The Rosenbaum Law Firm P.C. Blog

In the good old days of participant-directed 401(k) plans, a good chunk of financial advisors did very little work for the plans that they advised. Many of them sat back, collected their trail or asset-based fee, and maybe saw the client once a year. Thanks to changes in regulations and court decisions, the day of wine and roses are over.

Recent court cases make it far easier for 401(k) participants to sue plan sponsors. In addition, anytime there are poor market returns, it creates an incentive for plan participants to sue plan sponsors for breach of fiduciary duty. These cases have shown that many plan sponsors don’t do a very good job in managing the fiduciary process in developing an investment policy statement (IPS), reviewing plan investments against the IPS, and providing participant education.

While so many other plan providers tell me that they are jealous on how much advisors charge and how little they do, a financial advisor is an integral part of limiting a plan sponsor’s fiduciary liability and so many are underpaid for what they do. Sure I have found those advisors making 60 basis points on a $14 million plan and do nothing, there are so many advisors that understand their role and do a great job in limiting a plan sponsor’s liability, The fiduciary process of being a plan sponsor is an arduous task, so plan sponsors need to rely on someone and that someone is a financial advisor, Whether they serve as a broker, co-fiduciary, or an ERISA fiduciary, a financial advisor has a job to do. The days of showing once in a while offering no IPS help or participant education is slowly becoming part of the retirement plan past.

The day where an advisor can simply put a plan on a bundled platform and forget about the plan until the quarterly fee is paid is over. Financial advisors have to help the plan sponsors out to manage the fiduciary process. If financial advisors are not up to the task, then they should surround themselves with those that can like an independent ERISA attorney or a top-notch third-party administrator. Some advisors have sought out the advice of other advisors to offer a turnkey 401(k) platform and support.

Financial advisors can sit back and pretend the good old days are here, but they stand at the risk of losing business to those breed of financial advisors that know their role and will strive to fulfill it.

As a plan sponsor, you have a fiduciary duty to hire competent plan providers to handle your 401(k) plan. So as part of that duty, it’s important to identify who these providers are, how you hired them, and why.

Why? Besides it being an exercise of your fiduciary duty, the fact is that I’ve seen on Department of Labor audits of agents asking plan sponsors and their counsel to ask who the plan providers are and what was the process of selecting them. That goes from the third-party administrator to as trivial as the custodian for automatic rollover individual retirement accounts.

So the more you know and can explain, the better off you are.

Many years ago, I represented a defined benefit plan sponsor being investigated by the Department of Labor (DOL). The DOL thought the plan sponsor had embezzled money from the plan because the deceased actuary never provided any valuation reports and he gave the advice to the owner of the company that it was no problem to write a check from the defined benefit plan to prop up another related company because the owners had the bulk of the benefit.

Based on the evidence (or lack thereof), I thought the plan sponsor should come to a deal with the DOL. I’m not a litigator and I wanted to recommend litigators I knew. However, the owner of the company had a relationship with a litigator that had no ERISA experience. They wanted to fight the DOL and I thought that was the wrong tactic. Let’s just say that I was pushed aside and 3 years later, the owner had to shell out $4 million to the DOL and agree that an independent fiduciary be appointed. The only one who made out on the deal besides the DOL was the litigators, who know how much the plan sponsor had to fork over in needless litigation bills.

Always be wary when litigators want to litigate with the government, resistance might be futile.

A growing number of U.S. employers are adding lifetime income solutions to their defined contribution (DC) retirement plans, according to the 2019 Lifetime Income Solutions Survey by Willis Towers Watson.

While I know the marketplace and the Department of Labor are considering adding annuities to DC plans. For me, it’s a pause for concern because of the role of insurance products in retirement plans. Insurance in retirement plans is like eating red meat, nothing wrong in moderation, but not many people will take that advice. Many insurance agents are more interested in the commissions and less interest in the relationship and my concern is that there will be some high-cost annuity products making its way into retirement plans. Just my two cents.

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

In a recent revenue ruling, the IRS stated that if a participant or a beneficiary doesn’t cash a distribution check in the year it was issued, the individual still must include the amount in gross income for that year. Also, if any withholding is required on the distribution, the issuer must withhold and report for the year in which the distribution is made, regardless of whether the check is cashed in the same year. Also, the 1099-R is issued for the year of distribution and must reflect the distribution amount and amount withheld. While it’s guidance, I don’t think it’s much as its consistent with the rule of constructive receipt.

The problem is that the IRS didn’t take the time to provide any clear guidance about what to do when a distribution involves a missing or lost participant. The IRS punted and stated that it’s still analyzing the missing participant issue. Presumably, this means that if a check is returned to a plan as undeliverable this IRS guidance doesn’t apply.

I wasn’t a fan of target-date funds when the markets crashed in 2008 because there was no consistency of investment objectives and equity-fixed income mix between target-date funds for a specific year among different fund companies.

People who thought a 2010 or 2015 fund would have more fixed-income investments were in for a big of a shock based on the fund they were in. Funds also had different glide paths. It’s like buying diet sodas where some had a lot more calories than zero and there wasn’t any regulation that had labeling requirements where a 2025 target-date fund had a consistent equity-fixed income split among the fund companies.

Also, I have concerns over investment education because I’m sure there are countless participants out there that invest in target-date funds, as well as other funds in their investment selections, which defeats the purpose of the target date funds. Also, I’ve seen a major uptick in litigation against larger plans over proprietary target-date funds. With asset allocation funds and managed accounts available, I don’t know if target-date funds offer any type of value to both plan fiduciaries and plan participants.

My newsletter geared toward retirement plan providers can be found here.

People who are late are usually late most of the time. I’m usually always early for a meeting unless I severely misjudged traffic. I have a business partner who is almost always late, very rarely is he on time.

So I think that if you’re late in depositing salary deferrals once, you’re liable to do it again and again. It’s just a nature of life. Whether you are late once or multiple times, my rule of thumb is that you have to put a procedure in place to deal with late deposit of salary deferrals. Otherwise, you will likely have an epidemic of late deferrals, which won’t make the Department of Labor happy.

So consider that upon the first late deferral, you might do it again. That’s why you should a procedure in place to avoid further later deposits. If you implement a procedure and follow it, you’re likely not going to deposit deferrals late again.

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