The Rosenbaum Law Firm P.C. Blog

When I was at that semi-prestigious law firm many moons ago, I developed this plan review called the Retirement Plan Tune-Up. I’d look at the plan document, plan design, costs, the Fiduciary process, basically anything that the plan sponsor can grow at me and I’d do it for $750.

When I started my own law firm, I kept that program and even had brochures about it. I gave speeches at some great 401(k) Rekon events to tout them as well and I’ll be honest, maybe I’ve done about 10 of them in 8 years. The fact is that most plan sponsors tune out the need to take care of their plan and usually only take care of it when it needs to. Plan sponsors for the most part are reactive rather than pro-active. They don’t understand the threats to liability as a plan sponsor until it happens to them.

I’m not trying to mean or to denigrate Plan sponsors. The fact is they’re busy with running their business and they don’t understand the nature of fiduciary responsibility and the continued need for vigilance. Some plan sponsors, but most don’t and that is always going to be an uphill battle.

When you look at the problems of retirement plans, one that gets short shrift is coverage and that is one of the pillar of qualified plans needed to be fulfilled in order to be a qualified plan. It’s a forgotten rule of compliance that can always end up leading to plan disqualification if the employer fails to properly cover enough of their employees in order to satisfy minimum coverage tests.

I don’t want to get into a complex discussion on coverage, but you need to know that every plan sponsor must annually meet a coverage to ensure that the minimum amount of people that need to be covered are. One big problem with coverage is that there are third party administrators (TPAs) that may forget to actually perform the test or tests and if a plan would have failed, then the corrective methods aren’t made and it becomes a bigger headache many years later especially when caught on a government audit,

The other problem with coverage is understanding that a group of corporations that have some common ownership and/or some affiliation maybe counted as one company under the controlled group or affiliated service group rules which means that employees of these other companies may have to be covered under the one company who sponsors a retirement plan. How does an error like that happen? A TPA not getting the rules analyzed correctly based on the corporate fact pattern or the plan sponsor failing to tell the A that there are these affiliated companies with common ownership that needs to be reviewed.

In terms of errors, failing to provide benefits to employees who needed to be covered under a retirement plan for coverage is one of the deadliest errors made by a plan sponsor and a candidate for plan disqualification.

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

If there is one opinion that I have that is argued about many times is my two cents in the use of the largest payroll providers being in the Third Party Administration (TPA) business. Usually, the people who criticize my opinion tend to work for those payroll providers.

My opinion is my opinion, it’s based on 18 years experience as an ERISA attorney, I doubt you can say my opinion is biased since I haven’t worked for a TPA since 2007.

I believe that the TPA business is a very tough job, it just shouldn’t be someone’s ancillary business if you just see it as just an offshoot of your primary business. My problem with payroll provider TPAs is that they require too much of the plan sponsor to do the heavy lifting, aren’t very creative in plan design, and they take an assembly line approach to retirement plans. Henry Ford once said you could pick the color of a Model T as long as it was black. Offering retirement plans on some sort of plain vanilla prototype with no discussion of other designs and combo plans with cash balance or defined benefit is malpractice if it costs the plan sponsor money by not maximizing the use of employer contributions.

The McDonalds approach to fast food is fine, but retirement plans administration isn’t something that you could quickly push out. Payroll Provider TPAs aren’t a black or white issue; I’m sure a three employee company using safe harbor 401(k) might be a good fit. For most plan sponsors, it’s not. I’ve seen less problems with standalone TPAs than those two big payroll providers in terms of issues and plan errors. Standalone TPAs have less of a churn rate than payroll provider TPAs, they have larger plans, more plans under administration, and are more efficient in plan design. In addition, What payroll provider TPAs forget to tell you is that if you fire them as a TPA, they’ll fire you as a payroll customer and that payroll integration they talk about is something they offer to other plan providers like Empower. If payroll integration is such a big deal, why do they offer it to competing TPAs?

Again, it’s my opinion based on 18 years of experience. Believe me, I’d make more money as an ERISA attorney by keeping my mouth shut about this because when you speak out against these big payroll providers, they don’t refer you much business.

Defined contribution plans such as 401(k) plans have a forfeiture provision if there are contribution in the plan that are not immediately vested. The problem with the forfeiture provision is that they are usually neglected and can be a big headache for compliance.

Plan documents are pretty straightforward on what do do with forfeitures, the first part is dealing with when a forfeiture occurs. It usually happens when in the year when a participant terminates service. Sometimes, you need to wait when a participant completes a 5 year break in service because at that point, you’d never have to reinstate a forfeiture if that former participant returns to employment.

Now that the plan says when a forfeiture occurs know the plan has to specify what to do with them. Some plans will say your reallocate forfeitures to remaining plan participants or you use that amount to reduce contributions. There may also be language that forfeitures are used to reduce employer contributions. Regardless of what the allocation of forfeiture provision is, what is usually forgotten about is that it’s a mechanism that has to be done annually. Too many plans fail to make use of their forfeitures according to the terms of their plan, they essentially end up having a forfeiture “war chest” that is big enough to fund a private war. The compliance headache is not following the terms of the Plan which if discovered on an Internal Revenue Service or Department of Labor audit is something that is going to raise concerns.

As a plan sponsor, I suggest taking a look at the forfeiture provisions and understand what needs to happen with them, and that they are operated according to its terms.

Plan sponsors should understand that under ERISA, plan participants are entitled to certain disclosures and documents. We should all know that a participant is entitled to the summary plan description, summary annual report, a fee disclosure if the plan is participant directed, an annual statement of benefit, and some other documents enunciated and codified in law.

A plan participant in Askew v RL Reppert Inc. sued their employer as plan administrator for failing to furnish requested documents as well as failing to provide an audit for the Form 5500 which was required. The plan sponsor was penalized $15,959 for by the Eastern District Federal Court of Pennsylvania. While the penalty of failing to fusion is the documents is $110 a day, the Court had the discretion to penalize $50 a day for failing to provide plan documents and a $1 a day for custodial agreements between the plan and the trust company.

This is t some large plan that was sued. This was against a small to medium sized plan who neglected their duties in providing documents and getting a plan audit that was required. If it could happen to a plan like that, I’m sure it can happen to thousands of plans that don’t understand their duty to plan participants.

Broker-dealers are certainly in a bind to comply with the new Fiduciary Rule and one aspect is sending disclosures to IRAs and qualified plans. This may be a good time for all type of plan providers such as brokers, registered investment advisors, and third party administrators to take a stock of their plans that are on their books.

Broker-dealers may find qualified plans on the books for companies that may no longer exists, which can certainly be a compliance headache especially fix it’s an abandoned plan. There are plans on the books that are as obsolete as an 8 track like SAR-SEPa and Keogh plans, there may be money purchase plans that should have been merged into the employer’s paired plan when the cap on deductible contributions to a profit sharing plan was increased in 2002. There are just so many plans that you might have on the books that have fallen through the crack because the company sponsoring may no longer being around or you might have forgotten about it.

While brokers try to figure out which type of plan gets the IRA or ERISA disclosure, this maybe a good time for all plan providers to check the plans on their books and whether some plans may need their attention for one reason or another.

I’ve heard so many negative things about the impact that the fiduciary rule will have on the retirement plan business, you’d think Irwin Allen made a disaster movie of it. You’d think it was the 11th plague to free the Israelites from Egypt.

You hear so many predictions about the impact and they are all over the place. I saw one study that the rule will have a negative impact of $20 billion on the wealth management industry in 4 years. I’ve heard someone else claim that 150,000 financial advisors (presumably mostly brokers) will just leave the business. These “experts” might as well predict next week’s winning PowerBall numbers because they have as much chance of getting that right then correctly guessing the true impact of the new fiduciary rule.

150,000 advisors aren’t leaving the business. Morgan Stanley, Merill Lynch, and all the other large broker-dealers aren’t going to fold up their tent and leave the retirement plan business, they will adapt to the change. Why? They will still make money in the retirement plan business because there is enough opportunity out there.

The fiduciary rule will certainly have a negative impact on the wealth management business because the day of wine and roses for certain brokers is over. They won’t be able to push unsuitable proprietary or annuity products for retirement plans when they have to meet that best interest exemption, but $20 billion? Your guess is as good as mine.

The only thing you can predict is that many brokers will make less money, plan participants will pay less with better management fee rates and less expensive financial products, and certain wealth management firms will do quite well with the change. To quote one of my favorite actors Morgan Freeman from the disaster movie , Deep Impact: “life will on, we will prevail”. We’ll survive the meteor hit of the fiduciary rule this April, you can predict that.

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

While everyone is trying to get used to the term President-Elect Donald J. Trump, anyone remotely connected to the retirement plan business has a thought: what’s going to happen with the new Fiduciary Rule?

If you think you know what a President Trump will really do, then you might have been following polls a bit too much. While Trump is all for “Making America Great Again”, I’m not convinced that the fiduciary rule is going to immediately die. While a Republican agenda is usually the removal of regulations, the fact is that Wall Street didn’t exactly warm themselves to Trump and he certainly used them as fodder for attacks. While I’m sure that Trump will stray a little bit from his populist stance to cultivate a relationship with free market Conservatives, a firm decision on the fiduciary rule isn’t going to be made until a President Trump takes office and a new Department of Labor Secretary is affirmed. It’s all going to depend what type of person is selected and who the next head of the Employee Benefit Security Administration will be as well. Congressional action to kill or delay the rule shouldn’t be discounted as well.

There is always a difference between campaigning and governing and some of the rhetoric is never going to be implemented. I suspect that any change with the Fiduciary Rule is going to start slowly such as a last minute delay to implement it. It may be under the guise of claiming that people are having a tough time and need more time to comply while they figure out whether they want to withdraw the rule or not. I think after so many years of preparing for this change and the millions spent by broker-dealers to comply, I think a quick yank of the new rule isn’t likely.

So in the end, I really have as much answers as you do.