The Rosenbaum Law Firm P.C. Blog

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

When the great Bill Parcells was the head coach of the New England Patriots, he got into a tiff with owner Robert Kraft because Parcells wanted more of a say in the personnel decision-making process. Parcells famously said: “They want you to cook the dinner; at least they ought to let you shop for some of the groceries. Okay?”

It sort of reminded me of my old law firm, where I was asked to feed people (by getting new clients) and I had someone who doesn’t cook (the Advertising Committee of one) tell me which ingredients I could use. It also reminds me of my synagogue where I served as Vice President in organizing events (read my latest book for details) but had no say in how the place was run. Do you see a pattern?

I admit it; I am more comfortable when I have control over things. When I have control, I succeed or fail based on my decisions instead of a bureaucracy that is less interested in my success and more interested in playing political games.

As someone who likes being in control, it should be no surprise that I like the proliferation of ERISA §3(38) fiduciaries and I think registered investment advisors (RIAs) who are interested in the retirement plan business should have the goal of offering it to some of their clients.

Once again, the use of ERISA §3(38) fiduciaries is a great fit for some plan sponsors who have none of the time or interest in keeping up their end in the fiduciary process of selecting plan investments and educating plan participants. The ERISA §3(38) fiduciary is a great solution for these type of plan sponsors because the fiduciary is defined as an “investment manager” under ERISA and assumes almost all of the liability (hiring a bad fiduciary is a breach of the plan sponsor’s fiduciary duty) of handling the investment decision making process.

I think advisors (as long as they are surrounded by a good team including a good ERISA attorney (cough, cough) )should consider entering that space so that this solution could be offered as one of their services.

While some RIAs consider the liability aspect of it, the increased liability will always be offset by engaging in good processes (recording decisions, offering educating, memorialized investment choices in an investment policy statement) and by picking the right type of plan investments (most of these investment managers are using passive funds such as exchange-traded funds, Dimensional Fund (DFA) and Vanguard index funds).

I always say that if you can’t do it right, don’t do it all. ERISA §3(38) fiduciaries should be for those RIAs that are serious about their trade as retirement plan financial advisors and should not be for those who don’t understand their roles as financial advisors for retirement plans. If you are serious about entering the space, speak to an ERISA attorney or speak to current ERISA §3(38) fiduciaries whopartner with RIAs who don’t want to be in the space like James Holland at Millennium.

In addition, I will be making an announcement in the coming year on how I will be providing a bigger role for RIAs who want to be in this field.

As an ERISA §3(38) fiduciary, you get to buy the groceries and cook, the only thing to avoid is burning the meal.

A friend of mine called me up a few weeks back and was telling me a story how he had a debate with Jeff Richie from Vantage Benefits at a conference a few years back. Richie claimed he had some writing from the Department of Labor that says that a plan sponsor who hires an independent fiduciary cedes that fiduciary function that they delegate. One of the arguments for hiring an independent fiduciary in a §3(16) or §3(38) setting is that these fiduciaries will assume discretionary control and the liability that goes with it. Through all the marketing you see and hear, it’s claimed that the plan sponsor is not going to be on the hook as a fiduciary.

While hiring an independent fiduciary is likely a settlor function, the plan sponsor doesn’t shed all their liability because they will still retain liability as a plan settlor. The point here is that if the allegations against Vantage are true and they stole millions from clients, what does it matter if a plan sponsor is not liable as a fiduciary because they’re still liable for hiring the fiduciary that stole in the first place? Hiring an independent fiduciary will protect a plan sponsor in most instances, but when hiring an incompetent or corrupt fiduciary, it doesn’t really matter. One of the reasons that plan sponsors are suing Vantage is because it’s pro-active method of covering their rear end since they’re on the hook for hiring a fiduciary that stole plan assets.

In the scheme of things, what difference does it make if a plan sponsor is being sued for hiring a stealing fiduciary? At the end of the day, the plan sponsor is liable for hiring a fiduciary who stole.

I used to love paper until I had a 5-foot flood in the downstairs of my home during Hurricane Sandy. When you have a file cabinet with files sitting outside your house with files that you hope dry over 6 months, you learn to hate paper.

So that’s why I love what my friends at the American Retirement Association are calling for in their new initiative.

ARA CEO Brian Graff announced plans at the latest NAPA 401(k) Summit, to push for the elimination of the expensive and outdated ERISA requirement to disclose information to 401(k) participants in paper form.

The current rule of the Department of Labor’s ERISA regulations in information delivery is providing paper disclosures — including the Summary Plan Description (SPD) and Summary of Annual Report (SAR) — to plan participants.

There is a current safe harbor permitting electronic delivery to certain types of participants with online access. To utilize the current safe harbor,  plan sponsors using electronic delivery must solicit participants’ consent to e-delivery, track their responses, store their e-mail addresses and monitor delivery of the disclosures, which is why paper delivery is still king.

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

I don’t pull any punches, so I have certainly written many articles about plan providers issuing something called a fiduciary warranty, that is free and doesn’t protect the plan sponsor from almost any liability because plan sponsors never get sued for what the warranty is supposed to protect plan sponsors from.

While a fiduciary warranty is just a marketing gimmick, I never thought it was dangerous. I always saw it as a marking throwaway. I recently received information from my client regarding a plan provider touting their fiduciary warranty that I find to be absolutely dangerous. The materials and the email from the plan provider make it seem that a fiduciary warranty can be used as a replacement for a plan sponsor using an ERISA §3(21) or §3(38) fiduciary. A fiduciary warranty “protects” a plan sponsor from liability when dealing with the broad range investment requirement for plan investments. To quote Montgomery Scott from Star Trek III: “a money and two trainees” can meet that requirement. The same goes with selecting the QDIA fund as well.  That’s far different from what a §3(21) or §3(38) fiduciary does in limiting the plan sponsor’s liability with investment selections, fiduciary process, and participant investment education. A fiduciary warranty is worthless as opposed to hiring a financial advisor, which is what a plan sponsor needs. I find it reckless that any plan provider would suggest that a fiduciary warranty can replace the effectiveness of a financial advisor.

A fiduciary warranty is worthless, but harmless on its own. However, it is marketed and used as some alternative to hiring a good financial advisor, it is misleading and fraudulent advertising.

My great Uncle Jack was the youngest of 4 children. He followed Herschel, Zoltan, and my grandmother Rozalia. He was a troublemaker when he was a kid. One time, he gambled away the family’s ration coupons and my grandmother had to get hem back. One day, he was cutting school with Zoltan to attend a soccer game and ran into his parents. He was rebellious and that was the complete opposite of my grandmother. Uncle Jack and my grandmother were the only members of the immediate family that survived. Uncle Jack met Aunt Clara in a displaced person camp after the war and he moved to the United States. When my grandparents and their children came to the United States in 1964 because Uncle Jack sponsored them, one of the first things he told my grandmother was how he wished their parents could see how he turned out. I’m sure it was Clara who had a positive effect on him. When his daughter’s husband left her when he had three young children, it was Uncle Jack who became the father that those children needed. Jack and Clara moved from the Whitestone, Queens area that they loved to move in with their daughter because Jack was a very selfless man. Uncle Jack was one of the greatest men I knew, next to my grandfathers because while he might have been a troublemaker as a kid, he showed everyone in my family what a real man is and I think everyone including myself will always fall short when we compare to him. People can change and Uncle Jack showed that we don’t have to be born a saint to become one.

I believe in redemption, I believe that people can make mistakes, atone for them, and turn it around. However, it only goes far. I know that there are people who are convicted of crimes and make amends for it and I can accept that. However, when dealing with plan providers, trust is a very important concept that I need and I can’t hire a provider if I know one of the principals is a convicted felon of a financial crime. If you’ve been convicted of check fraud, I’m just not going to hire or refer business to you. It’s all about trust. While I’m sure people will try to say that such a person is trustworthy and that the crime is somehow analogous to a DWI conviction. I don’t think it’s the same, but I will say that: I won’t hire someone to drive me or my family with a DWI conviction. After the Vantage Benefits debacle where a person sanctioned by the SEC is accused of stealing millions from retirement plans, I would advise any plan sponsor using a plan provider where the principal was convicted of a financial crime to run away as fast as they can from them.

It’s one of the greatest lines in a movie and even my 11-year-old daughter knows it. Harrison Ford playing Richard Kimble finds the gun that Federal Marshal Samuel Gerard played by Tommy Lee Jones dropped in The Fugitive. Gerard’s job is to track down Kimble. Kimble points the gun at Gerard and tells him he didn’t kill his wife. Gerard said he didn’t care because his job as a Marshal was to bring Kimble back into custody.

One of the biggest problems in dealing with clients is when they feel you don’t care. While I’ve never come across a plan provider who told their plan sponsor client they didn’t care, I’ve seen quite a few that let off an attitude that they didn’t care. Whether it’s the third party administrator that butchered compliance testing or the advisor who can’t bother to visit the client at all,  there are enough plan providers who show clients that they don’t care. Don’t be that provider, don’t ever give the perception that you don’t care about your clients.

Who can forget Alec Baldwin’s speech in Glengarry Glenn Ross on how salesmen should “Always Be Closing” and how coffee is for closers only? It was the highpoint of a great movie.

I’m not going to go through a discussion on sales, but a cautionary tale that you have to advise your clients to navigate a path where other plan providers will try to sell you client products or services that they don’t need. So instead of Always Be Closing, you should “Always Be Watching” what happens with your client.

I once had a retirement plan sponsor client trying to terminate his retirement plan. The retirement plan had a fully paid up insurance policy and the sole owner participant wanted to purchase that policy from the Plan. So my client talked with a salesperson with the insurance company about the policy. Of course, the new salesman wants to sell my client another insurance policy that he didn’t need because the business was folding and he was 71.  So I always watch and my client avoided buying that new policy.

I advised my client that he should open a new bank account for his retirement plan at the local bank when dealing with transferring the life insurance policy. So my client went to the local bank to set up a bank account for the plan’s trust. The bank told him that he has to meet with the financial advisor at the bank, i.e, the broker. Why does anyone have to meet a broker to open a bank account? Not to talk about how my Mets will do in 2018.

It’s not enough to service the client, you always have to watch and make sure that the client doesn’t end up buying retirement plan services and products that they don’t need.

The company that told us we can do home improvement by ourselves might not have been able to properly run their 401(k) plan.

Home Depot is now the target of a $140 million class-action lawsuit that was filed in the U.S. District Court of the Northern District of Georgia.

The lawsuit claims that Home Depot violated their fiduciary duty by mismanaging their 401(k) retirement plan. According to the complaint, Home Depot selected multiple poorly-performing funds for its 401(k) plan, that allowed their investment advisers to charge its employees unreasonable fees. It also claimed that Home Depot turned a blind eye to a kickback scheme between an investment adviser and the plan’s recordkeeper. 

The Plaintiffs alleges that with their $6 billion plan that Home Depot arranged for the investment advisor Financial to sell investment advisory services through “robo advice,” in which “a robot creates cookie-cutter portfolios based on minimal participant input.” It’s also alleged that Home Depot allowed Financial Engines to charge plan participants advisory fees that were in some cases double the competitive rate. While Financial Engines was replaced by Alright Financial Advisors in 2017, they rehired Financial Engines as a sub-advisor. The lawsuit names Financial Engines and Alright as co-defendants.

With 20,000 employees, $6 billion in plan assets, and using a robo-advisors, suing Home Depot is an ERISA litigator’s dream. Whether this lawsuit survives a motion for summary judgment is anyone’s guess. Regardless, it’s important for a plan that size to be careful out there.