The Rosenbaum Law Firm P.C. Blog

If you become big enough, you can get sued. That is the lesson I tell everyone when someone mentions to me when a large plan provider or a large plan gets sued.

Jerry Schlicter’s law firms has targeted the Pentegra Defined Contribution Plan for Financial Institutions, a multiple employer plan, or MEP, for a class action lawsuit.

The case claims that the Defendants acted to enrich themselves, including Pentegra, by allowing exorbitantly unreasonable expenses to be charged to participants for administration of the Plan. The suit also alleged that the defendants “profit from collecting additional fees directly from employers who participate in the Plan—putatively to pay for “outsourced” fiduciary responsibility—but act directly contrary to that assumed fiduciary responsibility by draining the retirement assets of Plan participants to enrich themselves.”

The MEP has  27,227 participants and $2.1 billion in assets, according to the lawsuit. The lawsuit invokes claims that participants in the Plan subsidize Pentegra’s marketing materials and whitepapers that tout their MEPS.

According to the plaintiffs, the plan “paid Pentegra at least $9.52 million in direct recordkeeping and administration fees, or an average of $359.70 per participant,” rising to $10.58 million, or $388.77 per participant by 2018. These fees are clearly are eye popping for a plan that size. The lawsuit compares this MEP to other MEPs that charge participants hundreds less per participant.

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It was in “This is Spinal Tap” where I heard the line how there was such a fine line between stupid and clever.

When it comes to protecting retirement plans, I always say KISS, the acronym for “keep it simple stupid”. So many times I have seen plan sponsors try to be clever and there is always a high price to pay for being clever.

Whether it’s allowing company stock, too many proprietary funds, or hiring a plan provider who is a relative, people who ask for trouble in their role as 401(k) plan sponsor will find it. Being a plan sponsor means minimizing risk and risky behavior will make you end up paying a price.

As summer turns to fall, it’s important for you as a 401(k) plan sponsor to use this time to consider what changes you may need for 2021. Whether it’s a change of plan provisions for eligibility or contributions, it’s the best time to get ready for the new year.

While you do have added flexibility in adding a safe harbor non-elective contribution thanks to the SECURE Act, you still don’t have that with adding the safe harbor matching contribution. Fall is the time for New Year planning as well when it comes time to reviewing plan providers and fees as January 1 is the best time to make a switch to a new plan provider.

Whatever you decide to do, it’s the best time to figure out what should be done.

The law firm I started 10 years ago is actually more than 20 years old as it was a shell where I could offer legal services on the side while I did my normal day job. It was an experiment on whether I could go out on my own and I learned during that time what worked and didn’t. I can tell you that advertising in the local Pennysaver or advertising yourself as a low-cost legal provider are likely misses.

So part of my practice was offering most services such as tax preparation and wills on a flat fee. For a time, wills were ridiculously low such as a will for $100. I had a tax client who wanted me to do a will and she knew about those fill in the blank forms that Staples offered. I had software that produced wills in a Microsoft Word format. The clients asked me whether I would do their wills using those fill in the blank forms and whether I would cut my fee. I told them I wouldn’t because that was outside my comfort zone and my will fee was ridiculously low as it was.

A good part of my practice is working with financial advisors and TPAs. Some have me on a monthly retainer; most just call out of the blue with questions (feel free to call). Many advisors ask for my opinion on clients who request something outside the box, such as asking an ERISA §3(38) fiduciary who uses index funds to retain some of the actively managed funds that the previous advisor added to the fund lineup or a financial advisor being asked to assist a plan sponsor with an Internal Revenue Service (IRS). Being a retirement plan provider is hard enough without adding stuff to your plate that may put yourself out of your level of comfort. If you are a §3(38) fiduciary, the whole point was for the plan sponsor to offer discretionary control over plan investments and you don’t have control when the plan sponsors are asking you to retain their previously added investment options. Being a financial advisor doesn’t mean being an ERISA attorney in handling plan audits.

The road to hell is paved with good intentions and I am sure that there have been plan providers being sued for errors caused in favors these providers did for specific plan sponsor clients that the provider knew was out of their level of comfort.

It’s easier to say yes to every plan sponsor request, but it takes a better businessperson to turn down business that may increase your liability and get you out of that zone of comfort.

I once referred a 401(k) plan to an advisor. He did a terrible job and there were issues regarding his ability to do the work. Making a lousy referral is even worse than doing poor work of your own because at least you had control over your own work.

Of course, I was embarrassed and the advisor came up with so many embarrassing excuses as to why he neglected the client and I looked like a moron in front of this plan sponsor. Yet, despite everything, all I wanted was an apology from the advisor.

Sometimes all you have to do is to say sorry if you mess up or if the client is disappointed in any way even if it was something out of your control. Saying sorry and not making any excuses is a good way for your clients to release tension because unhappy clients leave and just fighting over something just because you won’t simply say sorry is silly. Saying you are sorry isn’t the same as admitting guilt and sometimes, it’s better to give in even though apologizing is not giving in.

Clients need to know you care and just being indignant in refusing to apologize for anything can go a long way in causing grief for your business that you do not need.

I like choice and I like the idea that there is something called Pooled Employer Plans (PEPs) in 2021 because I always liked the idea of Open Multiple Employer Plans (MEPs). Another great aspect of it is the discussion and debate concerning them.

I have spoken to many providers about PEPs and they’re wary of its success or lack thereof. We all have memories of the Open MEPs and how so many were never able to achieve they needed to be, to be cost-effective. Some providers are going all-in on PEPs and my concern is that it will be a gold rush where few providers will find gold and most, will just find worthless rocks.  Those that succeed will figure out how to properly price these plans in both time and money. They will know the correct methods of distribution and growing assets big enough to justify the fees associated with an audit.

This isn’t automatic enrollment or another provision to grow plan assets for everyone, it’s going to be a niche market where very few plan providers will succeed.

If you look at the stock market, you wouldn’t know unemployment is 10% and that 180,000 Americans died.

Small and medium-sized businesses have born the brunt of the closings mandate by state governments around the country, while the Wal Marts, Home Depots, and Targets have remained open.

The problem with business closings is that we are starting to see the temporary closings become permanent for many businesses. The problem with the 401(k) plan terminations of these shuttered businesses is that it will incite distributions to terminated participants who need the money now and will not roll over to an IRA. The problem is that by cashing or retirement benefits now, it will only exacerbate the retirement crisis in this country.

A new report from the Government Accountability Office looks at the barriers that participants and their former spouse face when seeking to obtain a Qualified Domestic Relations Order (QDRO).

In a report, the GAO examined what is known about the number of QDRO recipients, the fees involved, and other expenses for processing them, the reasons plans do not initially qualify DROs and the challenges experts identify regarding the QDRO process.

According to the GAO’s report, there no data on the number of QDROs, but plans and recordkeepers the agency interviewed and surveyed reported that few seek and obtain QDROs.

The GAO recommend\ed that the Department of Labor (DOL) take steps to ensure that information regarding the requirements for QDROs is available and easily accessible to participants

The DOL generally agreed that it should take steps to ensure that information regarding the requirements for QDROs is available and easily accessible.

As an ERISA attorney for 22 years, I find that the problem with QDROs rests on divorce attorneys who have basic or little. knowledge of QDROS. Most people going through a divorce rely on counsel and the problems I’ve seen rests on divorce attorneys who know little on how to properly draft a QDRO.

I always talk about how plan sponsors need to work with experienced financial advisors, third party administration (TPA) firms, and ERISA attorneys on their plan needs.

Like with reasonable fees, I believe that the term “experienced” is vague. Experience doesn’t just mean years of service as a service provider. Years of experience are just one measure of retirement plan experience. Retirement plan experience could be a number of plans that a provider is currently working on or even something as performing good practices in an industry where not many providers do that. So I was kind of taken back when a financial advisor I assumed that I said experience means years because this advisor (who has made a name for himself as being excellent) protested that he had 3 ½ years experience and his commitment to his clients in doing the right thing was better than what many with 35 years experience as a financial advisor who put their needs ahead of the client. I told him that he was preaching to the choir because I’ve been there and done that.

I worked at a law firm for 2 ½ years. You had some law firm partners who were excellent and then you had some that you knew that either fell through the cracks or more likely, were “juiced in” because a senior partner took their fancy. At one point, our firm had about 5 ERISA partners. All of these partners were from the multiemployer world (union Taft Hartley plans), which is a different creature from the single employer world. I bet none of these attorneys knew what revenue sharing was or how a single employer 401(k) plan because one of these partners was our 401(k) plan’s trustee and he never bothered to hire a financial advisor or review investments with the other two trustees or have participants in the plan get investment education that only increased the law firm’s fiduciary liability as a plan sponsor. So if you sponsor a 401(k) plan, would you hire one of these ERISA attorneys? At another firm, I once worked for one of the best ERISA attorneys in the country (in the multiemployer world) and didn’t know what revenue sharing was and why plan sponsors need to be concerned about administrative costs.

The same can be said of financial advisors. A financial advisor may have a billion dollars or management or have been in the business for 30+ years, but it’s irrelevant if they don’t have more than one retirement plan on their books. Even if they have a load of retirement plans on their books, it doesn’t mean anything if they don’t help their clients with an investment policy statement or giving education to participants in participant-directed 401(k) plans.

Same with TPAs. Some can’t handle daily valued 401(k) plans, some can’t handle defined benefit plans, and some can’t handle any retirement plan outside of the box like new comparability form of allocation.

The point is that levels of experience may vary and it’s important to find the retirement plan provider with the right experience. It has to be the right fit for the plan based on the plan’s size and type. How do you? Nothing beats word of mouth and asking the potential retirement plan provider the right questions, especially if they have the experience to handle your type of plan.