The Rosenbaum Law Firm P.C. Blog

When I was at law school, I was the editor of the student magazine there and I broke the story about a scandal at one of the law journals. The editor in chief was implicated and she gave me a letter from her lawyer, asking for all my sources, who I talked to, and everything but my name, rank, and serial number. This was the first lawsuit threat that I got and I was hyperventilating. Then I looked down on my desk and noticed that the work number for this editor in chief was the same phone number as her attorney and this attorney was in international law, not libel. I have been threatened with litigation over one of the payroll provider Third-party administrator articles I write annually (except the 11th annual edition this Spring). The point is that clients and non-clients can have a threatening lawyer to you all the time.

Occasionally, these letters are serious especially if you have serious liability exposure. Most of the time, it’s just used as a threat to get a better result than by doing nothing. When I got that letter in law school and I gave it to the Dean, he said I should settle immediately. I think when you get a letter from a lawyer, speak to a lawyer. They will certainly help you gauge the seriousness of the matter and what the response should be. I know attorneys are expensive (except me ), but I think the greatest mistake is thinking you can handle a legal threat on your own.

That lawyer letter is like playing poker. Most of the time it’s a bluff and sometimes it’s not, you need someone who can tell the risks and what the response should be. If you get a letter from a lawyer, you know where to find me.

I am a proponent of multiple employer plans (MEPs) and the new change that will allow pooled employer plans (PEPs) that will be what we called an Open MEP in 2021. As discussed in other posts, the PEP change doesn’t change what trouble most MEPs, the struggle to grow assets and achieve that promised cost savings.

I’ve talked to plan providers that are very skeptical about PEPs, especially as it pertains to asset size and cost savings. While I don’t think any third-party administrator (TPA) should forget about PEPs or focus only on them, I think they can be a good opportunity for the micro plan market. My concern is that if as plan providers that we don’t embrace PEPs, one of the larger bundled providers will and cut a lot of us out of some serious business. If a plan provider targets the PEP as a turn-key solution and has a good distribution system, the concern is that they will cannibalize the small plans of every smaller plan provider out there.

Give me a call and we can talk about what we can do about PEPs, would love your insight as a plan provider because you just got mine.

Sears and Macys announced some massive store closings. The department store has been a business that has been dying for 50 years. Ever since the shopping mall, growth of discount retailers such as Wal Mart and Target, and shopping on the internet, department stores are just dying because it is a dying business. As I stated, it’s been dying for 50 years and no one in management has done much in trying to stem the tide. It reminds me of A&P which was the dominant grocery chain in the United States that ended up dying over 60 years.

Your business won’t die tomorrow. If it dies, it will take some time before you have to close your doors. The problem is that most dying organizations tend to be in a death spiral, they do nothing to break their pattern. The organizations that I’ve been involved with that were dying, you could see the blindness towards the fact that the business was dying and nothing was being done to change pace. I worked for a third-party administrator (TPA) where there was a reorganization every year or so and nothing changed. The man running that TPA said after one reorganization that if things don’t work out, he’d fire himself. Unfortunately, when it failed, he didn’t keep his promise.

The retirement plan business is an ever-changing business. Change with the times or you will end up being like a department store.

In the movie Casino, Robert Deniro’s character Lefty Rosenthal warns Joe Pesci’s character Nicky Santoro that his actions will get him into the Gaming Control Board’s “Black Book”, which means he would be banned from all casinos. Nicky doesn’t take the threat seriously and states that there are only two people in the book and one of them is Al Capone. Of course, Nicky was wrong. There are a lot of people in the black book.

When it comes to retirement plans, the ultimate sanction which is the Internal Revenue Service’s (IRS) penalty or black book for non-compliant plans is “plan disqualification.” Plan disqualification would cause immediate taxation of retirement benefits to participants and disallowance of previous employer deductions. It is the death penalty or neutron bomb for retirement plans.

So often you will hear that failing to follow the plan document can be a disqualifying event or allowing in-service distributions of 401(k) plans before a participant attaining age 59 ½. You will hear about the one bad apple rule about multiple employer plans (MEPs) that the transgressions of an adopting employer could result in the disqualification of the entire MEP. Threats of plan disqualification are like some of the threats my parents made against me. I’m still scratching my head on my mother’s claim that radishes will grow on my feet if I didn’t clean the dirt from them.

The fact is that plan disqualification is rarely used. It sounds good as a threat, but the Internal Revenue Service would be hard-pressed to declare all of the retirement benefits of rank and file employees to be immediately taxable. While I’m sure that plans have been disqualified, I have yet to see one. I’ve had defined benefits plans where all the benefits were invested in Bernie Madoff or plans where plan sponsors stole, or when owners of the S Corporation took out excessive loans even though in 2000, they were not allowed to take out loans. None of these plans were disqualified.

The IRS does not want to be in the business of disqualifying plans and depriving participants of retirement savings. That is why they have voluntary compliance programs to correct plan errors and defects. The IRS wants to make plans compliant and will do all they can to make that so.

I once was recommended by a registered investment advisor to help with his client who was reviewing the plan’s operation. The problem was that the client already had an ERISA attorney. Unfortunately, I was asked to draft a notice to interested parties because the plan was being submitted to the IRS. I used boilerplate language that I use for all my plans. The ERISA attorney claimed that there were one or two sentences from the IRS model language which were not applicable. This ERISA attorney, hoping to upstage me, claimed that the notice would cause the plan to be disqualified. Since the client was being represented by counsel, I had to ask out of the arrangement because I could not believe that this attorney would use the plan disqualification event on something so petty. Of course, the client suffered and had spent their entire $100,000 ERISA budget on this attorney who was using the retirement plan equivalent of yelling fire in a crowded theater.

When it comes to my practice as an ERISA attorney, I am very big on plan sponsors taking pro-active stances to minimize liability, basically good plan fiduciary practices like knowing plan fees, implementing an investment policy statement (IPS), and ensuring that plan participants get the education they need, Letting plan sponsors know about the hidden pitfalls of being a plan fiduciary is not trying to sell fear, it’s about selling preventative practices. That’s like claiming a dentist who tells you to floss is selling fear. Quite honestly a dentist who tells their patients to floss regularly may lose out on some periodontal work in the future. So pushing for plan sponsors to implement good fiduciary practices may avoid some large legal bills down that road, so it’s hardly selling fear. Claiming a plan sponsor will suffer plan disqualification for failing to implement an IPS is selling fear because that will never happen.

Let us not discount plan errors and defects, but let us not make plan disqualification threats that won’t happen.

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

Growing up, I was a pessimist. I don’t why, but I let any little thing get to me and I realized that being negative, scares people away.

That’s why I recommend when dealing with potential clients, don’t harp on the negative that you see with the plan. Always come from a positive view and how your services could go a long way in improving their plan. Plan decisionmakers have egos and no one wants it rubbed in their face that made poor decisions even it was clear that they made poor decisions.

Years ago, a certain third-party administrator (TPA) was going through a very public crisis and every other advisor and TPA out there were making phone calls to this TPA’s clients and al;l they did was sprouting negativity about this TPA. I can’t imagine that these providers got many clients that way because selling is all about what you can do for the client, not how badly the current plan provider is doing. You need to differentiate yourself from the incumbent provider, but it has to come from a positive standpoint.

One of the most forgotten parts of a 401(k) plan is the automatic rollover and who the automatic rollover provider is. I was going through a Department of Labor audit on a terminated plan and they asked me how the automatic rollover provider was hired and what the fees are. Unlike most plan sponsors, I knew the answers, but I’m not like most plan sponsors. I think there will be greater scrutiny to who the provider is and what the costs are, as well as how much these automatic rollover participants are earning in their IRA.

So that is where my friends at FPS Trust come in. They will be presenting at That 401(k) National Conference and have been around most of our regional events offering their IRA solution. If you haven’t had the opportunity of attending these events, I suggest you reach out to Jeff Linkowski there, to see hoe beneficial as a third party administrator or financial advisor that you can develop a great solution that could be turned on as a voluntary IRA where everyone including the participant makes out.

One of my favorite Yiddish words is schnorrer. While it means beggar or sponger, it’s essentially a cheapskate who wants to chisel you by getting something for nothing.

There is nothing wrong with potential clients trying to get a bargain by negotiating fees. I often discount fees as long as potential clients ask and it’s reasonable. The problem is that you have to draw the line somewhere because your work and effort deserve to be compensated. I think what makes someone wanting a discount and being a schnorrer is that the schnorrer doesn’t care how insulting they are. A perfect example is selling sponsorships for That 401(k) Conference. If people book multiple events and ask for a discount if they are a new sponsor, I don’t have a problem with discounting the $1500 speaking fee per event. Yet when a plan provider invited me for lunch to their private club and said he only had a budget for $250 for my $500 supporting sponsorship, I took a pass. Don’t invite me to your private club and claim poverty.

Dealing with chiselers is part of the business, but I think you have to draw a line and realize that there are times you can’t make a deal with a chiseler because their offer might be insulting or just too low and you know you will always have to deal with them, every step of the way.

When fee disclosure regulations were implemented, there were a few industry chicken littles that suggested that the disclosures would be a race to zero and only the cheapest providers would win out. History has proven that while fees have gone down, there hasn’t been that race to zero because plan sponsors are willing to pay more for more service.

With a lot of consolidation in the retirement plan business, there are industry chicken littles that suggest that only the largest plan providers will do because of their mass, lower cost, and bells and whistles with their services. I think there is room for everyone.

Compare it to beer. When I was a student, we would drink whatever was on sale at the local 7-11 (usually a Molson or Michelob), I avoided Budweiser and some of the cheaper brands like the plague. When Samuel Adams started hitting the stores and started the microbrewery renaissance (my village now has two small breweries), it didn’t mean people stopped buying Bud and Coors Light. There are enough budget drinkers or beer drinkers who don’t care about taste (yes, I’m a beer snob) that still buy the budget brews. Bud Light is the best selling beer in the United States for quite some time. The point besides making me thirsty for a Boston Lager is that there is enough space out there for every provider of every size because plan sponsors have varying asset sizes and budgets. There is enough space at the table for you, it’s up to you how to handle the space.

Investment Company Institute conducted a study that shows that 56% of Defined Contribution plan participants agree that they probably wouldn’t save for retirement if they didn’t have a plan at work.

What does that tell you as a plan sponsor or a potential plan sponsor? It tells you that a 401(k) plan is an effective savings vehicle for you and your employees. While health insurance is probably the top benefit you could provide, a 401(k) plan comes #2. Despite all the criticisms, a 401(k) plan is still the most effective savings vehicle for your employees and your wallet.