I have to see that as after 18 years, there is very little I fear and I fear of retirement plan audits by the Department of Labor (DOL). I’m going to have a larger fear as it’s clear that DOL audits will increase thanks to increased regulation and oversight.
Why do I fear it? Usually, unlike Internal Revenue Service (IRS) audits, they don’t seem to be random. There is a randomness to many, but many audits are thanks to a complaint filed by an aggrieved plan participant. My two biggest DOL audit issues were from issues that appeared small, but were bigger plan disasters and both resulted from former employees that they weren’t covered under the plans when they should have. Complaints and audits are an opportunity for the DOL to dig and they do a really good job of digging. I think they are scarier because unlike the IRS audits, they’re concerned about the rights about plan participants and when you are trying to identify if someone’s rights are being violated, then you maybe a little more dedicated in what you’re doing and I find DOL agents to be very knowledgeable and through.
If you hear from the DOL, immediately contact an ERISA attorney. I say that with peace and love, don’t ever handle it by yourself.
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When I was in college and law school, I had this fancy leather bound DayRunner that had all my contacts, business cards, and notes. For 1992-1998, it was state of the art because I didn’t have the shekels for a Palm Pilot and the Newton couldn’t read my writing anyway.
I called the DayRunner, the “football” in recognition of the “nuclear football” attaché case that stores all of our nuclear launch codes that is usually handcuffed to someone up the chain of the military command.
I’m sure somewhere in my mind, I though the name and number of the recruiting coordinator at the Irvine, CA office of Ernst & Young was as important as a launch code, it wasn’t. It reminds me, she never did let me now about that job from 1998.
Seriously, to differentiate yourself as a plan provider, it maybe wise to give clients their own “football”. Their football wouldn’t have codes, but the important stuff that all plan sponsors need. That would be copies of the plan documents, the investment policy statement, fund menu, minutes from fiduciary meetings, materials that were handed out at enrollment meetings, or some other things that you may deem worthy. These days, it doesn’t even have to be in a fancy binder because a USB flash memory key can do the trick.
It maybe a gimmick, but it’s a good gimmick. It allows you to differentiate yourself from the competition, and a little gift to a client goes a long way. I knew of an advisor who did this many years ago, probably to justify the 75 basis points he was charging at the time. Regardless of what you charge, I think it’s an effective tool.
I was leaving a position as an ERISA attorney at a third party administration (TPA) firm for what I thought would be greener pastures. The TPA quickly hired an unemployed ERISA attorney for the role and when he was telling me how he was going delegate work to some of our administrators to help him out, I predicted he wouldn’t last 6 months. He lasted 4 months.
What he failed to realize and what I knew was that there was a culture where the administrators wanted to do nothing other than the work they had to do. I couldn’t blame them; most of them were overworked. It was a culture there that the administrators had where they did everything for clients except for trading, so they had no interest or time in helping me when I needed their client list to send out retainer letters for amendments and restatements.
No matter how much this ERISA attorney would have tried, he would have failed because there was a culture there that would not change. The change can only come from the top. I’ve learned that way in the places I’ve worked. There was a culture that I may not have been a big fan of, but I kind of knew that I’d have no way to change that because the change can only come from the top.
If the office is in disarray or good talent isn’t appreciated, that’s part of the culture and the DNA of the firm and it can only be changed when the leadership decides to make a change.
Those small employer plans like a SEP or a SIMPLE-IRA are great opportunities for small businesses to save for retirement because of the no administration costs. However, like clothing for kids, there will be a time when these plans no longer fit.
When do they no longer fit? When you start adding employees that aren’t owners or related to owners because these plans allow no disparity in employer contributions. So if you want a 15% employer contribution, you have to give it to the employees who have been there for a year full time. There is also no salary deferral component in a SEP and a limited one for SIMPLEs, so the bulk of the retirement plan contributions are what you’re going to fund.
So that’s why you need to look into something that’s a better fit like a 401(k) plan or one that’s in conjunction with a cash balance plan. So you need to know when the SEP no longer fits.
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My latest article for JDSupra.com can be found here.
A few years ago, researchers from the business schools at the University of Indiana and the University of Texas at Austin looked at some data to try to figure out why many poor 401(k) investment choices linger on fund lineups. The researchers identified one fairly clear explanation: a sub-par fund is much more likely to stay on the menu if it’s managed by the mutual-fund company that’s helping administering the plan.
While it’s very easy to point to the mutual fund companies turned bundled plan providers of the world to blame, the fact is that regardless of whether you are dealing with a bundled or unbundled product, poor investment options are dependent on the work or lack thereof of the financial advisors and/or the plan fiduciaries.
My old law firm was using an open architecture platform where they hand a fund lineup that hadn’t changed for 10 years. The culprit? The fact that they never bothered to hire a financial advisor until I told them it was a good idea.
There are too many plan sponsors who don’t have a financial advisor and there are too many financial advisors who don’t do enough of a credible job to merit the fee they are getting.
Perhaps plans on mutual fund company platforms are more likely to have stinky fund lineups, but it’s still dependent on a plan sponsor and/or financial advisor sleeping at the end.
A few years back, a good friend of mine who is an ERISA §3(38) fiduciary won a case from a disgruntled broker who claimed that all 3(38) services was just marketing. A 3(38) fiduciary that does a competent job and assumes discretionary control over the plan’s fiduciary process is more than marketing. But it’s a gimmick.
Hear me out, every service and every feature that a plan provider advertises is a gimmick. Now, there is nothing wrong with being a gimmick as long as there is some substance behind that service or feature. A gimmick is a special feature that makes something “stand out” from its contemporaries. However, the special feature is typically thought to be of little relevance or use. If you offer a service or feature that other plan providers don’t offer, just make sure the gimmick is something that plan sponsors could use. A fiduciary warranty that offers a plan sponsor absolutely zero protection is a gimmick with a feature that has no use. A good ERISA fiduciary offering substantive §3(16) or 3(38) services are offering a gimmick with a feature that plan sponsors could actually use.
My flat fee approach to billing my clients is a gimmick, but it’s substantive because my clients have cost certainty rather than the billable hour approach that never seems to have any cap or limit.
The point is that any feature or service that you will use will allow you to stand out among the crowd, just make sure that the gimmick has some substance, so your client doesn’t ask like Clara Peller in those Wendy commercial as to “where’s the beef?”