The Rosenbaum Law Firm P.C. Blog

Advisors ask me all the time of the role of education in participant-directed 401(k) plans. Participant-directed 401(k) plans that are governed under ERISA §404(c) offer the plan sponsors liability protection based on a participant’s gains or losses on their account when they direct their own investment.

There have been so many misconceptions that plan sponsors and advisors have had concerning ERISA §404(c) plans. They had this belief that if they just give a mutual fund lineup and some Morningstar profiles to plan participants that they are exempt from liability. ERISA §404(c) protection is about following a process and Morningstar profiles are just not enough education to give to plan participants. On the flipside, education to participants doesn’t have to amount to an MBA education.

I think an effective education component to ERISA §404(c) plans should include enrollment meetings where the characteristics of the plan are discussed, as well as the investment options, and offering the building blocks of financial education to assist participants to get a better understanding on how to choose investments.

In addition, written materials such as plan highlights and some Morningstar profiles should always be distributed.

Also while many advisors dislike, one on one meetings to participants should always be offered. While most participants will probably shun such meetings, they should always be offered to those that want them because as we know, every participant has a different financial goal and need.  One on one meetings offer participant individualized attention on asset allocation and fund choices; it can be an effective means of educating plan participants more than what a general enrollment meeting can offer. It can help participants understand how retirement plan assets relate to their other assets as part of a comprehensive financial plan.

Advisors should always look at education as liability protection because offering participant education helps a plan sponsor minimize their liability under ERISA §404(c). While I always stress education as important part of the fiduciary process, it’s not about achieving a specific result from participants directing their own investments. Offering participants educations is like the old proverb, “You can lead a horse to water, but you can’t make him drink.” So no matter how great the education component is, there is no guarantee that it will help plan participants achieve a better financial result because like they say, there is no guarantee in life, except maybe death and taxes. The participant who put all his money into a mid-cap fund because he considers it the “average of the market” may still do so even after getting an education at the enrollment meeting and through one on one meeting. As with most things with retirement plans, it’s about following a process and not guaranteeing a result.

When picking a retirement plan provider whether it’s a third party administrator (TPA) or financial advisor, don’t pick a provider just because they’re the biggest provider out there. Bigger doesn’t mean better. As you see in high school, being popular also doesn’t mean better either.

You should pick a TPA that is competent at what they do and that charges a reasonable fee. The number of plans under management or/administration may mean the provider is very good at generating business, but it doesn’t mean they’re good at what they do.

When someone says their TPA is better because all the plans they administer, all I point out is that Bud Light is the best selling beer in the United States. Does that make it the best beer? Of course not. Case closed.

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As a plan sponsor, it should be obvious that you need to keep all beneficiary forms on file and make sure they’re updated. However, surprisingly, I have found many plan sponsors that are deficient when it comes to this form of recordkeeping.

As we all know with life, things change and family situations change. So that’s why you should always keep the forms on file and make sure they get updated when circumstances change for the participants or just ask whether there needs to be a change at an enrollment meeting. Life can be a soap opera at times, but not having beneficiary forms on file or updated forms will create a soap opera when it comes time to pay out a deceased participant’s benefit.

When I started my law firm about 8 years ago, I had already had a marketing guru who was handling my public relations side even when I was an associate at a semi-prestigious Long Island law firm.  Yes, as an associate at a law firm, I had hired my own p.r. guy because our outside p.r. firm was dreadful and our in-house marketing staff was busy with the dozens of other lawyers and the law firm administrator who had to publish articles that never made our firm a dime.

This p.r. guy’s mantra was that marketing works and he was right. Through some of my referrals, this p.r. guru with the golden touch got two clients based on my recommendations. The first week I started, I got some nice coverage in the Long Island Business News and that really was it. Other articles I was quoted in were leads that he was sending me and I did all of the work by contacting the reporter and following up. As with any business, it was a struggle and business wasn’t good.

Over time, I started to suspect that p.r. guru was no guru, especially when our local newspaper Newsday had an article on 401(k) fees and there were no quotes from his clients (myself, a third party administrator (TPA), and pension consultant) in it. From what I gather, he had a good friend in Long Island Business News and that was it. He wanted me to network with people that he recommended and all of them were his clients.

I lamented to this p.r. guy about my lack of new business and he suggested that I take some time off.  Since I had to pay my mortgage, that wasn’t an option. I also thought that the comment was insensitive and showed a total lack of empathy. So instead of taking his advice, I read a few books on social media and hired a social media guru. I realized that for the $30 a day I was paying, this p.r. guy was doing nothing. He was very good at promoting himself, not so well at promoting his clients. He had no knowledge what I did because he started setting me reporter requests for experts on finance topics that had nothing to do with my ERISA expertise. The kicker at the end was when he suggested that I rent an office where the TPA was leasing space, so I can get work from this TPA (who had been referring work to another ERISA attorney). Since I don’t believe in any kind of quid pro quo arrangement, I was offended that he suggested that I rent out space for an office I didn’t need, so he could look good with this TPA client. I quickly fired him and it’s no surprise that my business has lifted off.

The point of this diatribe is about empathy. Empathy is an important, yet neglected trait. Empathy is the capacity to recognize and, to some extent, share feelings (such as sadness or happiness) that are being experienced by another person.  Empathy is a major cornerstone in building human relationships and it is a key to having compassion.

Retirement plan providers whether they’re financial advisors, TPAs, ERISA attorneys, and accountants are in the professional services business. These professional services entail working with retirement plan sponsors that are businesses, individual owners, and plan participants. To properly service the clients, you have to know the needs of the client and sometimes those needs are quite large for one reason or another. To properly service the needs of your clients, you need some empathy. That means when times are tough, don’t charge $150 for a boilerplate safe harbor notice when you always gave it away for free. That means not charging a client $30,000 for a plan amendment to correct the errors you put in the plan document. It means returning part of your administration fee when you do so many mistakes in the discrimination testing of the plan that caused the plan sponsor penalties.

This is not to suggest that when times are bad economically that a service provider should cut their fees. It means that service providers should show concern when their clients and their employees are going through rough times. They always say you know who your friends are when you see who sticks with you when times are tough. Plan sponsors will always the retirement plan providers who helped them when either the employer or the plan was going through some rough times and those who didn’t.

Providing top-notch professional services isn’t enough, plan providers need to deal with their clients because of the human factor. We are not robots, we are human beings and while financial advisors have been fired for poor mutual fund selection, I have seen many financial advisors fired because they didn’t meet the client’s needs when things weren’t going so well.

If you’ve learned anything from me, just realize that anyone can be sued for anything. All you need to be sued is the purchase of a court index number and the filing and serving of a complaint.

I’ve been one of the few people following the Vantage Benefits case and I was contacted by a representative from Matrix Trust Company about a class action lawsuit filed against them in a Colorado Federal Court.

Two Texas A&M retirees filed a class action lawsuit against Matrix Trust Company. The complaint stated that Matrix provided custodial and trust services for section 403(b) Retirement Plans, including Plans associated with Texas A&M University, Vernon College, Collin College, Laredo Community College, and Tarrant County College. Vantage Benefits Administrators was the record keeper for those plans. The retirees are seeking compensation from Matrix for failing to meet its obligations as a trustee to protect their savings.

The representative from Matrix stated: “This lawsuit is completely without merit. Matrix Trust Company did not manage these investment accounts or serve as a trustee or fiduciary for them. This lawsuit involves accounts that were opened and managed by Vantage Benefits Administrators. Matrix’s actions were consistent with its custodial agreements and intends to vigorously defend itself against these baseless claims.”

I don’t usually opine about litigation, but I think Matrix is in the right on this one. First off, 403(b) plans don’t have trustees on the plan. So how did Matrix serve as a trustee? Second, Matrix denies that it’s a trustee and said they provided custodial services for the plan. Being a custodian doesn’t make them a fiduciary on the Plan. It just seems that the Plaintiff’s attorney doesn’t really understand how 403(b) plans work and how Matrix as custodian only, doesn’t meet the level and duty of a plan fiduciary.

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My latest article can be found here on JDSupra.com

I love Clint Eastwood movies and one favorite is “In The Line of Fire’.  John Malkovich is playing a wannabe Presidential assassin named Leary and Clint is playing  Frank Horrigan, the Secret Service agent who is trying to catch him. For me, my favorite scene is when Clint and John Malkovich are on the phone and John calls Clint’s character a friend.

Frank Horrigan: I know who you are – Leary.

Mitch Leary: I’m glad, Frank. Friends should be able to call each other by name.

Frank Horrigan: We’re not friends.

Mitch Leary: Sure we are.

Frank Horrigan: I’ve seen what you do to friends.

Mitch Leary: What’s that supposed to mean?

Frank Horrigan: You slit your friend’s throat.

While not the same thing is slitting a friend’s throat, it is amazing to me how large 401(k) providers handle the 401(k) plans of their employees. I can attest that as someone who worked for a third party administrator once, I can tell you that our 401(k) plan wasn’t very good. It’s kind of like the old adage about the cobbler’s children having no shoes.

There have been several large 401(k) providers who have been sued over their 401(k) plans. While a number of cases are outstanding at this moments, there have been several that have forked over millions as part of a settlement.

If these large plan providers overcharge their own employees, does that mean they do it for their “real” clients? That’s not for me to say, that’s for an independent review to find out.

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.

Court cases have made it far easier for 401(k) participants to sue plan sponsors. 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 will 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.

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.