persevere. I’m not the smartest or the best, I just will never quit. 11 years after starting my own practice, it’s still a struggle and as I stated in the first paragraph, it has been a lot of fun.

People hate dentists. I get it, having gone years at times without getting a checkup. Since I take care of my teeth, cavities weren’t a problem. I just hated the whole scaling process and the x-rays where I was gagging by shoving film in my mouth.

Plan sponsors have the fear of ERISA attorneys and the reason why is the unlimited power to bill by the hour. ERISA attorneys that work at larger firms have a propensity to bill a lot because of the economies of law firms with large overhead. That’s why I flat fee bill almost everything I do.

Aside from the quick commercial about my firm and reasonable fees, the other reason those plan sponsors should get over the fear of ERISA attorneys because of the trouble that ERISA attorneys get plan sponsors out of by helping them maintain the tax qualification of the Plan and complying with ERISA. Too often plan sponsors call ERISA attorneys when it’s just too late to avoid penalties and sanctions.

If you’re a retirement plan sponsor, why should you care about plan design? Retirement plan design is one of the most underappreciated facets of the retirement plan business and it really should be appreciated. The reason why it should be appreciated is that it can help you maximize and better utilize employer contributions, which are used for tax deductions.

If you’re a plan sponsor with ample resources to make contributions to yourself and your highly compensated employees, a good plan design can allow you and your highly compensated employees to get more in employer contributions than you could if you had a third-party administrator (TPA) that didn’t understand the beauty and science of plan design.

Sometimes plan design isn’t enough to maximize employer contributions and sometimes you may need another retirement plan like a cash balance plan or defined benefit plan to work with your 401(k) plan to do the trick.

So when you look for a TPA to hire, someone who is an expert at retirement plan design is someone you need.

Most administration conducted by third-party administrators (TPAs) is quite good, but the juicy and scary stories are about the terrible TPAs and the havoc they create.

What is amazing are not the errors in the definition of compensation or a screwed-up compliance test, what is amazing are the catastrophic errors. I’m talking about the 5500s that weren’t filed or the missing restatements that weren’t made. I just talked to a potential client over 15 years of documents and Form 5500s that were not done. While I can scratch my head about how a TPA can get this so wrong, I also think about the plan sponsor that was taken for a ride and just didn’t realize their fiduciary duty to get these things done.