The Rosenbaum Law Firm P.C. Blog

My latest newsletter can be found here.

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

A few years ago, researchers from the business schools at the University of Indiana and the University of Texas at Austin looked at some data to try to figure out why many poor 401(k) investment choices linger on fund lineups. The researchers identified one fairly clear explanation: a sub-par fund is much more likely to stay on the menu if it’s managed by the mutual-fund company that’s helping administering the plan.

While it’s very easy to point to the mutual fund companies turned bundled plan providers of the world to blame, the fact is that regardless of whether you are dealing with a bundled or unbundled product, poor investment options are dependent on the work or lack thereof of the financial advisors and/or the plan fiduciaries.

My old law firm was using an open architecture platform where they hand a fund lineup that hadn’t changed for 10 years. The culprit? The fact that they never bothered to hire a financial advisor until I told them it was a good idea.

There are too many plan sponsors who don’t have a financial advisor and there are too many financial advisors who don’t do enough of a credible job to merit the fee they are getting.

Perhaps plans on mutual fund company platforms are more likely to have stinky fund lineups, but it’s still dependent on a plan sponsor and/or financial advisor sleeping at the end.

A few years back, a good friend of mine who is an ERISA §3(38) fiduciary won a case from a disgruntled broker who claimed that all 3(38) services was just marketing. A 3(38) fiduciary that does a competent job and assumes discretionary control over the plan’s fiduciary process is more than marketing. But it’s a gimmick.

Hear me out, every service and every feature that a plan provider advertises is a gimmick. Now, there is nothing wrong with being a gimmick as long as there is some substance behind that service or feature. A gimmick is a special feature that makes something “stand out” from its contemporaries. However, the special feature is typically thought to be of little relevance or use. If you offer a service or feature that other plan providers don’t offer, just make sure the gimmick is something that plan sponsors could use. A fiduciary warranty that offers a plan sponsor absolutely zero protection is a gimmick with a feature that has no use. A good ERISA fiduciary offering substantive §3(16) or 3(38) services are offering a gimmick with a feature that plan sponsors could actually use.

My flat fee approach to billing my clients is a gimmick, but it’s substantive because my clients have cost certainty rather than the billable hour approach that never seems to have any cap or limit.

The point is that any feature or service that you will use will allow you to stand out among the crowd, just make sure that the gimmick has some substance, so your client doesn’t ask like Clara Peller in those Wendy commercial as to “where’s the beef?”

Throughout my career as an ERISA attorney, I’ve come across actuarial third party recordkeeping firms that push the envelope in cash balance and defined benefit plan designs. I can’t forget the actuaries who still push for special trustees and trustees with life insurance in defined benefit plans, years after the Internal Revenue Service (IRS) said no. What frightens me is that I almost accepted an ERISA attorney position at one of these firms many years ago.

So it should come as no surprise that the IRS is directing its agents to review cash balance formulas especially as it relates to compensation.

A qualified plan “within the meaning of section 401(a) is a plan established and maintained by an employer primarily to provide systematically for the payment of definitely determinable benefits to his employees over a period of years, usually for life, after retirement.”

The IRS is advising their agents to determine whether a benefit formula based on only a portion of annual compensation, a special bonus, or other measure not based on annual compensation, is “definitely determinable.”

The memo they issues states that if the terms of the plan specifically allow the employer to vary the employee’s compensation used in the benefit formula (e.g., an employee’s annual compensation less an amount designated by the employer), the plan would violate the definitely determinable rule. That’s a big rule to violate and I applaud the IRS trying to crack down what I think is some trickery in the administration of cash balance plans.

7 years ago, I knew I was going to start my own national law practice dedicated to ERISA because I wasn’t going to accomplish that at the law firm I was working at. Prior to leaving, the local salesperson for one of the bundled providers introduced me to one of the big out of state brokers who did quite some business in New York.

The broker was very nice and he liked the idea of my Retirement Plan Tune-Up plan review and he discussed pushing this out to all his clients and he wanted favored nation status on pricing and perhaps some regional exclusivity. With one foot out the door of my firm, I thought this was a homerun.

After starting my own firm, the broker invited me to his offices where I met the rest of his team. The meeting went well and I thought I had my first big break. Well the broker contacted me and told me that the rest of his team had trepidation because I didn’t have a name for myself that had panache or recognition in the retirement plan business. He thought that my old law firm had the name, but the fact is that the law firm name isn’t well known outside of Long Island and New York City government circles.

Since you’re reading this article, you know the story about my name in the retirement plan business. I once joked to that broker a few years back that maybe now, I have a name. Regardless, I never got any business referrals from him.

I didn’t hear about this broker for quite some time and there was a reason for that. Apparently, his brokerage firm terminated him for a number of issues that probably could have been avoided had he been more transparent. I guess things work out for themselves as I probably wouldn’t want to be linked with a broker who is now well known for being terminated.

The point here is that when it comes to the retirement plan business, there really is no brand name like Rolex or Brooks Brothers, it’s all about quality of service. Don’t get hung up on the names of the providers you work with, concentrate more on their quality of work.

I guess my comments regarding revenue sharing is a bit sarcastic, but I think accurate. While revenue sharing payments from mutual funds to TPA to help defray the costs of administration of a plan sponsor’s plan is legal, it remind me of a kickback because only some mutual fund companies pay for it and only some of their mutual funds pay it (also it may depend on the mutual platform that the plan uses as well as its size).

I guess the term kickback has a negative connotation to it, but isn’t that what revenue sharing is? The mutual fund paying the sub t/a or 12b1 fee is telling the plan sponsor or financial advisor or TPA (or all three) that if you use my fund, it will help lower the cost of administration. Again, totally legal in the 401(k) industry, it would certainly be illegal in other industries. Ask the disc jockeys who got implicated in the payola scandals of the 1950’s whether what they did was illegal.

Again, I have no problems with revenue sharing if it’s fully disclosed. My problem is that there is a silly notion that revenue sharing is some sort of free money that mutual fund companies distribute that helps lower a 401(k) plan’s plan expenses. The revenue sharing is not free money because plan sponsors are already paying that money through a mutual fund’s expense ratio.  Low expense ratio funds such as index mutual funds or exchange traded funds can’t afford to pay revenue sharing when the revenue sharing payment is almost as much if not more than their expense ratio.

The expense ratio of mutual funds have always been the most overlooked plan expense, even with all the current litigation. Since plan sponsors and their advisors never take that cost into mind when discussing plan expenses, they then develop this crazy notion that revenue sharing is some sort of “free” money. It isn’t. I contend that plans that use revenue sharing are not cheaper when it comes to plans that don’t. I don’t have any empirical proof, but it’s just a hunch.

One theory that many people have in the industry is that fee disclosure will put pressure on 401(k) fees and plan expenses, so many mutual fund companies will be forced to slash the revenue sharing they distribute to lower their fund expenses, which may have the negative outcome of less 401(k) money into these funds. We shall see.

Again, I have nothing wrong with the use of revenue sharing as a legal method for plan expenses, but let’s call a spade a spade. Let us not pretend that revenue sharing doesn’t cost the plan sponsors any money.

This is a heads up for retirement plan providers and it has nothing to do with retirement plans.

It has to do with your website and the pictures you may use. As you know, I have this website called that401ksite.com and you should know that since you’re reading it here.  For the articles, I use photos to illustrate the articles. Since I know a thing or two about copyright, so when searching for photos on Google and I search it using with photos that are tagged that they are allowed to be reused.

So a few months back, I get a letter addressed to my law firm (even though a separate company owns the website) with a demand from another law firm that I pay some photographer $5,000 for the use of some photo on employee benefits.  The demand was attached with an image of my website and nothing to indicate that the photographer actually owned the image.

So I searched from the image and while it was labeled as allowed to be reused on a site, there was a caveat that suggested that you need to pay $10 for the image. So while it was labeled as giving permission to be reused, the photographer had this $10 request that no one would know about unless you clicked on his site and looked around.  So if the photographer is willing to sell it for $10, why is his lawyer demanding $5,000? It’s what we call a honeypot or honeytrap scam. This photographer in cahoots with a lawyer entices people to use a stock image that appears to be free and they try to extort money from small websites for money. I went on Google and did further research and discovered that the law firm and the photographer are well known for this scam. Many small websites settle for hundreds of dollars because they don’t want to hire an attorney and I have the luxury of being one.

They send me another letter and I ignore it. Then I get a call from someone who claims to be a lawyer and I know from 5 seconds in that the person on the phone with me is not a lawyer because she asks me where to send the paperwork for a lawsuit. Like I’m going to her job for her. So I tell her that what she is doing is extortion and I will refer the matter to the proper authorities. I also tell her that next time she wants to extort money from me, she should bring a gun because she’ll have a better chance. Totally unprofessional on my part, but I didn’t giver her my name and I’m going to respond in kind for someone who is trying to rip me off. A few days later, I get another message from someone who is claiming to be an attorney who wants to settle the case. I don’t return the call because I don’t think they’ll settle for nothing and I never hear from them again.

The point here is that you should always be careful about the images used on your website and if you ever get a threatening letter like I did, give me a call.

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

I always jokingly say that the reason I try to avoid hiring employees is that I once was an employee too. However, part of the problem is that I worked for many employers who didn’t understand their role and the role of their employees.

Too many employers don’t have the ability to censor themselves especially when it comes to the sometimes disgust of running a business and employee really don’t want to hear that.

If you’re complaining about billing and the employees know you’re going on a luxurious trip in the not too distant future, employees don’t want to hear your complaints.

If it’s snowing badly and employees can’t get in because of traffic or public transportation issues, employees don’t want to hear how if you came in the morning, you should too because an owner has more dedication to showing up.

Employees don’t want to hear about how you had to use your credit card to pay something for the client when you’re throwing a lavish wedding for your son.

Too many employers think their employees want to know everything and they really don’t want to hear your complaints. Trust me, I was an employee once too.