The Rosenbaum Law Firm P.C. Blog

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

When I started my law practice, I started to look at what the competition was doing and I decided to do things differently. Other ERISA attorneys charge by the hour, they charge for every phone call, and I just didn’t want to nickel and dime clients potential referral sources. Helping plan providers on the house by providing articles and answering a question went a long way.

As a plan provider, you also need to stand out among the crowd. Look at what other competing plan providers and do things differently because the competition is usually focusing on one area. If I’m a financial advisor, I’d focus on participant education/enrollment meetings. If I was a third party administrator, I’d focus on communication with the plan sponsor. I think those are areas that many providers aren’t, just a free suggestion.

There are quite a few people who will say that the Department of Labor (DOL) didn’t go far enough in their proposed regulations on electronic delivery of plan disclosures. I’m just glad the DOL is now in the 21st century. When talking about e-disclosures, remember that at the heart of it are participant rights and the rights of participants to be informed, many that may still not have access to a computer at home.

More robust regulations allowing e-disclosure will progress over time. My hope for the change in paper vs. electronic notices is hundreds of millions in cost savings. While paper manufacturers will lose out, I believe that participants will gain with more competitive fees, supported by plan providers’ cost savings in paper.

As they once said in This is Spinal Tap, there is a fine line between stupid and clever. I can assure you that Michael McKeon who played David St. Hubbins in the movie and co-wrote it, was not in plan administration. Based on what I’ve seen when it comes to plan document drafting, the line fits just based on what I’ve seen.

The fine line between stupid and clever are plan provisions that are outside the box of normal administration. Complex provisions on eligibility, compensation, and vesting will lead to more errors than with provisions that are in the normal realm of plan administration. For example, eliminating forms of compensation for purposes of an employer contribution or salary deferrals leads to many errors, as well as unique eligibility provisions and entry dates.

There are so many normal choices for plan provisions, yet being unique and creative when it comes to plan document preparation isn’t a great feature. As I always say: keep it simple, stupid. Unique plan parameters lead to more errors and some errors will cost you to fix. Creativity isn’t a great trait when it comes to plan provisions.

ERISA requires disclosure of certain plan documents to participants including a summary plan description, statements, and notices. The problem is what do you do with people who aren’t participants such as potential employees?

If you’re scared about providing an SPD to a potential employee, maybe you should worry about what’s in your SPD. As for other information, you have to measure risk vs. offending the person requesting the information. You just don’t want to land in trouble by disclosing too much information and you also don’t want to offend those asking for information by just saying no especially if the goal is to hire them. There are certain things I wouldn’t disclose such as plan provider contracts and anything about plan governance.

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

Advisors ask me all the time of the role of education in participant-directed 401(k) plans. Participant directed 401(k) plans that are governed under ERISA §404(c) offer the plan sponsors liability protection based on a participant’s gains or losses on their account when they direct their investment.

There have been so many misconceptions that plan sponsors and advisors have had concerning ERISA §404(c) plans. They had this belief that if they just give a mutual fund lineup and some Morningstar profiles to plan participants that they are exempt from liability. ERISA §404(c) protection is about following a process and Morningstar profiles are just not enough education to give to plan participants. You have to provide enough information for participants to make informed investment decisions. On the flipside, education to participants doesn’t have to amount to an MBA education, especially if you don’t want to offer advice.

I think an effective education component to ERISA §404(c) plans should include enrollment meetings where the characteristics of the plan are discussed, as well as the investment options, and offering the building blocks of financial education to assist participants to get a better understanding on how to choose investments.

Advisors that may have issues in offering education should always consider using some of the online resources out there that do offer advice for a fee.

Also, written materials such as plan highlights and some Morningstar profiles should always be distributed.

Also while many advisors dislike, one on one meetings to participants should always be offered. While most participants will probably shun such meetings, they should always be offered to those that want them because as we know, every participant has a different financial goal and need. One on one meetings offer participant individualized attention on asset allocation and fund choices; it can be an effective means of educating plan participants more than what a general enrollment meeting can offer. It can help participants understand how retirement plan assets relate to their other assets as part of a comprehensive financial plan.

Advisors should always look at education as liability protection because offering participant education helps a plan sponsor minimize their liability under ERISA §404(c). While I always stress education as an important part of the fiduciary process, it’s not about achieving a specific result from participants directing their investments. Offering participants investment education is like the old proverb, “You can lead a horse to water, but you can’t make him drink.” So no matter how great the education component is, there is no guarantee that it will help plan participants achieve a better financial result because like they say, there is no guarantee in life, except maybe death and taxes. The participant who put all his money into a mid-cap fund because he considers it the “average of the market” may still do so even after getting an education at the enrollment meeting and through one on one meeting. As with most things with retirement plans, it’s about following a process and not guaranteeing a result.

As a 401(k) plan sponsor, you need to know that plan errors happen all the time. A 401(k) plan has so many moving parts, so that means something might break. The problem here is that while things can happen without control, you can control some errors by avoiding some problems.

One of the most avoidable errors you can avoid is offering multiple loans through your loan program. I believe you should offer only one loan maximum at all times. You’re not in the business of being a loan shark and I have seen so many errors happen because the plan sponsor or third-party administrator forgot that one or more loans weren’t being repaid, which may lead to defaulted loans and deemed distributions. Having just one loan outstanding at all times can help avoid that error.

There are many things with the plan you can’t control, but you should avoid any errors that are under your control.

One of the biggest problems for my clients after they hire me is that they realize that they never bothered to review the plan provider contracts that they signed long ago. There might be surrender charges or termination fees that they never anticipated. In the past, I’ve had plan sponsors figure out there were 7% surrender charges out there because they decided to break a 7-year contract with their bundled provider.

You can avoid that kind of sticker shock by having counsel reviewing those agreements before they’re signed. The few hundred bucks in legal fees can avoid unnecessary surrender charges later that will dwarf any legal fees you’re paying upfront

I use the expression “garbage in, garbage out” if an end of year census report is done incorrectly and the third party administrator (TPA) doesn’t pick up the error.

When given that census request at the beginning of the new year, you need to make sure that the information you provide is correct. When it comes to identifying employees as highly compensated and/or key employees, errors will come back to haunt you in terms of incorrect compliance testing and possibly failed required minimum distributions.

TPAs aren’t baby sitters and most will assume that then information you provide is correct, so it’s on you to be right.