The Rosenbaum Law Firm P.C. Blog

Shelf space payments where mutual fund companies pay to get access on a particular 401(k) custodial platform is a trending topic. The payments made are for access and if you don’t pay if you’re a mutual fund company, you don’t play.

Many pay for play schemes are illegal such as the music payola scandal in the 1950s and the reason that was illegal because a law was passed to make it so. Until Congress says something or the SEC or Department of Labor does something in the rulemaking realm, shelf space payments are legal. Whether participants are harmed in these type of arrangements will probably be decided in the courts through litigation.

It will be some time before it’s decided whether shelf space payments are a growing trend or a dying trend, thanks to new rules being place on them.

We all know that when we make a mistake, it’s best that we correct them. Yet too many plan sponsors take a gamble by not self-correcting errors made in their plan. They play what we call the audit gamble, gambling that the government won’t be auditing the plan so the error never has to be corrected. I don’t gamble and as an ERISA attorney, I always tell my clients that it’s not a gamble worth the risk.

Errors can be corrected through a self-correction program which has been expanded and there is also a voluntary compliance program to take care of larger errors. Whichever program you choose, it’s better to correct through self-correction than an open audit

I was very outspoken in law school, complaining some of the injustices and hypocrisy that went on. I think there were some in the faculty and in the student body that thought that I was just an army of one disgruntled student. I always insisted that I spoke for a silent majority of students who weren’t happy, but just didn’t want to rock the boat.

Years later, on Facebook and through various reunions, I realize that I was speaking for the silent majority, almost all who haven’t contributed a nickel to the law school.

When it comes to clients and employees, they may be unhappy and chances are that you will never know that until they leave. Even when they do leave, you may not understand how unhappy they were because many people are passive aggressive and other people just want to avoid the confrontation. As I always say, happy clients and employees never leave and clearly, if they do, there has to be some level of dissatisfaction. Just because they don’t tell they’re unhappy doesn’t mean they weren’t unhappy.

I had a plan sponsor forward me a contract they received from their financial advisor on a previous plan. Rightfully, the plan sponsor was concerned that they received this contract out of the blue.

While this plan sponsor was wise to reach out to me, I find that most small to medium sized employees don’t reach out to counsel to review a plan contract. I find that a mistake because contracts may have hidden fees and surrender charges that non-ERISA counsel or non-counsel may be unaware of. There is nothing worse for a plan sponsor to be unhappy with a specific provider and find out that there are charges that they would be responsible for, sometimes in the tens of thousands of dollars.

So that is why it’s wise to make sure all contracts with plan providers are reviewed by counsel.

In news that was far from earth-shattering, The Department of Labor (DOL) announced a final rule today that reiterated the proposed rule on multiple employer plans (MEPs) – and an RFI that seeks more information on “open” MEPs.

The final rule reiterates the proposed rule that requires commonality between adopting employers, just a reiteration of the DOL’s viewpoint in their 2012 Advisory Opinion on the TAG Advantage Plan. They have requested an RFI on open MEPs which have no commonality between adopting employers.

For 7 years now, the DOL has punted the ball and have not opined on what open MEP could constitute as a single plan because they seriously don’t like the concept and are more likely not going to offer new regulations until Congress finally passes some MEP relief, whether it will be the Secure Act or some other legislation.

So while the Final Rule isn’t fake news, it’s just not earth-shattering news.

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

For my first year of law school, I had a renowned criminal law professor. He had a penchant for ties and an odd love for Melrose Place (I was a Dallas guy myself). For his final law exam, the fact pattern for the final exam was based on Melrose Place. I thought I did particularly well and I think I got a B+ (for some reasons, our law school didn’t have minus grades).  I jokingly said that there was no rhyme or reason how he graded his exams that he just threw the exam down the stairs and he would assign a grade based on the step it hit.

When it came to working for a particular third party administrator (TPA), I remember we had a fee for clients terminating our services that we never disclosed nor was ever there a set fee. Our conversion guru would simply go down to our Chief Operating Officer and get a de-conversion fee quote that could be $1,500, $2,500, or $5,000 or anything he felt like. He could quote it based on plan size, whether he liked the advisor or not, or because his stock portfolio wasn’t doing well that day.

There is something to be said about plan providers charging direct fees that the plan sponsor and their advisor could understand and gauge. Even with fee disclosure regulations eventually being implemented one of these days, I believe that some providers will still have fees that plan sponsors will have a tough time understanding what the fees actually are.

I was busy drafting a new service agreement for a West Coast TPA so that they could comply with the fee disclosure regulations (cheap plug). The agreement was easier to draft because their fees were rather straightforward. They had a base fee, a per participant head charge, and an asset-based fee.

I was reading a sample fee disclosure agreement for a TPA that one of the insurance company providers have been sending out. This sample was put out by some pretty reputable ERISA attorneys and to tell you the truth, reading the agreement gave me a headache. The agreement, unlike most agreements drafted by ERISA attorneys, was written in English. What gave me a headache was the different reimbursements that the TPA may be getting from this insurance company. Special programs, special allowances, and special sauce. It’s sort of like Dean Wormer’s “double secret probation” in Animal House. It’s short on details because the TPA has no idea what they will get in these special programs, but scout’s honor, they will use 100% of these special payments as an offset to the fees charged.

I am a very direct person (which works well with clients, financial advisors, and TPAs I work with; managing partners of law firms, not so much), so I like knowing how much in fees that my client might be paying when they sign an agreement with a TPA. I know eventually that a plan sponsor will know how much a TPA working with this insurance company will charge, but I think clients should get direct fee quotes.

I remember when the Enron debacle happened that I never would have invested in Enron because I could not state what Enron did for business in one sentence. The same with TPA fees in their agreements, I would be wary of recommending a TPA where I couldn’t directly state what their fees would be. But that’s just me.

When I was 13, I bought my very first computer, an Apple IIe for $2,000, which would be about $4,760 in 2019 money. This year, I bought an Apple MacBook Pro for about $1,800.

In 2008, I was reviewing the 401(k) plan of a soon to be defunct mattress retailer that was on an insurance company platform. A copy of the 1995 contract that actually expired in 2001, charged the plan sponsor 267 basis points in fees.  Obviously, for a plan that had almost $4 million in assets, that was a lot of money. In 1995 when daily 401(k) plan were the exception and not the norm, 267 basis points was reasonable. In 2008, that was outright theft.

Since 1995, fees for daily recordkeeping plans and the margins in 401(k) administration have fallen in price as technology and economies of scale reduced costs. The advent of revenue sharing fees where mutual fund companies kicked back fees to the third-party administration (TPA) firm has helped as well. Since TPA firms had no requirement to breakout revenue sharing fees, the true costs of plan administration were actually masked to the plan sponsor and the plan participants.

With the advent of fee disclosure regulations in 2012, the mask of revenue sharing was taken off and that revenue share subsidy was exposed as another cost of plan administration that acted as sticker shock to plan sponsors. Hungry financial advisors and competing TPAs used that opportunity to recruit new plan sponsor clients by promising lower fees with the use of lower fee mutual funds and/or exchange-traded funds (ETFs).

The cutting of revenue sharing fees did hurt the margins of TPAs that touted these more expensive funds, but fee disclosure regulations and technological improvements had already put pressure on these margins. Transparency and technological breakthroughs in the business narrowed the margins and these narrowing margins are here to stay.

My latest newsletter for retirement plan providers can be found here.

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