The Rosenbaum Law Firm P.C. Blog

Before we start this out of the gate: this isn’t about the actual positions of the candidates or what the candidates did or not do, this is about what the election campaign can tell us that actually help with our retirement plan practice.

Why did Trump win? He connected with the electorate that Hillary Clinton couldn’t do. There was clearly anger there where people felt that the country is on the wrong track. Trump was able to capitalize on that anger and Hillary never reacted to it, the point is that if you want to succeed, you have to make a connection with the audience. You have to understand what they’re feeling about as plan sponsor. You have to understand their frustration or confusion because of a lack of knowledge; you have to connect with plan sponsors on the level that they can actually understand.

For full disclosure, I didn’t vote for either of them and for months even when Trump was doing badly in the polls thanks to his previous antics, I kept on insisting to anyone would listen that Hillary was running a lousy campaign. One of her biggest problems is that she could never get it across to voters why she was the best candidate. Her campaign solely rested on the fact that she wasn’t Trump, there was nothing out there that energized people in voting for her because of her record and what she stood for. This is akin to what I say about plan providers who visit a potential plan sponsor client and just attack the current provider. Plan sponsors will hire you because you’re a better option, not just because the current provider isn’t very good. It takes a lot of work to get a new client and just being negative about the current plan provider isn’t going to do it. Hillary needed to convince people to vote for her because of her, not because she wasn’t Trump.

Another reason for Trump’s winning is that he had trusted advisors who were able to control him, rein him in, and keep him off Twitter. Trump was his own worst enemy and he was now to control his message. Once he moved off of the embarrassing videos and tweets, he was able to focus on winning the race by connecting with people in mid America who felt they were forgotten. Your message needs to be controlled and you need to keep away from the distractions as a plan provider, you need to focus on servicing your clients and trying to connect with new ones. Getting into skirmishes with other providers or inflaming unhappy customers isn’t the way to act. Anything besides helping your practice service your clients and grow is just a distraction. I always never understood for example why plan professionals would go on LinkedIn and make political messages that were only going to drive away potential partners and clients. You need to get rid of the distractions and focus on your business.

Thanks to the new Fiduciary Rule, I believe that you’re going to see more index funds in 401(k) plans. However, that’s no surprise because that‘s the way we’ve been heading now for the past 15+ years.

When I first started in the retirement plan business in 1998, daily valued 401(k) plans were becoming a big thing. I think it helped that there was a big book in technology funds and everyone want to be in technology mutual funds as well as offerings from Janus. Of course, the dot bomb run in the market exploded in 2000. Index mutual funds were around and John Bogle from Vanguard was pushing its virtues, but the problem was that they were average and those technology mutual funds prior to 2000 had some eye popping returns. Thanks to that crazy market, index funds in 401(k) funds weren’t a big thing. Many plans offered an S&P 500 Index in their plan along with all actively managed funds.

There was also a strong bias against index funds because they didn’t pay revenue sharing and many actively managed funds did. Since there was no true fee transparency at the time, actively managed funds that paid revenue sharing were going to be more attractive to the plan sponsor who couldn’t tell the difference between a C share and an institutional share class. Thanks to the poor market returns and thanks to the embarrassing late trading mutual fund scandal, index funds started to get a better footing when people realized that 70% of the. Usual funds out there don’t meet their benchmarks over an extended period of time.

In addition, concerns about fees, revenue sharing, and investment returns spurred more interest in index funds. In addition, the proliferation of ERISA 3(38) fiduciaries helped because of one of their hallmarks in dealing with the added liability of having discretionary control over the fiduciary process is using index funds.

Now with the new Fiduciary Rule, you’ll also see more index funds being offered when all advisors working on plans are going to be considered fiduciaries. When brokers pushed actively managed funds, they were always concerned about the trails they received from specific funds. Now that they have to select mutual funds that are in their clients best interest, don’t be surprised you see many of them tout index funds because the broker has the added responsibility of being a plan fiduciary and a great way to manage that risk is using index funds that try to mimic the benchmarks. While index funds aren’t sexy in terms of returns, they’re a great thing for any advisor concerned with liability of being a retirement plan financial advisor.

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The Department of Labor (DOL) issues the first of a few Q&As to help with financial advisors to cope with meeting the requirements of the new fiduciary rule coming down the pike in April.

For those hoping for some sort of reprieve through an implementation delay, they were not going to get it. After looking through the 34 questions and answers, it just validates what I’ve been saying all along about the DOL. They are really serious in changing the retirement plan industry when it comes to financial advisory work. Some of the requirements are quite burdensome for those who need to meet the Fiduciary standard, but they are really targeting the crux of what was really plaguing the retirement plan business, the inherent conflicts of interest. The new rule and the Q&A is changing how brokers and broker dealers sell and act, the client’s needs are going to come first. Even if you’ve always been a level fee financial advisor, there are some issues with rollovers that you’re going to have to deal with that you never contemplated. There is certainly something in that Q&A that’s going to upset you if you’re a financial advisor.

Unless there is some reprieve by the next administration, any broker or broker-dealer is going to have to deal with a changing world.

When I first started in the 401(k) plan business in 1998, it was a boom time for the stock market and mutual funds. That got plan sponsors wanting daily valued participant directed 401(k) plans and that helped put almost an end to trustee directed 401(k) plans and eventually defined benefit plans.

The technology to launch daily valued 401(k) plans was there, but it was expensive at first. Thanks to technology and the use of the Internet, daily valued 401(k) plans became more accessible to most employers and revenue sharing helped make that happen.

As you know, revenue sharing payments go from particular mutual funds to help defray plan expenses. The idea is since the mutual funds companies don’t have to do record keeping on participant accounts, they should help the third party administrator (TPA) with the cost since they were doing the job.

I was against revenue sharing from the moment I heard about it because it reminded me something of payola or a kickback just because only some mutual funds pay for it. Index funds can’t afford to pay revenue sharing, so the idea in my head was always that more expensive funds pay for that. Knowing how people are, I thought revenue sharing would lead to more plan sponsors to use revenue sharing paying funds than funds who don’t because the advisor and TPA will tell them the benefits of reducing plan administration costs through revenue sharing without identifying how expensive management fees from mutual funds negatively impact a participant’s rate of return,

When I predicted to someone I worked with in 2007 that revenue sharing was going to be on the way out, I was laughed at. I’m sure that former co-worker isn’t laughing anymore. ERISA litigators saw the issue of revenue sharing and used that issue in many successful lawsuits against plan sponsors because revenue sharing was either the sole or determining factor why some mutual funds were selected by a plan sponsor when other criteria are more important.

Courts, ERISA litigators, and many very bright TPAs saw that revenue sharing was an issue and decided to make that as a movement for change in the retirement plan business through litigation and change of pricing. Fee disclosure regulation initiated by the Department of Labor was also a big help since it finally showed what fees a TPA was receiving directly and indirectly. A TPA would have to account what revenue sharing they were receiving and what they were doing with it. A TPA here and there that was pocketing the revenue sharing without actually offsetting expenses knew that practice was going to come to an end when they had to disclose what they were receiving for plan administration.

There are many people who tell me up and down, there is nothing wrong with revenue sharing and that might be a case. The problem is I come from the school that when something looks improper, just the sight of it is problematic.

More and more plan providers are hesitant in pursuing revenue sharing paying funds and I think mutual fund companies are going to think twice about continuing the practice. While revenue sharing isn’t really impacted much by the new Fiduciary Rule, I believe one of the consequences of the best interest exemption contract is that brokers are going to be very careful about mutual fund fees, trails, and share classes. I’m sure one of the consequences of the new Fiduciary Rule is that there will be a lot less letters in the alphabet soup we call mutual fund share classes.

I believe that revenue sharing is going to go the way of the 8 track, bell bottoms, and disco. Yet you won’t remember revenue sharing as fondly as remembering your leisure suit.

A few weeks back, I had the pleasure of interviewing Ross Marino from Rekon Intel and he told me about a non-profit they set up which you can find at www.missionmadeglobal.org. I commend Ross on giving back to the community including helping out in third world countries that can certainly use the help.

Being successful and giving back is just a great thing. For example, I’ve been lucky to support a scholarship at my alma mater Stony Brook University named in memory of my grandparents. Giving back through philanthropy is just a great way to show people your corporate values and culture.

People like Ross Marino who are philanthropic do it for the right reasons. They do it to help and they expect nothing in return. If you donate, it should be from the goodness of your own heart with no string attached.

Over time I come across people who donate with strings attached and the string is to use those “good deeds” to profit themselves.

One of my most frustrating episodes of late was serving as a Vice President of my former Synagogue. The reason that it’s former is for a wide of variety of reasons (especially that they weren’t teaching my kids in Hebrew School), but everything I did for the place was to make it better. I never used that place to grow my practice or make a buck. I contrast that with the former President who as a real estate broker shamelessly advertised in his Presidential reports that he would donate 10% of any commissions that resulted in referrals from synagogue members. 10%? There are people who tithe their salary in that amount without getting any referrals. It’s shameless and I’m sure he thinks he was being generous. In Yiddish, we call that man a schnorrer.

The strings attached approach also reminds me of a well-known individual in my village. His organization claims to do good, but it’s used as a haven to get employment from the school board, sanitation, and library for the people that are members and for the most part are undeserving. I was very critical of someone in that organization and this person attacked me for doing nothing for the community. This same individual collects commissions for selling insurance to the local tax districts and his wife just got a job as a librarian from the school board, all as result of his “work” for the community. So if helping the community is about helping yourself, then I haven’t helped the community.

The point is that philanthropy and helping out the community is really about showing people that you care, it shows the goodness of the values and culture of your organization. That philanthropy may get people to consider your company for services because you look like someone who has good values.

When I was younger and it involved with student organizations, there was this saying that you should give people a title and get them involved. Making someone the assistant editorial page editor at the school paper was fine as long as they did the work. Otherwise, it’s meaningless to have a title without having any responsibility.

As a plan provider or someone working for a plan provider, I think people are more interested in titles than the responsibilities that go with it. I saw it in the non-profit organization that I was the VIce President. Your have people get titles that they were in charge of some committee or auxiliary organization and they were content to doing nothing. On the flip side, I demanded I be made Vice President because I was doing a ton of work and I wanted a say in how the organization was being run. When I found out that the organization was being led by 5 people who were unelected and I was just a figurehead, I stepped down. What’s the point of having the title if you don’t have any responsibility and call the shots?

Titles look good on a resume, they sure do, but if the requisite experience isn’t behind it, what’s the point? They’re going to find out somehow. I remember when I got ticked off at law school that I didn’t make law review or another journal that I decided to start my own. After I realized the struggle to start one and the fact that the administration would do noting to get that off the ground, I thought calling myself the Editor in Chief of a law journal that was never going to be published was awfully silly.

The point is the work you do is more important than the title. When I got named the head ERISA attorney at a third party administration firm and was named a company director, it wore out thin especially when being director means you got a nice desk clock and no say in the running of the place.

The other issue in titles is something I’d discussed a few weeks about what I call “top heavy” administration where a company has too many generals and not enough soldiers, giving people titles that are more important than their actual job can give people an arrogance that the company doesn’t need and people stop doing work that they think is underneath their title. I told the story of a plan administrator on the first day on work where the administration firm had nothing for her. When asked to help out and make some copies of plan documents, she quit on the spot.

Heck, you can call yourself the King or Queen of 401(k), but it becomes a joke when your work doesn’t live up to the title.

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When your practice is successful as a retirement plan provider, you’re going to want to hire people who work outside the retirement plan business to help you manage your firm because the day to day running of a business doesn’t just need someone who is experienced about retirement plans. Hiring a chief operating officer or office administrator is extremely important for growing any business and you’re going to want someone who is experienced in helping run a business.

I’ve worked for a number of businesses over the years and the most smoothly run businesses are usually the ones where the owners seek outside help in many of the important business functions like practice management and Human Resources,

When you hire someone to help with the day to day running of the business, you need someone who has the experience in dealing with the nuts and bolts rather than someone who likes to talk and write about practice management without actually practicing it.

In the 12 years I worked for someone other than myself, I worked with hundreds of different employees including bosses, people on my leadership level, and those who worked below and I have to say the co-worker I liked least was the law practice administrator at a law firm I worked at, called Fred.

Fred was the law firm administrator or at least he claimed he was. Other than reminding attorneys to submit their time sheets, he did very little in helping the managing attorney run the firm. He tried to act as the gatekeeper to the managing attorney, but all he was, was a snitch. I remember him telling me that I should send a proposed client solicitation letter to him so he could edit it and send it off to the managing attorney so it would help with the process. So I drafted a solicitation letter to Fred and he never edited it, he actually gave it to the managing attorney and I had to get an earful from her on how bad it was. I remember Fred once telling that my goal of starting a national ERISA practice is one of the ones he was concentrated on expanding for the Firm in 2007. I’m still waiting on him in 2916 to help.

My biggest gripe about Fred is his use of the marketing department to publish his own articles. Now I’d write article for the firm to get clients or build relationships with plan providers. In the two years I was there, I’d write three articles, which is less than my haul at my practice in a week. The problem was that not only did my article have to get approved by three different partners. I had to deal with the fact that Fred was clogging the marketing department with his articles. The problem with his articles is that it had to do with law firm management and that’s not one of the businesses that my law firm was in. We were in the business of law and his articles on law firm management weren’t going to draw us a dime. Fred was using law firm resources to prop up his own image as some sort of law firm management guru, which he wasn’t. No one in the firm or the marketing department would say anything because he supposedly had the managing attorney’s ear. He’d write an article a month, which was wasting law firm resources that could have easily been spent publishing articles from attorneys that could help generate business.

The production of his articles ended at some point and I think it coincided with the fact that I started my own firm and I would write articles lampooning what he was doing. I knew he was reading my work because he was accosting members of the marketing department, accusing them of egging me on in my articles which wasn’t true because I don’t need any help in getting egged on. Needless to say, Fred moved on for that law firm, and of course, moved on to a larger law firm where he tweets articles he doesn’t write and he’s not misusing that law firm’s resources to publish his articles.

The point is that you need to hire the best of the best to help your practice, not some narcissist who thinks they’re a celebrity in their own right when all they are is a fan of the concept of practice management without practicing it.