The Rosenbaum Law Firm P.C. Blog

When I look at plan errors, one major area of a plan keeps coming up: compensation issues. Compensation issues deal with the definition of Compensation in the plan as well as when salary deferrals are dealt with in the plan.

I’ve come across so many plans where the wrong definition of Compensation is being used which usually require the employer to make a corrective contribution to the Plan. Other compensation issues deal with untimely deposits of 401(k) deferrals (I have a complete side business of dealing with employers in that area) and so many issues with payroll especially employees trying to modify their deferrals.

As an employer, you need to sit down with your payroll provider and your third-party administrator to make sure that there are no issues in dealing with Compensation because I think it frequently is becoming one of the biggest issues with 401(k) plans.

I always believe that the two worst things that you can give people are false praise and false hope. As a plan sponsor, you need a plan provider that is not afraid to tell you the truth that something is wrong and that you need to fix it.

A perfect example is that I had a client who didn’t file a Form 5500 for 5 years and clearly didn’t fill out the correct census information. The third party administrator (TPA) didn’t say anything and it’s clear they knew that the clients didn’t file the 5500 and there is a dispute as to who should have prepared them. They also should have known that the census information wasn’t correct. Yet the TPA never bothered to communicate with the plan sponsor on what was wrong until the client found a new TPA and demanded that the corrections be made.

As a plan sponsor, you need a plan provider that has tough love. They are providers that will fire you if you don’t get your act together because they don’t want the potential liability and the headache.

You need plan providers that will tell you straight and what needs to be fixed and when and if you don’t fix it, they’ll say goodbye.

I hate to do things last minute. I passed three different state bar exams and I never studied the day before.  So when it comes to being an ERISA attorney and/or ERISA §3(16) plan administrator for a few handfuls of 401(k) plans, I’m a little perturbed that every October 15th, I have to wait for either a 5500 to be completed or an audit be completed so a 5500 can be filed.

You would think with the advent of increased technology and an easier flow of information out there, that October 15th, the due date of Form 5500 with an extension would be easier. It isn’t. Quite honestly, I think it’s gotten worse. I don’t blame auditors and I won’t blame third party administrators because every down to the wire filing has its own issues and own stories. The problem is persistent and annual, the same plan that went down to the wire last years is going to be the one that will be that this year because it’s part of the culture and DNA of the plan, either the plan sponsors and/or plan providers can’t get the information done as quickly as possible.

I hate last minute because everything is so dependent now on technology with the electronic filings, as well as the fact that mistakes are easier to fall through when you rush. I had a slight hiccup with one of the plans where I am the named administrator because a small error by the auditor went through and wasn’t caught. This is why I hate the rush every October 15th and wishes it changes. However, I’m starting to think that’s the same as wishing for world peace.

I have always been concerned about the use of proprietary funds, especially belong to mutual fund companies and their use in their own 401(k) plans because they’re ripe to be a target for a class action lawsuit.

Fidelity should know since they’re being sued again after shelling $12 million as part of a 2014 case settlement.

In the current case, Moitoso et al v. FMR LLC et al, Plaintiffs claim that Fidelity breached its fiduciary duty by loading its $15 billion 401(k) plan with proprietary mutual funds, causing the firm and several affiliated entities to benefit financially. They claim Fidelity’s conduct is “particularly inexcusable” because of the prior lawsuit (Bilewicz v. FMR LLC ) and being one of the largest 401(k) record-keepers.

The problem with Fidelity and other fund companies is that when you’re in the business of selling mutual funds, it looks bad for business if you don’t offer your funds in your 401(k) plan. It would be like working in a restaurant and ordering out. If Fidelity predominately carried Vanguard funds in their 401(k) plan, imagine what other mutual fund companies and other plan providers would use for that information.

The biggest problem for Fidelity is that in 2016, they had 234 proprietary mutual funds in its plan and zero non-proprietary funds. 234 funds? In my mind, that’s 222 funds that many because studies show that too many funds in a 401(k) lineup depress deferral percentages in the plan. Only using their own proprietary funds doesn’t look good for Fidelity, but plaintiffs will have to show that it’s a breach of fiduciary duty when Fidelity will make that motion for summary judgment and if the plaintiffs survive a summary judgment motion, then Fidelity will settle again. I think settlements by fund companies who persist again to using only their proprietary funds are probably seen as the cost of doing business.

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

When you start fixing up the house (for me, a never-ending battle) and replacing appliances or items like the front door or the roof (I think I’ve replaced 4 front doors in 13 years), you realize that the replacements are more energy efficient. Replacing that old refrigerator or that washing machine can lead to some savings in your energy bills.

When it comes to retirement plans, there are so many of them that are inefficient in either their cost structure or plan design. While cost structure will be all disclosed to plan sponsors (who have the duty as fiduciaries to determine their reasonableness), plan design inefficiency is something that won’t be discovered until the plan goes through an independent review (like my Retirement Plan Tune-Up) or takes the plan to another third party administrator (TPA). Inefficient plan designs come in all sorts, but it wastes money like that 40-year-old furnace I replaced 13 years ago.

Inefficient plan design wastes money because it either makes less cost-effective contributions or it doesn’t maximize tax-deductible contributions to highly compensated employees. So it either wastes money in unnecessary contributions or is inefficient for tax savings.

In terms of wasting money, it could be a defined benefit plan that has outlived its usefulness or it could be a 401(k) plan with a new comparability plan design and a safe harbor matching contribution (because unlike a safe harbor 3% profit sharing contribution, you cannot use the safe harbor matching to offset any new comparability contributions to non-highly compensated employees like you could with the safe harbor 3% profit sharing contribution). A plan that doesn’t maximize contributions could be a 401(k) plan that consistently fails discrimination testing and doesn’t implement a safe harbor plan design or a plan that doesn’t offer a new comparability profit sharing allocation to highly compensated employees when the plan sponsor can afford it.

Retirement plans are a great employee benefit for retirement savings, but you should never forget the tax savings component it has.

So when I consistently state the claim that plan sponsors need to find a quality TPA that is not predicated on price but predicated on its competency and knowledge of cost-effective, retirement plan design.

When you look for new appliances, you always look for those with an Energy Star sticker. When shopping for TPAs, look for those who would deserve a Tax Star sticker (if one existed, don’t steal my idea!).

The idea of That 401(k) Conference is based on creating memorable events and it probably can trace itself to the time I brought Sal The Stockbroker for a comedy show as Vice President of my old synagogue.

My old synagogue was like many synagogues who would always run the same old fundraising events like a journal dinner and a Monte Carlo event. They must have been strong environmentalists because they kept on recycling tired old events that would only be attractive to its members. We also had a fundraising chairman who wouldn’t publicize the event until 2 weeks before the event would take place which would depress attendance.

I wanted a fundraising event that would attract non-members because their money is just as good as members’ money and since we only had a solid core of 50 people who regularly attended events, I wanted something unique that would have broad appeal to the outside.

Since a fellow member and a good friend worked on the Howard Stern Show, I inquired whether he could get Sal to appear at a comedy show. Sal agreed and I ran the event and allowed minimal involvement from the fundraising chairman to make sure he didn’t ruin the event. The only drawbacks that I had to deal with are that I had opposition to a $50 charge (I agreed to the suggested $40) and I had to cut in our caterer in for $12 ahead. The event was a raging success as we packed in around 200 people with most coming from the outside community. A few weeks back, a current synagogue trustee lamented that he wished we’d have fundraisers like the Sal show again. I told him that they still think it’s 1978 and run events that cater to a select few.

While That 401(k) Conference is a growing endeavor, what I like about is that it’s something unique for plan advisors. You can always offer a rubber chicken from the local Sheraton, but offering a memorable event for either plan sponsors or plan providers goes a long way. Hopefully, you can join me at the next That 401(k) Conference and That 401(k) Plan Sponsor Forum soon.

Casino is an underrated movie and it had a great line on the poster that said: “no one stays on top forever.” It’s a great tagline and I find it to be true. Just look at the New York Yankees between 1965 and 1976.

Dien Ben Phu was the decisive and final battle of the war between Vietnam and its colonizer France in 1954. It was an absolute disaster that led to French surrender of power in Vietnam in 1954, which eventually led to our intervention in what we call the Vietnam War. Dien Ben Phu was such a defeat for the French, it is now used as an adjective to describe a quagmire that is a humbling defeat.

ERISA litigators have has tremendous success over the last 15 years and it seems that when dealing with 403(b) plans, the ERISA litigators seem to be on the losing side more often than not as cases are being dismissed.

The latest case against Washington University follows resounding defeats with the dismissal of cases against University of Pennsylvania and Northwestern University. New York University won its case on trial as well.

The Washington University is a resounding defeat because the Judge dismissed the case with prejudice, so it can’t be refilled.

What Judge Ronnie White rules in the case in Federal Court is an eye-opener for all of us when it comes to litigation regarding high fees. “Plaintiffs start with the false premise that just because the Plan’s fees could have been lower that necessarily Defendants’ breached their fiduciary duties,” the judge wrote. “Plaintiffs fail to allege that the process of choosing the investment options was flawed, other than a mere inference of fiduciary wrongdoing. These allegations are insufficient to allege a breach of fiduciary duties based upon excessive fees.”

What Judge White is saying is simple: proving that plan sponsors paid too much in fees is not enough, they need to show that the process in choosing investment options was flawed. Better pleadings with evidence of a violation of prudence would go a long way in avoiding a dismissal of a case before trial. While I’m sure ERISA litigators will change their approach, these are bad defeats that are part of a losing battle against universities over high fees.

I hate paper, I really do especially when I can do thing paperless by going online.

The Internal Revenue Service (IRS) will begin accepting applications and payments under its Voluntary Correction Program (VCP) online through the www.pay.gov website beginning on January 1, 2019.

Plan sponsors will continue to be permitted to file VCP submissions in paper form during a transition period ending April 1, 2019, at which point all VCP submissions will need to be made through that online site.

As with anything submitted online, the hope is that there will be a quicker response by the IRS to these VCP submissions.

My newsletter for retirement plan providers can be found here.