The Rosenbaum Law Firm P.C. Blog

President Donald Trump delayed the implementation of the Department of Labor fiduciary rule by six months through a directive. While the delay is only for six months, Trump put enough hurdles that implementation of the new rule seems unlikely.

Before brokers rejoice about what seems like the end of the rule, they shouldn’t uncork the champagne bottle. They’ve paid a high price to comply with the rule. That means paying ERISA attorneys a lot of money to comply and they have spent so much money on mailings, developing policies, and procedures. They’ve told a lot of their clients that they would have to stop servicing their accounts to comply. So it’s going to be hard for them to go back to business as if the new rule never existed.

Don’t be surprised to see some sort of backlash. The fiduciary rule has been the talk of the retirement plan industry for the last couple of years and plan sponsors have slowly learned the ramifications of it especially the fact that brokers weren’t serving in a fiduciary capacity. Now that it looks like they’ll be free from it again, there will be some sort of backlash especially now since Trump is pretty unpopular these days. I just don’t think its going to be so easy for broker-dealers to go back in doing what they did before they had to start complying with the new rule.

Just because the new rule is being delayed and/or being killed, doesn’t mean there wont be a fiduciary rule coming down the pike in another 2, 4, or 8 years. I think broker-dealers are going to want this rule implemented rather than a rule in the future that is just going to be more oppressive for brokers to operate in the retirement plan space.

So new fiduciary rule is delayed and the broker-dealers didn’t win anything.

My newsletter geared towards retirement plan professionals can be found here.

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

I worked 9 years working as an ERISA attorney for a couple of third party administrators (TPA) and I always felt like I was a fireman because I put out a lot of compliance fires for our clients and sometimes, it was our administrators that caused these issues. While I always say there is no such thing as a stupid question, sometimes there are truly baffling questions to get from the administrators I had worked with.

5. A 401(k) plan administrator asked why I thought it was inappropriate to reconcile a daily valued 401(k) plan on a quarterly basis.

4. Another 401(k) plan administrator asked me about the non-resident alien exclusion, where you can exclude non-resident aliens who receive no U.S. source income from the retirement plan without an effect on the Section 410(b) coverage test. The administrator then asked if that exclusion included Puerto Rico (of course Puerto Rico is a U.S. commonwealth). When I told about Puerto Rico’s status and that they use dollars, he asked me if they use Puerto Rican dollars.

3. A client relationship manager (who visited the client and reviewed funds) asked me what’s the difference between an age 60 in-service distributions and an age 59 ½ in service-distributions. Of course, the answer I gave was six months.

2. That same client relationship manager was at a meeting with a potential client and their lobbyist. She said she was from Yonkers. The lobbyist said Yonkers was the second largest city in New York State. She asked what was the largest city in New York State?

1. A salesman asked me whether with a new client that sponsored 401(k) plan with a large illegal alien employee base, whether it was appropriate for illegal aliens to defer in the 401(k) plan with fake social security numbers. Yes, you read that right. Of course I told him that even if it wasn’t illegal, it was still unlikely illegal aliens would defer money into a 401(k) plan based on their income and legal status.

My latest newsletter can be found here.

Charles Schwab Corporation is the latest plan provider whose 401(k) is the subject of a class action Employee Retirement Income Security Act (ERISA) lawsuit. It’s starting to feel like a game show.

The lawsuit claims that plan fiduciaries engaged breached their fiduciary duty over the plan by including Schwab’s proprietary investment products as investment options within the plan and sale of their own services to the plan.

The compliant states that there was a 3 to 5 basis point difference in fees between the Schwab S&P 500 Index Fund and the other S&P 500 Index funds. While that’s small, for a plan of that size, the complaint alleges that Schwab reaped hundreds of thousands of dollars in extra fees because of that 3 to 5 basis point difference.

The lawsuit also says that Schwab included seven other Schwab mutual funds, ten Schwab target-date funds, a Schwab stable value fund, a Schwab money market fund, and a Schwab savings account as investment options. In 2015, more than $500 million in plan assets were invested in Schwab proprietary funds.

What do I think? This is as easy as picking ripe fruit off the vine. As long as plan providers use their own proprietary funds in their 401(k) plan, these class action lawsuits will still pop up. Mind you, you know why Schwab had Schwab products in their own 401(k) plan? It’s not to make money off their participants; it’s about keeping up appearances because how would it look if the Schwab 401(k) plan for its employees only had Vanguard funds? It wouldn’t look good, I’ll tell you that.

In British-style parliamentary systems, a backbencher is a member of parliament who doesn’t hold government office and isn’t a spokesperson of the opposition. They’re essentially a rank and file member. However, the backbencher is usually the future of the party. For example, British Prime Minister Theresa May had to start somewhere and its not in the front bench as an opposition member when she joined parliament in 1997.

As a retirement plan provider, your backbench of employees is usually the future of your organization and it’s best to take care of them and nurture them. I’ve been involved with one too many organizations where the backbench is ignore or treated so poorly that they decide to leave. Best example is that semi-prestigious law firm I belonged to which was loaded with some of the best associate attorneys I’ve ever know. Every one that I know were rising legal stars and for one reason or another went to greener pastures where their talents could be appreciated.

As a plan provider, you spend so much time in training your employees that you can’t afford to have a revolving door of employees, especially talented employees. I’ve seen too many plan providers lose talented employees who actually join the competition or become a competitor. I can recall a certain third party administrator where their backbench was stacked with such seasoned plan professionals that it’s an all-star list of professionals that many in the business would know.

The backbench is your future, nurture it or it goes away.

One of the wrinkles of the new fiduciary rule is the requirement of a financial advisor who wants to solicit former plan participants for a rollover to review the costs involved with the plan to determine whether moving the money to a rollover IRA is in the potential client’s best interest.

While I’m a fan of fee transparency and this is going to be a plus for consumers, I think there is one big problem with this rollover wrinkle.

Mots money these days in qualified plans is in participant directed 401(k) plans. Despite what the media thinks, the fees aren’t as bad as they were 10 years ago. They are low when compared to the asset-based fee that advisors have for IRA clients where they have discretionary control. They may charge 100 to 125 basis points for advice and that looks rather high than the 25-50 basis points that advisors collect on 401(k) plans. Of course, there is a difference when participants direct their own investment and bear the risk. The work by a financial advisor who makes the investment decisions in a fiduciary capacity deserves more than the 25-50 points they charge when they don’t have discretionary control and they select the investment lineup.

I think advisors should certainly charge more for the work they do especially when they’re the ones in control of making the decisions. The problem is whether the Department of Labor and litigators understand the notion that people who do more, should get paid more.

With an April 2017 deadline fast approaching, the Department of Labor (DOL) issues another frequently asked questions (FAQs) concerning the fiduciary rule which is always nice to get their interpretations of the rules with certain hypotheticals.

The FAQ addresses general communications with plan participants, investment education and exemptions for independent fiduciaries. Other areas in the FAQ cover mandatory distributions, revenue sharing when plan fees are offset, and marketing platforms.

There was nothing earth shattering in the FAQs, but here are some things that piqued my interest:

The FAQ clarifies that an adviser charging clients a level asset-based fee for providing advice on 401(k) fund offerings may use revenue-sharing payments to offset part or all of that level fee, without worry about the fiduciary regulation.

The FAQ clarified that investment advisers won’t be considered fiduciaries for investment decisions made by their clients if those decisions are against the adviser’s recommendations.

The FAQ stated that employers can recommend that plan participants increase their contributions to a suggested percentage of compensation to maximize the employer match without that communication being treated as fiduciary investment advice.

It’s now clear that financial service providers’ interactive investment tools will be treated as investment education and not as fiduciary investment advice.

The FAQ also made clear that if a representative of a recordkeeper meets with a fiduciary advisor to a plan and with the plan committee, the recordkeeper is entitled to the ‘wholesaler exception’ to the fiduciary rule, so that means the recordkeeper would not be considered a fiduciary.

All in all, nothing earth shattering.

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