The Rosenbaum Law Firm P.C. Blog

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

When you start fixing up the house (for me, a never-ending battle) and replacing appliances or items like the front door or the roof (that was me last week), you realize that the replacements are more energy efficient. Replacing that old refrigerator or that washing machine can lead to some savings in your energy bills.

When it comes to retirement plans, there are so many of them that are inefficient in either their cost structure or plan design. While cost structure will be all disclosed to plan sponsors (who have the duty as fiduciaries to determine their reasonableness), plan design inefficiency is something that won’t be discovered until the plan goes through an independent review (like my Retirement Plan Tune-Up) or takes the plan to another third party administrator (TPA). Inefficient plan designs come in all sorts, but it wastes money like that 40-year-old furnace I replaced 15 years ago.

Inefficient plan design wastes money because it either makes less cost-effective contributions or it doesn’t maximize tax-deductible contributions to highly compensated employees. So it either wastes money in unnecessary contributions or is inefficient for tax savings.

In terms of wasting money, it could be a defined benefit plan that has outlived its usefulness or it could be a 401(k) plan with a new comparability plan design and a safe harbor matching contribution (because unlike a safe harbor 3% profit sharing contribution, you cannot use the safe harbor matching to offset any new comparability contributions to non-highly compensated employees like you could with the safe harbor 3% profit sharing contribution). A plan that doesn’t maximize contributions could be a 401(k) plan that consistently fails discrimination testing and doesn’t implement a safe harbor plan design or a plan that doesn’t offer a new comparability profit sharing allocation to highly compensated employees when the plan sponsor can afford it.

Retirement plans are a great employee benefit for retirement savings, but you should never forget the tax savings component it has.

So when I consistently state the claim that plan sponsors need to find a quality TPA that is not predicated on price but predicated on its competency and knowledge of cost-effective, retirement plan design.

When you look for new appliances, you always look for those with an Energy Star sticker. When shopping for TPAs, look for those who would deserve a Tax Star sticker (if one existed, don’t steal my idea!).

When it comes to health and fitness, you constantly hear studies about what foods fight or cause cancer. Of course, those studies are then debunked. I remember how oat bran was cited to cut down on cholesterol and how margarine was better than butter. Plus I have heard how coffee can prolong life or kill you. I joked that one study will suggest that constantly eating broccoli will cause cancer too.

I blogged once about how the paranoia in me figures that a plan provider that quickly cuts down their fee might have been overcharging the client, to begin with. People tend to think I have a bias against plan providers such as third party administration (TPA) firms and I certainly don’t because I see the overwhelming value of a good TPA.

With fee disclosure regulations around for 8 years and constant news articles about 401(k) fees, I think the fascination and concentration on fees could be detrimental if that is the major or sole criteria in selection plan providers.

 401(k) plan sponsors, as plan fiduciaries have important responsibilities. These responsibilities include:

Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them; carrying out their duties prudently; following the plan documents (unless inconsistent with ERISA); diversifying plan investments, and paying only reasonable plan expenses.

While paying unreasonable plan expenses is a breach of fiduciary duty, picking providers solely or mainly because they are low in fees can also breach a fiduciary duty. Retirement plan sponsors also have a duty of prudence as one of their fiduciary duties. Prudence is about the process of making fiduciary decisions. Prudence requires the plan fiduciaries to document decisions and the basis for those decisions. So in hiring any plan provider, a fiduciary should survey several potential providers. By doing so, a fiduciary can document the process and make a meaningful comparison and selection.

Governmental contracts are typically decided by the lowest bidder. Sometimes it works, lots of times it doesn’t. The same thing goes with selecting plan providers. There are many low-cost providers out there and some do a very good job and some do not. Some low-cost TPAs may be good if there is a limited amount of work on a 401(k) plan that has a safe harbor design and terrible if the plan requires a discrimination test.

Paying only reasonable expenses is not the same as paying low expenses. Plan provider expenses are less about cost and more about value. A financial advisor charging 15 basis points providing no help in the fiduciary process such as developing an investment policy statement, reviewing investment options, and educating participants in a participant-directed 401(k) plan is less reasonable than paying another advisor 50 basis points to serve as an ERISA §3(38) fiduciary. Why? The advisor charging 15 basis points is increasing the plan sponsor’s liability as a fiduciary because they are doing nothing while the ERISA §3(38) fiduciary is assuming almost all of that liability. Reasonableness is not about cost, it’s about the value of the services provided. A TPA that can help develop a plan design that maximizes contribution for highly compensated employees through a safe harbor/new comparability or a cash balance design is a better value than a TPA who only knows a 401(k) plan with comp to comp allocation.

Plan sponsors need to focus on the competency of plan providers, the services they offer, and the value they provide. Concentrating just on how much a provider charges may cost more in the long run if that provider provides incompetent services. I have seen too many plan sponsors forced into the Internal Revenue Service correction programs to fix the errors of plan providers that were picked solely on cost.

I am still how often 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. 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 as required under a Section ERISA 404(c) Plan.  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 to meet that broad range requirement.

I think the value of a financial advisor 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 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.

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 is 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.

As an ERISA attorney, I always have an open phone policy with plan sponsors, financial advisors, accountants, TPAs, and other attorneys from around the country on questions they may have about their plan or a client’s retirement plan. I never wanted to be that law firm attorney who was charging for every simple phone call and I just feel that this policy is a great way to build relationships in this tight-knit industry. That being said, some of the questions I get tend to be repetitive. So while I’m not trying to dissuade people from calling me, I just want to educate everyone on some issues that they may not understand. Like I always say, the reason I love the retirement plan industry is that you can learn something new every day. So here we go:

1. In a 401(k) plan, if you are under 59 ½, you can only get a distribution of your salary deferrals for hardship, death, disability, or retirement. There can be no in-service distribution for salary deferrals in the plan document for less than age 59 ½. If you did, it would be a disqualifying plan provision. You can have an in-service from the profit-sharing source at any stated age though.
2. A transaction between a plan and a disqualified person is a prohibited transaction. So the plan buying a building and leasing it to the plan sponsor is a prohibited transaction. Even a financial advisor serving as a plan fiduciary can’t actively solicit rollovers from former plan participants.
3. Any participant-directed investment that requires a minimum investment or account balance is subject to testing under benefits, rights, and features to make sure that these benefits, rights, or features of a plan don’t discriminate against non-highly compensated employees. So investments with minimum investments of $25,000 can be discriminatory if enough non-highly compensated employees don’t have $25,000 in their plan account. One solution to that dilemma is if the investment can be traded in a brokerage account, offer self-directed brokerage accounts to all plan participants.
4. There is no statute of limitation for not filing a Form 5500. Using the Department of Labor’s Delinquent Filing Program is far less expensive than getting socked with a penalty from the Internal Revenue Service for $50,000.
5. Offering a new comparability profit sharing allocation to a 401(k) plan should not be used in tandem with a safe harbor matching contribution formula because you can not use the matching contribution to offset any minimum contributions under a new comparability plan design (which a safe harbor profit sharing 3% contribution can).
6. When terminating 401(k) plans, be wary of the successor plan rule which is only applicable to 401(k) plans. Under the successor 401(k) plan rule, generally, an employer may not terminate a 401(k) plan and then start a new one for at least 12 months after the original plan is terminated.
7. Be careful of offering any incentives for people deferring or not deferring into a 401(k) plan. A 401(k) plan is not qualified unless it complies with the Contingent Benefit Rule. The Contingent Benefit Rule provides, in part, that no other benefit may be conditioned, directly or indirectly, on an employee electing to make or not to make elective contributions under the 401(k) plan.
8. Many plan errors can be corrected without seeking submission to the IRS’ voluntary compliance programs. It all depends on the size of the error and the years involved.

As many of you know, I offer a Retirement Plan Tune-Up, a legal review for $750 that reviews the documentation, administration, costs, and the fiduciary process of a retirement plan.

Regardless of whether you would use my review or hire someone else, it is incumbent on plan sponsors as plan fiduciaries to review their plan on an annual basis to see whether the plan still fits their needs and whether it’s running correctly. Running correctly is about paying reasonable fees, taking care of the fiduciary process, and making sure the plan is operating correctly according to its terms and the law.

So while all plans should be reviewed, there are some plans with more glaring problems than others. These plans may have symptoms that the plan isn’t running correctly and should immediately undergo a plan review.

1. A plan where the third-party administrator is not fully transparent on fees, especially when it comes to indirect payments they receive, such as revenue sharing payments from mutual funds.
2. A company that has a profit-sharing and money purchase plan that covers the same group of employees.
3. A plan that has consistently failed their discrimination testing, whether it’s the tests for salary deferrals, top-heavy, match, or 410(b) participation.
4. A defined benefit plan that is underfunded.
5. A defined benefit plan for a company that has increased its workforce.
6. Any plan with no financial advisor.
7. A money purchase plan that is covering non-collectively bargained employees.
8. Any 401(k) plan that has not reviewed their contract with their insurance company provider in the last 5 years.
9. Any plan without an investment policy statement.
10. Any plan that has not reviewed their choice of investments in the last year.
11. Any plan that has not seen their financial advisor in the last year.
12. Any plan without an ERISA bond and/or fiduciary liability insurance.
13. A 401(k) plan with low participation or low average account balance per participant.
14. Any plan that has not been updated in the last 2-3 years.

These are just some examples of symptoms that indicate you may have a retirement plan in distress. Regardless of whether you have the symptoms or not, you should have your plan reviewed.

My latest newsletter can be found here.

When I was 13 and I had my Bar Mitzvah, I plunked down about $2,000 in 1985 money for a state of the art Apple IIe with a monochrome monitor. One of the first pieces of software I bought was the top desktop publishing software known as Print Shop. I bought it through mail order (yes, there was life before Amazon.com) for about $30 and I remember that my wealthy uncle bought the very same program for my cousin for about $60. My uncle really thought nothing of the fact that he bought the very same program at double the price I paid. Sometimes people like to overpay.

When I was 13 and I had my Bar Mitzvah, I plunked down about $2,000 in 1985 money for a state of the art Apple IIe with a monochrome monitor. One of the first pieces of software I bought was the top desktop publishing software known as Print Shop. I bought it through mail order (yes, there was life before Amazon.com) for about $30 and I remember that my wealthy uncle bought the very same program for my cousin for about $60. My uncle really thought nothing of the fact that he bought the very same program at double the price I paid. Sometimes people like to overpay.

I have a mantra that I hate to pay retail. I love a good sale. Yet there are some people who thumb their nose at paying at a discount or going to an outlet store. Somehow, it isn’t right for these people to pay less.

The problem is that plan fiduciaries such as plan sponsors and trustees don’t have that luxury. With their fiduciary duty on the line, plan sponsors need to pay reasonable plan expenses for the services involved. Plan fiduciaries can only determine whether the fees they pay are reasonable by shopping their plan to other service providers. If they don’t shop around and overpay in fees, they may subject themselves to liability from plan participants. It should be noted that plan sponsors don’t have to pick the cheapest providers because often, there is a reason why some providers are cheap.

How to determine whether a plan sponsor is paying way too much? Like Justice Potter Stewart would say, I know it when I see it. I have seen the information shown on Form 5500. Whether it’s the plan sponsor paying a Big 4 accounting firm $54,000 for a limited scope audit or another plan sponsor paying a broker 60 basis points (.60%) on a $14 million 401(k) plan, there are plan sponsors seriously overpaying for services. Fee disclosure has made it easier to detect if plan sponsors are overpaying, but again, the only way to determine that is if plan sponsors survey the 401(k) marketplace to see what other plan sponsors are paying.

I have a mantra that I hate to pay retail. I love a good sale. Yet there are some people who thumb their nose at paying at a discount or going to an outlet store. Somehow, it isn’t right for these people to pay less.

The problem is that plan fiduciaries such as plan sponsors and trustees don’t have that luxury. With their fiduciary duty on the line, plan sponsors need to pay reasonable plan expenses for the services involved. Plan fiduciaries can only determine whether the fees they pay are reasonable by shopping their plan to other service providers. If they don’t shop around and overpay in fees, they may subject themselves to liability from plan participants. It should be noted that plan sponsors don’t have to pick the cheapest providers because often, there is a reason why some providers are cheap.

How to determine whether a plan sponsor is paying way too much? Like Justice Potter Stewart would say, I know it when I see it. I have seen the information shown on Form 5500. Whether it’s the plan sponsor paying a Big 4 accounting firm $54,000 for a limited scope audit or another plan sponsor paying a broker 60 basis points (.60%) on a $14 million 401(k) plan, there are plan sponsors seriously overpaying for services. Fee disclosure has made it easier to detect if plan sponsors are overpaying, but again, the only way to determine that is if plan sponsors survey the 401(k) marketplace to see what other plan sponsors are paying.

10 years in, I’m glad I went on my own as an ERISA attorney, so I could provide value to clients, instead of being wedded to a billable hour because of a huge overhead working for a law firm. 

I have championed the use of an independent ERISA attorney for plan documents instead of relying on the attorney for the third party administration firm (TPA) or whoever is drafting plan documents for a bundled provider. I stressed the value of an attorney-client relationship and the fact that plan documents are legal documents with legal consequences.

Like with TPAs and financial advisors, there are some good ERISA attorneys and not so good ERISA attorneys. I know this from my experiences working for TPAs and working at a law firm. I will never forget reviewing the work of a California ERISA attorney and an amendment he was trying to make to his client’s matching contribution formula. The amendment was a monstrosity and I quipped to my plan conversion expert that this attorney can write the amendment, but good luck to us in administering it. So when picking an ERISA attorney for a single employer plan, pick an ERISA attorney who works with single-employer plans. So when hiring an attorney for a 401(k) plan, don’t hire an ERISA attorney who only works on union (multiemployer) plans and doesn’t know what revenue sharing is.

 Also, value is an important consideration. If a TPA is offering a pre-approved plan document for $2,000 and an attorney is creating a plan from scratch for $7,000 to $25,000 and the plan belongs to a small or medium-size employer, then I would recommend using the TPA’s services. I also recall an advisor friend of mine who advised me of an ERISA attorney who went through a plan sponsor’s entire $100,000 budget for a full fiduciary review before all the work was completed.

To me, value is such an important concept in terms of all retirement plan services, then that is why my practice is focused on flat fee billing and being competitive with the legal services of TPAs. I stress a flat fee because retirement plan sponsors need cost certainty and because of my disillusionment with working for law firms, who stressed billable hours more than anything else. I have never been a big fan of the billable hour because since billable hours are the most important criteria in judging and rewarding partners and associates; it opens itself to abuse and overbilling. I understand why medium-sized law firms need to bill by the hour, based on the overhead they carry.

 As far as my TPA experience goes, I know it has been fodder for a lot of my material, but my career would have been nothing without it. It brought me so much experience that I have never would have gotten from a law school textbook or the halls of a law firm. Working for a TPA made me think quickly on my feet, churning out plan documents quickly, come up with solutions for problems you don’t read in textbooks, and made me love the idea of flat fee billing for plan documentation. I wouldn’t have traded that experience for anything.