The Rosenbaum Law Firm P.C. Blog

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

When I was 13 and I had my Bar Mitzvah, I plunked down about $2,000 in 1985 money for a state of the art Apple IIe with a monochrome monitor. One of the first pieces of software I bought was that top desktop publishing software known as Print Shop. I bought it through mail order (yes, there was life before Amazon.com) for about $30 and I remember that my wealthy (at the time) uncle bought the very same program for my cousin for about $60. My uncle really thought nothing of the fact that he bought the very same program at double the price I paid. Sometimes people like to overpay and he never cared about bills which may explain his bankruptcy about a dozen years later.

I have a mantra that I hate to pay retail. I love a good sale. Yet there are some people who thumb their nose at paying at a discount or going to an outlet store. Somehow, it isn’t right for these people to pay less.

The problem is that plan fiduciaries such as plan sponsors and trustees don’t have that luxury. With their fiduciary duty on the line, plan sponsors need to pay reasonable plan expenses for the services provided. Plan fiduciaries can only determine whether the fees they pay are reasonable by shopping their plan to other service providers or by using a benchmarking service. If they don’t shop around and overpay in fees, they may subject themselves to liability from plan participants. It should be noted that plan sponsors don’t have to pick the cheapest providers because often, there is a reason why some providers are cheap.

How to determine whether a plan sponsor is paying way too much? Like Justice Potter Stewart would say, I know it when I see it. I have seen the information shown on Form 5500. Whether it’s the plan sponsor paying a Big 4 accounting firm $54,000 for a limited scope audit or another plan sponsor paying a broker 60 basis points (.60%) on a $14 million 401(k) plan, there are plan sponsors seriously overpaying for services. Plan sponsors need to check their fee disclosures from plan providers and need to shop it around. Simply accepting the fact that they are paying more than my uncle isn’t going to work.

Chutzpah is nerve, shameless audacity. The best example of chutzpah is someone who kills their parents and asks the court for leniency because they’re an orphan.

I’ve been in this business of ours for the past 20 plus years and I’m still shocked by some of the things that go on.  The store I’m about to tell you is true and you’ll think I made it up.

There is a 401(k) plan with an ERISA §3(38) Fiduciary and an ERISA §3(16) administrator. Eventually, the 3(16) administrator and the third party administrator are fired. In addition, the advisor on the plan leaves for another firm, so his new firm is the new §3(38), fiduciary. The advisor discovers (at least he claims) that his old firm, the old §3(38) fiduciary was paid 40 basis points per quarter instead of 40 basis points annually.

Instead of demanding that his old firm hand over the excess payments they received, he conspired with them to what I think was a hustle/shakedown of the ERISA §3(16) administrator. They demanded that the §3(16) administrator, pony up half of the excess payments of $13,500, which means that the old §3(38) fiduciary would still keep $13,500 of the excess. The §3(16) administrator wasn’t born yesterday and suggested that the easiest solution was for the previous §3(38) fiduciary to hand over the entire excess payments because they were fiduciaries at the time and breached their duty by keeping a payments from the plan that they weren’t entitled to, since it was quadruple what they contracted for and disclosed to the plan sponsor. The §3(16) administrator was flabbergasted by this hustle, especially when the third party administrator (TPA) had paid them an excess fee, which they turned over when the TPA discovered it. The other funny part is when the advisor said that the fiduciary liability policy for the old §3(38) fiduciary wouldn’t cover the loss. Of course, they wouldn’t since the previous §3(38) was holding on to the excess. It was rather suspicious that the advisor would cover for their previous employer, but the §3(16) administrator had a hunch that the advisor had made money from that excess payment.

A few months pass and the §3(16) administrator is contacted by the plan sponsor. The plan sponsor sends a letter, demanding the same hustle, suggesting that the previous §3(38) hands over half of the error and that the §3(16) administrator hands over half. The §3(16) administrator quickly replied that they wouldn’t accept the proposal. The administrator pointed out that the previous §3(38) fiduciary breached their duty and committed a prohibited transaction by keeping a fee they weren’t entitled to. The proposal proffered still meant that the previous §3(38) fiduciary would still pocket $13,500 they weren’t entitled to. In addition, the current advisor was breaching his fiduciary duty by protecting his previous employer. The plan sponsor would also be breaching their fiduciary duty by allowing the previous §3(38) fiduciary keep a $13,500 payment that was in excess of the contracted amount and in excess of the fee disclosures, which would be a prohibited transaction.  The §3(16) administrator demanded that the previous §3(38) fiduciary return the excess payment or the prohibited transaction would be reported to the Department of Labor.

The previous §3(38) fiduciary blinked and agreed to fork over the entire $27,000 payment. In addition, they tipped their hand and confirmed that the previous advisor would have to fork over payments he received for that excess payment.

The story is amazing because it is surprising that a registered advisory firm a registered advisor would think that it was OK to pocket a fee that was in excess of the contracted and disclosed amount. They took such a gamble to try to shake down the ERISA §3(16) administrator and convinced the plan sponsor to agree to a prohibited transaction. A fiduciary has a duty to do right by the plan instead of using plan assets for their own benefit. Like the Twilight Zone, the 401(k) business can be the theater of the absurd.

“You like potato and I like potahto
You like tomato and I like tomahto
Potato, potahto, tomato, tomahto
Let’s call the whole thing off”

Fidelity is being sued and being investigated for shelf space payments they receive from mutual fund companies for room on their fund platform. They’re not the only provider to receive these fees and I find it totally problematic. The reason it’s a problem because it is essentially a replacement for revenue sharing and while government investigators are starting to figure out about it, ERISA litigators knew before that.

This shelf space fee isn’t much of a surprise. Revenue sharing was an attractive solution for third-party administrators, especially when they didn’t have to disclose it. When fee disclosure regulations were implemented, I had stated my concern that fees would be invented in order to replace revenue sharing and possibly to skirt the fee disclosure regulations. How did I know this? I remember one third-party administrator that used to pocket revenue sharing without disclosing it, created a new fee that it was absurd, They created a daily custodial access fee of 25 basis points when any reasonable person would know that must custody fee range from 5 to 10 basis points.

Don’t be surprised that the Department of Labor won’t offer an interpretative bulletin to update their fee disclosure regulations to cover shelf space payments.

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

If you have a client that is being bought out or is buying another company, the first thing you need to do like the plan’s financial advisor is to call an ERISA attorney.

From experience, not many people give ample consideration to what happens to retirement plans when there is some sort of corporate acquisition (stock or assets) including the sellers, buyers, and the corporate attorney, I’ve seen too many business transactions that don’t mention the retirement plan involved and that can be hairy if one of those plans is an underfunded defined benefit plan.

Any business transaction of that nature may bring up some important 401(k) compliance issues such as coverage, eligibility, compliance testing, and plan termination. So if you know any client that is being bought or is buying, contact an ERSA attorney pronto.

When it comes to business and generally people, I treat people the way I’d want to be treated and I give people the benefit of the doubt.

It usually works out for the best and there are occasionally times where it doesn’t. Most people in business and life will respond to kindness with kindness. The rare person won’t and might take advantage of that kindness.

When working with plan providers and even plan sponsors, there is nothing wrong with seeing the good in people, but once you see the bad side, it’s time to close up the trust department. If a client or other plan provider takes advantage of you through unprofessional conduct or by stiffing a bill, don’t let yourself to be open to being taken advantage of again.

As they say: fool me once, shame on you. Fool me twice, shame on me. Never let them get that second shot to do wrong by you again.

According to an article in the Wall Street Journal, the Department of Labor (DOL), is looking at an obscure and confidential “infrastructure” fee that Fidelity charges the mutual fund companies for putting their funds on its sales platform, called FundsNetwork.

Citing an internal Fidelity document, the Journal’s Gretchen Morgenson reports: “The fee, which appears to have been implemented in 2016, is ‘designed to ensure that each Fund Firm meets a minimum required payment to Fidelity.’ ” By marking the charge as an infrastructure fee, the fund firms may be able to avoid disclosing it to investors.”Fund companies that decline to pay the amount will ‘be subject to a very limited relationship’ with the company, the document says. Funds can either pay the fee themselves or push the cost onto investors in the mutual fund. This can increase the overall fees of a fund, causing individual investors to pay more and dent returns.”

The infrastructure fee appears to be a way for Fidelity to make up for revenue the firm has lost as a result of investors flocking to index mutual funds, a situation that Fidelity claims in their document that has ‘unsustainable economics.’ ”

“Fidelity also stated in the document that its traditional business model is ‘broken’ and characterized the infrastructure fee as a solution to that problem.”

The fee popped up in 2016 or 2017 as a convenient way for Fidelity to deal with the new reality of a move of 401(k) plans to index funds and the ending of the practice of revenue sharing payments from mutual funds to Fidelity. Having the DOL breath down your back isn’t fun, my clients will attest to that. The issue is whether the fee was being disclosed and if so, how? If the Fidelity documents are to believed, there might be a lack of transparency and I would expect the DOL to pound on that through fines. The jury is still out and we’ll find out if the DOL finds fault with Fidelity’s fee

A former participant of ConAgra’s 401(k) plan filed a lawsuit against the company, alleging they failed to adhere to the definitions of compensation and permissible contribution stated in plan documents. It stems from the failure of ConAgra to allow deferrals from a bonus payment received after termination of employment. ConAgra had changed their interpretation (but not their plan document) of the plan and would no longer pull deferrals from a bonus.

I’m not going to bog down on the details of the case, but one important thing that many articles glossed over is that the proposed class action lawsuit, also sues the retirement plan committee and sues the head of human resources personally.

While ConAgra has over a billion in assets, it’s important to show that retirement plan decisions by the decision makers of the plan may involve personal liability by being named personally in a participant lawsuit.

Fidelity is being sued again, this time regarding payments made by mutual funds to the Fidelity FundsNetwork. It is alleged that these payments are a kickback and a replacement for revenue sharing.

I’m not going to weigh in on the lawsuit because it’s pending, but I will say that any type of arrangement that looks suspicious will be treated by ERISA attorneys suspicious and any payment from a mutual fund company to anyone for placement is going to be scrutinized.

While fee disclosure has helped transparency, it hasn’t fully eliminated some of the novel ways that fees maybe slapped on to make up the shortfall from the declining revenue sharing payments.

I can never forget the producing third-party administrator that eliminated its practice of pocketing revenue sharing by creating a 50 basis point, daily custodial platform access fee, which is about 40-45 basis points more than any daily custody platform would charge. It may be transparent in disclosure, but it didn’t make it right.

I anticipate several daily custodial platforms that will start charging access of other mutual fund companies especially if that custodian has proprietary funds. This practice will start and continue until they’re sued or the government says something. Consider mutual fund access to these platforms as the whole call for net neutrality. Will mutual funds have to pay for access like Netflix might if net neutrality is completely ended? Is that fair, especially when we know Vanguard and DFA can’t afford to pay them from their meager expense ratio? Time will tell, but ERISA litigators will always be watching.