The Rosenbaum Law Firm P.C. Blog

Aside from my children and my wife, my favorite person of all-time was my grandmother Rose. She was the most selfless person I ever met, who was full of life, and love for family. When my grandmother decided she would move upstate to live with my aunt, she started cleaning out her apartment. She put her trash on the side of the street for sanitation pickup and she was amazed that people on the block were looking through her trash. She said: “what do they think I threw out, gold?”

It was a funny line, but I think my grandmother didn’t understand that to some, her trash might be gold.

As a professional plan provider, we usually think we’re great and we’re stumped when a potential client cherishes an incumbent plan provider that we know is no good and we’re dumbfounded by it. It’s human nature to question what a plan sponsor could see in such a plan provider, but we see this all the time whether it’s business or in family. What we may think is trash is someone’s gold and what we think is gold is someone else’s trash.

I worked for a third party administrator, where the chief operating officer would champion some administrator or actuary or salesperson as a superstar. They never were a superstar, but since this fellow cared less about good administration and more about paying employees on the cheap, they were his superstars.  He would tell me how he got an actuary for a $75,000 salary; the fellow wasn’t $7,500 even more so after the other partner woke up the actuary while he was sleeping at work.

I remember when a relative of mine dated someone she unfortunately married. I would hear my mother tout that he was a businessman. Dropping out of a community college, operating a hot dog stand at a flea market, and owning a dry cleaning store that did none of its dry cleaning doesn’t make a businessman. 28 years and 3 careers later, the jury is still out. But some people have such wacky (we think of low) expectations of their plan providers, that no matter how great you are and how bad the incumbent is, it’s not going to change.

It’s like the Olive Garden. Having grown up in such an Italian-Jewish neighborhood such as Canarsie, Brooklyn who all moved where I live in Oceanside, Long Island, I hate the Olive Garden. When you grow up with great Italian food, you find Olive Garden an affront because it tries to be the McDonalds of Italian food. Some people out in the Midwest where there are not many Italians may think the Olive Garden is the greatest thing ever. I’m not going to debate someone who loves the Olive Garden because you can’t properly debate opinions.

The lesson here is that there are some times; you’re not the answer because the plan sponsor loves the plan provider. Maybe the plan provider is a relative; maybe the plan provider went to the same college as the owner of the company; maybe the plan sponsor likes to surround himself or herself with incompetent people to make himself or herself competent (that TPA COO did that).  Whatever the reason, it’s a waste of time to crack that nut.  Just remember you’re not crazy, but maybe the plan sponsor is.

I talk to a lot of advisors and I have many advisor clients around the country and one of the things that I keep on hearing is that even with fee disclosure regulations almost 4 years later, it is still difficult to get through to plan sponsors about their fiduciary responsibility as plan sponsors.

Having been a pessimist for a good chunk of my life, I see things now as the glass being half full. That means over the past several years, plan sponsors are more educated as a whole when it comes to plan expenses and fiduciary responsibility. Companies like Brightscope have done a good job of bringing fee benchmarking and disclosure to the forefront for plan sponsors to understand why they need to care about fees and their investment options. The proliferation in the hiring of outside ERISA fiduciaries also proves that point.

So while many plan sponsors now “get it” when it comes to fiduciary responsibility, there will always be that group that don’t. They say they cover all their bases and how they are in good hands with their current providers even though they made absolutely no fee benchmarking or due diligence. They say that big participant lawsuits like Tibble and Tussey don’t matter to them because their plans are small. I learned a long time ago that there are probably still folks out there that think the earth is flat and there is no use in getting aggravated because their time will come when they see that light. There is no guarantee they will see the light, but these plan sponsors will only understand it when they get sued by their plan participants or when the Department of Labor starts auditing them and figuring out what they did with their fee disclosure and whether they documented their fiduciary process. Some people will never get it until some type of plan litigation goes against them or someone they know.

Fee disclosure will have greater effect when the DOL starts auditing plans and service providers because fee disclosure regulation without any teeth is useless. Making plan sponsors suffer the consequences of a prohibited transaction for not complying with the fee disclosure regulations will awaken the stubborn plan sponsors who shrug off their fiduciary responsibility.

My great grandmother said it best, don’t run after the carriage if it’s not going to pick you up which means that if you are a plan provider, that don’t bother with the plan sponsors who listen to your proposition concerning fiduciary responsibility and shrug their soldiers and give the old Alfred E. Neuman : “what me worry?” line. If there is any luck, they will get it when it’s too late.

My latest newsletter geared toward retirement plan providers can be found here.

My latest JDSupra.com article can be found here.

One of the interesting points of the new fiduciary rule is the best interest exemption that is intended to stop conflicts of interests especially for brokers who need to meet a new fiduciary standard.

As long as a broker can show that investment guidance was in the best interest for their clients, they should avoid being tagged as having a conflict of interest especially if they are selling their own proprietary product or getting a better trail of fees.

What is the best interest exemption? It seems like a low burden for a broker to meet, nut I think it’s so vague that only litigation will end up defining what is actually in the best interest for clients.

Just my two cents.

My latest newsletter can be found here.

My latest JDSupra.com article can be found here.

You read articles about the Department of Labor’s (DOL’s) new fiduciary rule and experts will tell you that it’s the greatest thing since sliced bread, the worst thing since Caddyshack II, or somewhere in between. I learned a long time ago that you can’t please everybody.

If you come from the broker side of things, it’s Armageddon. If you’re on the registered investment advisor side of things, the DOL sold old out by watering down the requirements laid out in the proposed rule.

What you really have to realize about the DOL is how the role of politics played into the implementation of the rule, it was one of the overriding factors in its formulation, change, and implementation.

The DOL under Phyllis Borzi’s leadership under the Employee Benefits Security Administration (EBSA) staked a lot of political capital on changing the fiduciary rule. 6 years of trying to formulate some type of rule that would get a broad range of support is the reason that the current DOL administration had to come up with a new rule.  Any politician or administration official is concerned about legacy and Borzi knows how much of a failure she’d look like if there were no new rule because that was something she was talking about for years.

As far as the changes from the proposed rule, a change was going to be made. The proposed rule was always going to be more stringent than the final rule because it’s the game of politics Noting the opposition from Wall Street and watering down the standards of the proposed rule is a way of throwing a bone to Wall Street. It was the DOL’s way of trying to say that they listened and made changes, but all along they knew that changes were going to be made to get a final rule in.

Further showing that’s it’s all a game of politics, the DOL won’t make the rule effective until January 1, 2018. That means a new administration in the White House will see that the rule gets implemented or they may delay it or they may kill it. It will depend who is in the White House, who is in charge of the DOL, and who will be in charge of EBSA in 2018.  So the current DOL administration looks good on paper for the new rule, but by delaying its implementation for 18 months, they are kicking the can for the next administration who will get the blame if the rule doesn’t get implemented because it’s all about politics.

John Carnevale, the President and Chief Executive Officer of Sentinel Benefits, a Massachusetts and New York based producing third party administrator (TPA), died of a heart attack suddenly last weekend.

I never met John, but our paths crossed a few times in the past 8-9 years over a couple of TPAs that Sentinel Benefits eventually purchased.

I never had a bad word with John and we exchanged a few phone calls, but I always had a feeling that John only called to gauge my feelings about things especially with one TPA that Sentinel Benefits merged with, a former employer of mine that I wrote quite a bit in the first few years of my practice. You can also check my Kindle book for some of that ancient history.

My experiences with John revolve around the snowball effect, where one small snowball (a business decision) can cause an unintended avalanche. As far as my former employer, I can tell you that if it was not for a partner of that employer who didn’t like me and his “superstar” administrator, I will tell you that Sentinel Benefits would still be a Massachusetts TPA instead of having offices in New York too. I’ll leave at that.

The other snowball effect that involved John is something I’m rather thankful to John for because it allowed me to grow as a person and as a businessman. Someone who was perceived as a mortal enemy of mine (I needlessly initiated much of that perception) quietly returned to the retirement plan business to serve as an independent fiduciary/registered investment advisor. Apparently this fiduciary was hurting Sentinel’s investment advisory business. So John called me to see some insight from me and I was perplexed with the call because I didn’t understand why my old grudge with this fiduciary had anything to do with Sentinel losing business. Any issue that I had with this fiduciary was over and I have a policy of not getting involved in someone else’s fight because I have enough fights of my own.

To cut the story short, I reached out that fiduciary not long after John’s call. It allowed me to bury the hatchet with someone who really wasn’t an enemy of mine; his partner was actually the enemy. It allowed me to repair a relationship with someone that I deep down liked and respected; this fiduciary is now one of my favorite clients. Repairing that World War sized riff allowed me to grow as a person and a businessman because I didn’t let an old grudge get in the way of getting new business and it allowed me to forgive someone who hurt me deeply. I grew as a person because it also allowed me to understand this relationship and how to properly serve it.

So I would like to thank John Carnevale for inadvertently helping me grow as a person and I’m sorry that I didn’t tell him that when he was alive. May he rest in Peace.

I had a few advisors who asked me about offering investment education as it pertained to the fiduciary rule, but it’s clear that the Department of Labor wants it offered when it made a crave out to the final rule to allow for it.

Advisors ask me all the time of the role of education in participant directed 401(k) plans. 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 and smart401k.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 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.