The Rosenbaum Law Firm P.C. Blog

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

When I first started in the retirement plan business in 1998, I worked for a law firm that served as the counsel for third party administration (TPA) firm in Syosset, NY.

There was an office worker there named Orville. I remember Orville because I never saw someone who was male who sang “My Heart Will Gone On”, the Titanic theme song sung by Celine Dion.

Orville wasn’t much of a worker, but for some reason, my boss had an affinity for him. When the office work wasn’t panning out, they made Orville a computer tech guy. I think Orville knew as much as about computers as my grandmother did. When the tech thing didn’t pan out, they put Orville in an administrative position of dealing with retirement plan distribution to participants. As my boss would probably say: “he’s a good guy, he’s loyal.”

Well, one day, Orville tried to overpay a participant $18,000 more than what the participant had in their account. The person managing the daily operation of this TPA had enough and Orville had to go. From what I was told, Tom actually had to call my boss to get permission to fire Orville. Never understood why my boss had this loyalty towards Orville. I thought it was a lot of misplaced loyalty.

Loyalty is an admirable trait, but misplaced loyalty is another thing. I see that with many plan sponsors and their misplaced loyalty with their plan providers, which is not reciprocated but is actually betrayed. Plan sponsors should pick plan providers based on competence and they should check every so often to make sure these plan providers are doing their jobs. Just sticking by providers because you have retained for so long is one reason to maintain that relationship, but it shouldn’t be the only reason. I have a client being sued by the Department of Labor because the client had used a TPA for 28 years, who apparently wasn’t doing the necessary work in the administration of a defined benefit plan. Saying you used someone for 28 years is nice, you have longevity. It’s not so nice if you discover that they didn’t do the work and as a plan fiduciary, you are the one on the hook for what the plan provider did or didn’t do.

There is nothing wrong with always using the same plan providers, but there is something wrong is that the only reason you keep them because you have been using them for so long. Every plan provider should be evaluated every so often to determine their competence because you may have a shock when your long-time provider turns out to have thrown you under the boss with poor work.

When you’re filing that Form 5500, just notice that certain answers may likely lead you to an Internal Revenue Service or Department of Labor audit.

If you have a plan that is covered under ERISA, saying you don’t have a fidelity bond or don’t have the required amount based on the beginning year’s balance, you may get audited.

The same can be said if you report that you had a prohibited transaction or you made a late deposit of salary deferrals in the 401(k) plan.

If you’ve made the answer to these questions that will pique the government’s interest, it’s best to contact an ERISA attorney to see what type of corrective actions you need to take before the government audits you.

I’ve told the story many times, but I used to work for a well known ERISA attorney at a union sized law firm for about 10 months. The woman was absolutely brilliant, but I had to leave there after 10 months because she liked to do things at the last minute and I didn’t want to be drafting plan amendments at 2 am when I had two infants at home. Another thing that drove me nuts is that our styles clashed: I believed that less is more and she believed that more is more, she felt the need to justify her fees. Instead of using existing model language for a canned plan amendment, she wanted me to draft one from scratch and charge the client 10 times more.

I come from the position that when dealing with clients and other plan providers, that less is more. When it comes to marketing materials, any form of communication, and even conference presentations: I believe that less is more. You can say more by saying less. I’ve spoken at conferences where I spoke for 10 minutes and have spoken for a half hour and I can tell you that I’ve probably said as much in 10 minutes than in 30 and I think I had a greater impact. You need to be straight and to the point and by stripping down what you need to convey, you don’t have a lot of fluff.

The principal of my synagogue’s Hebrew School announced he was quitting after 16 years to take a position elsewhere. It’s devastating to me since we left our old synagogue with an inept principal for this new one with a principal who was able to teach my kids more in two years than what they learned in the previous 5 years.

Clearly, by his email and my discussions with him, it was clear that he left after 16 years over a salary dispute. As someone who is no longer involved with synagogue management (a whole chapter is dedicated in my last book), I was just amazed that the synagogue would let such a great principal leave over money. While no one is irreplaceable, it’s going to be very difficult to find someone with that kind of experience.

It’s the same with the retirement plan industry, there are many employees out there, but not great employees. Losing someone who is so well accomplished and experiences for a few bucks is a hard pill to swallow because finding such great people in this business is hard to do.  You should never pay a king’s ransom for an employee that you can’t afford, but you also need to ponder the hidden cost of having to find employees with a similar background and experience and the cost of hiring them.

There is a hidden cost with having to replace members of your staff, especially if they are experts at what they do. So you need to figure out that hidden cost when you ponder on whether the incumbent employee is deserving of that raise.

In life, giving people a wide variety of choices is a good thing. However, when it comes to daily valued 401(k) plans, too many choices isn’t a good thing. It sounds counter-intuitive, but too many choices offered to plan participants isusually a mistake.

Offering participants the right to self direct their own 401(k) account sounds like a great idea because plan sponsors are giving a plan participant a choice in shaping their retirement. The problem with these choices is that plan participants get paralyzed by being offered too many choices; they tend to get overwhelmed. For example, people assume offering so many different mutual funds on a plan’s investment menu is the way to goo. However, studies have shown that the more investment options offered under the plan, it tends to actually depress the deferral rate of plan participants. Offering 57 mutual funds on a lineup sounds like a good idea on paper, but it overwhelms plan participants to the point that they don’t want to participate and defer their income.

The same can be said by offering participants a self-directed brokerage account. Allowing plan participants the right to a brokerage window within the 401(k) plan allows them to purchase stocks and other investments apart from the typical mutual fund menu offered under a 401(k) plan. Again, a study has shown that plan participants who use a brokerage window tend to have a worse rate of return on their 401(k) account than those participants who stick to the core fund lineup.

Offering 25+ versions of Tide detergent probably has done well in selling detergent, offering too many choices within a 401(k) plan isn’t a great thing.

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

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

I have written many articles on the fiduciary warranty and how that is a deceptive practice in my mind because plan sponsors assume that this warranty protects them a lot more than in the very limited circumstances that it actually does.

When I first wrote an article about it in 2011, someone I know who worked for one of these fiduciary warranty pushing providers didn’t take too kindly to my article and asked me to take his name off of my newsletter subscriber lists. He also indicated that in the past, he referred a lot of work to ERISA attorneys. I got the picture and of course, in the years that I knew him, I never got any legal work from that relationship. Regardless, when you are outspoken as I am about fee disclosure and some of the abuses in the retirement plan business, this is the price you have to pay for being outspoken. Most of the time, my outspokenness gets me more business like the time I was hired by a West Coast registered investment advisor because the competition (the top ERISA attorney in the country, in my opinion) was returning the client’s phone calls from a meeting with a bundled provider client that was known for its poor product and high fees. The client knew that they didn’t want to hire an ERISA attorney who represented providers like that. In the end, you can’t be everything for everybody.

As a plan provider, you have to develop your niche and market yourself to the marketplace you want to work with. A financial advisor, who only wants to work with $100 million plans, isn’t going to join a small business networking group. A third party administrator (TPA) that only handles small, balance forward retirement plans isn’t going to handle a $75 million, participant-directed 401(k) plan.

Plan providers need to their strengths and weaknesses. I worked for a provider with an owner who thought we could do everything and when we tried to handle something out of our element, we’d flop. As Dirty Harry said in Magnum Force:  “A good man always knows his limitations.” Plan providers need to market their strengths and not try to be a provider for every type of plan coming down the pike.

The fact is that the retirement plan business is large enough for providers of all different sizes and shapes. There is enough area for the bundled provider and unbundled provider, as well as brokers and registered investment advisors. To me, it’s all about fit. For some plans, bundled providers may be the solution and there are times when they are the completely wrong answer. Plan sponsors need to find the right team, the team with the background to handle a plan of their size and shape.

Plan providers need to understand they can’t be everything for everybody. Just like I won’t be representing any companies pushing those fiduciary warranties.

I’m very proud to announce that The 401(k) Conference will emanate from the friendly confines from Wrigley Field on Thursday, September 13th. If you’re a 401(k) financial advisor, you get 4 hours of content, lunch, a Wrigley Field Stadium Tour and a meet and greet with Hall of Fame member Andre Dawson for $100. In addition, we’re having a Cubs game outing the night before on Wednesday, September 12th as the Cubs take on the Brewers. Tickets for the game are $100 and are going quickly. Tickets for the game and conference can be found at http://that401ksite.com/that-401k-conference/

My friends at PCS have decided to join in the fun as they will be having their 401(k) advisor event, The Advisor Lab on Wednesday, September 12th. It’s a half-day of great 401(k) content, followed by a Happy Hour before that Cubs game we have. So if you’re an advisor in Chicago or points elsewhere, this is a great way to spend 2 days in the Windy City. Sign up for The Advisor Lab at http://events.r20.constantcontact.com/register/event?oeidk=a07efhhvvlib2e1fd65&llr=kbebigzab

Chicago this September 12th and 13th is the place to be if you’re a 401(k) advisor.