The Rosenbaum Law Firm P.C. Blog

I always say that the reason I’ve never hired an employee is because I was an employee once too. I say that the problem with the employee-employer relationship is that no employee thinks they get paid too much and no employer thinks they pay their employees too little.

The worst time of the year for me was the annual review because I always ended up being unhappy with my raise. The problem really was only at one job I had because when it came time to getting promoted, I never got the salary that I thought should come with that promotion. So every year, I felt I needed to chase that salary with a raise. One year, my employer said that if I wasn’t happy, I should leave and find another job. I packed up my stuff and was ready to walk off, but a fellow employee knocked some sense into me that I was married and had an infant son. A year and a half later, I was gone.

When you have great employees, one of the worst mistakes you can make is making them feel unappreciated. Another big mistake is making it clear to them that can go elsewhere. Maybe they didn’t think about going somewhere else, but telling they can may provide the spark that gets them to leave. If you truly value your employees, don’t give them the idea that the grass maybe greener on the other side.

The snowball effect is a term for a process that starts from something that is small and builds upon itself, becoming larger and also perhaps potentially dangerous or disastrous. The idea is that an avalanche can be started by a single, rolling snowball, hence the term.

When it comes to retirement plans, we have a snowball effect. The effect is usually when the plan sponsor has a plan problem and decides to either try to fix it on their own or lean on legal counsel with absolutely no training in ERISA.

I have seen too many plan sponsors pay tons of penalties and excise tax to correct problems that could have cost them a lot less if they were represented by ERISA counsel.

I remember being contacted a few years ago by a financial advisor whose client’s plan was disqualified by the Internal Revenue Service and was asked if I could possibly represent them in negotiating down any other Internal Revenue Service penalties. I told the advisor I should have been called a lot earlier because the transgression shouldn’t have led to the plan being disqualified if they had some decent ERISA counsel.

Too many plan sponsors think they can handle an audit or inquiry or investigation on their own and they’re wrong unless they are a third party administrator or ERISA counsel.

In the past, I have been able to negotiate penalties down for failures to file Form 5500 on time when plan sponsors not represented by counsel have paid through the nose in penalties. Too often plan sponsors are so more interested in saving on legal fees, that they end up cutting their nose to spite their face by paying more in penalties.

ERISA counsel have the experience to handle the government and I have found a deference by IRS and DOL auditors in dealing with professionals who understand the ramifications of the situation, which often leads to a better resolution.

Using counsel who have no ERISA experience is a mistake as well, like hiring a dentist to do a colonoscopy. ERISA is a different animal than what most attorneys handle and I have found there is no room for lawyers who want to dabble in ERISA because it’s not something you can dabble in.

Once a plan sponsor gets that initial inquiry, they need to contact ERISA counsel and their TPA to draft an action plan on how to handle because often the IRS and the DOL may use an audit to investigate a major complaint. Having a lack of experience in handling a governmental audit can make things so much worse.

A good chunk of my work as an ERISA attorney is working with financial advisory firms in managing their retirement plan practice especially with 401(k) plans. I have many registered investment advisory clients around the country and I counsel them all areas of their practice. I always caution about share classes in mutual funds offered to plan participants and the need to find the lowest costing share class possible.

So here is an example of advisory firm getting the attention of the government. The SEC issued a cease-and-desist order against Envoy Advisory Inc. Envoy agreed to pay disgorgement for failing to offer the lowest-fee mutual fund share classes available and failing to adequately disclose compensation paid to its affiliated broker-dealer.

The RIA recommended third-party mutual funds to 403(b) and IRA clients, who directed the investments.

According to the SEC, from January 2013 through March 2017, Envoy recommended, and plan participants and IRA holders held, Class A mutual fund shares when less expensive institutional share classes of the same mutual funds were available. Class A shares usually include 12b-1 fees. In this case, the 12b-1 fees paid by mutual funds held by plan participants and IRA holders went to Envoy’s affiliated broker-dealer, Envoy Securities LLC, which is a huge problem and conflict of interest.

Envoy’s Form ADV disclosures to plan sponsors during the relevant period disclosed that certain mutual funds “may” pay a “dealer” 12b-1 fees, but they failed to disclose that the “dealer” receiving the 12b- 1 fees was Envoy’s affiliate.

Thanks to the Tibble case, there is more pressure to find the lowest cost available share class and this Envoy case is a text book case for what advisory firms should not do.

History has shown that when it comes to tax reform, certain personal deductions are sacrificed for lower rates. Ask people who had deductible IRAs and deducted their credit card interest prior to 1986. Simpler, lower rates must be met by the elimination of certain deductions to recover revenue lost by lower rates.

The discussion that any tax reform may come with a $2,400 401(k) tax deduction limit is a trial balloon that will be burst. Pretty much making a 401(k) plan an after-tax Roth plan is going to meet with resistance from the retirement plan industry and the interested parties on Wall Street. I believe that forcing individuals to make post-tax deferrals only will have many individuals pass on making salary deferrals because of the need for the immediate tax gratification of the pre-tax deferrals. While many participants might be better to use the after-tax Roth option for a 401(k) plan, I think many people can’t afford it or psychologically can’t afford it.

It would take 50 votes plus the Vice President to pass a tax reform bill in the Senate. I can guarantee you that there will be more than 2 Republicans that will kill any proposal to put a $2,400 pre-tax cap. Why am I so sure? So much of politics is grounded in defining the issue. While the $2,400 cap does allow people to make after-tax 401(k) deferrals, most people will incorrectly assume that only $2,400 can be deferred in a 401(k), cut back from the current $18,000 limit. The public is so attached the pre-tax deferral of the 401(k), many or most don’t even know there is a Roth option. We have a retirement crisis in the country because of concerns over Social Security and the elimination of most private employer-provided defined benefit plans. The last thing people will call for is any rollback in participants having the opportunity to make pre-tax deferrals.

There is enough blowback to eliminate this limit from consideration and may have been an attempt in Washington to gauge reaction to the elimination of this deduction. I think tax reform in any fashion is going to be impossible to pass when you have a handful of Republicans that can kill it (like Susan Collins and John McCain). I think folks in Washington will consider other deductions that they will try to eliminate (having leaked proposals over phasing pre-tax deferrals and state and local taxes).

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

In any service industry, the quality of service and price can be far and wide. While people say that I focus way too much on the workings on the third party administration (TPA) business, I do have more experience in that field as an ERISA attorney and former employee of a couple of TPAs.

People often ask whether as an ERISA attorney, I work as a TPA as well. I quickly state no, let the folks who know what they are doing do it. I have too much respect for the work of TPAs to be in that business, which I find gets too much blame and not enough credit, at least for the good ones.

However, looking at the TPA business, I always notice the wide difference in pricing, but more about the wide difference in service. For example, I have a client who clearly was taken advantage of by a TPA that is really in the business of selling insurance, with administration just being treated as an ancillary service. The clients were sold a couple of life insurance policies that the company could no longer afford with a special sub-trust that the Internal Revenue Service no longer finds special.

I have another TPA looking at the plan, which may or may not charge the same price, but offering an exit plan to get out of the plan that is a half million in the hole. The potential new TPA remarked how the plan should have winded down earlier and wondered why the current TPA/ snake oil salesman didn’t advise the same. It’s hard to when you really aren’t in the TPA business and are really in the insurance selling business because terminated plans don’t pay administration fees or pay premiums.

When it comes to finding the right TPA, the price is important, but the quality of service is the difference maker to me.

Advisors ask me all the time of the role of education in participant directed 401(k) plans and it’s an important question. 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 is 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.

Advisors that may have issues in offering education should always consider using some of the online resources out there such as rj20.com, who could offer investment advice that an advisor can’t if they won’t comply with the investment advice regulations.

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 help 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.

Missing plan participants are usually only an issue when a retirement plan decides to terminate and wants to avoid dragging out the process and having to file another Form 5500.

Now there maybe further reasons for plan sponsors to clear out their plans of missing participants. The U.S. Department of Labor (DOL) is pursuing audits of defined benefit pension plans with “missing” participants. One doesn’t have to assume that if this happens, that other plans will be pursued.

This started from a pilot program in the Philadelphia DOL office and met with success, so it’s being stretched out nationally.

The Philadelphia office began looking at the Forms 5500 of defined benefit plans to identify plans with a lot of terminated vested participants who weren’t being paid out. When the DOL contacted plan sponsors asked about these participants, the plan sponsor said they were missing. The problem is that the DOL sent a certified letter to the participants’ last-known addresses where these participants responded and many didn’t know there was a benefit to them.

From October 2016 to August 2017, the Philadelphia DOL office recovered more than $165 million in benefits that should have been paid to participants.

The problem here is that DOL auditors will monitor plan sponsors’ failures to locate and contact missing participants and will treat that failure as a breach of fiduciary duty under the Employee Retirement Income Security Act (ERISA), which can trigger substantial penalties. So plan sponsor should formulate a program now to deal with missing participants by finding their last known address and contacting them; contact them by phone: or pay for an online search. Doing nothing could be a problem. Again, while defined benefit plans are the target, it’s a safe bet that other plans will merit the DOL’s review.

Over the past 7 years as a solo ERISA practitioner, I always get asked if that’s all I do. It’s not some kind of insult, but a question on whether I also do financial advisory work and/or third party administration work. The answer is no and I stick to what I do.

Over the years, I’ve seen plan providers get into trouble by offering advice that they are not experts in. Unless they have an ERISA attorney on staff, a TPA is not a lawyer and an ERISA lawyer is certainly no financial advisor. My wife and I always chuckle when non-attorneys give legal advice and I’m sure other providers would chuckle if I gave financial and/or plan administration advice.

You should stick to what you know. It will save you and your client, a giant headache.

The news comes trickling in for 401(k) plan providers and plan sponsors beating back class action lawsuits.

Many plan providers win their case as defendants because the plan participants fail to convince a judge that the provider serves in a fiduciary capacity. Plan sponsors often win, just because the plan participants showed that a certain decision like using revenue sharing funds was a clear breach of the sponsor’s fiduciary duty.

While plan providers and plan sponsors win their case, they have still lost. The news about them winning is far less public than the new about them getting sued in the first place. In addition, the cost of litigation is burdensome even if the providers and sponsors have fiduciary liability insurance.

There is no champagne celebration for winning a case on summary judgment because of the huge cost in publicity, time, and cost. Even if the plan provider and plan sponsor did nothing wrong, something they did suggest that there was impropriety that an ERISA litigator that was good enough in order to commence litigation.

So if a plan provider and plan sponsor have won their case, they’ve really won a hollow victory.