The Rosenbaum Law Firm P.C. Blog

When I used to date in school, I would get some crazy breakup lines that I knew had nothing to do with reality. “The maybe it’s fate we won’t be together” or “you’d make a great husband” lines are something that were just excuses to disguise another reason and when you get fired by a plan sponsor as a plan provider, you may get a line that is as inauthentic.

You may get fired by a client who may claim that you were inattentive or you were too expensive and the reasons don’t jibe. Maybe you got fired only because you were hired by the previous corporate administration and you’re perceived as someone else’s guy. Sometimes you get fired because they want to give the work to a relative because cousin Johnny needs more assets under management. I had a broker who was quickly fired, then re-hired as the broker of record. It turned out that the new CEO had fired him so a new broker of record could give a kickback to the CEO. When the skim was discovered, the CEO was fired and the broker was rehired.

Sometimes you will get fired for the wrong reason and as long as you did your job, there is nothing you can do about it. If you lose your job because of nepotism or some illegal kickback scheme, there is nothing you can do and just chalk it up to the crazy business you’re in. Plus you’ll have a wonderful story to tell for many years.

I love bagels and one of the greatest debates out there is what makes them great. People swear up and down that it’s the water from New York. They believe it so much so that there are businesses who advertise that they either bake bagel using New York water or have water filtered like New York. I don’t know, I always think it has something to do with how they are baked. A great bagel is boiled then put in the oven. Some places cheap out in this process and only use a steamer before they bake.

Regardless, there is very little debate on what is the reason for what makes a good retirement plan. When push comes to shove, it centers on a vigilant retirement plan sponsor. A well-run retirement plan doesn’t happen by accident, it’s the retirement plan sponsor that puts it all into place. Sure, there are great retirement plan providers out there, but who hires them?  There is no such thing as luck when it comes to good plans, retirement plan sponsors make their own luck by taking care of their job in setting up the plan and maintaining it.

So while the debate remains as to why New York bagels are so great, there is no debate on what is the reason why retirement plans can be great. It rests on the retirement plan sponsor.

A few weeks back, an advisor told me that a large bundled provider is offering some sort of hardship withdrawal service that allows participants to get a quick withdrawal as long as they state that they have an immediate and heavy financial need.

As an ERISA attorney who used to review hardship requests when I worked for a third party administrator, I don’t think that’s enough. Taking someone’s word isn’t enough when it comes to the qualification of a retirement plan. Hardship withdrawals should always come with documentation that shows that a participant has a financial need. Otherwise, it becomes an avenue for cunning participants to get a withdrawal request in order to circumvent the in-service distribution requirement of plans that usually require the attainment of age 59 ½.

Since the economy has been on a roller coaster ride since 2000, I would not be surprised that the Internal Revenue Service starts reviewing the hardship withdrawal procedures of retirement plans. So I advise all plan sponsors to make sure that the process is documented and requires plan participants to who something more than their word that they actually have an immediate and heavy financial need.

“When I introduce you, I’m gonna say, “This is a friend of mine.” That means you’re a connected guy. Now if I said instead, this is a friend of ours that would mean you a made guy. A Capiche?” – Al Pacino in Donnie Brasco.

As a retirement plan provider, you are often asked to give a referral to other retirement plan providers. If you are a financial advisor, you maybe asked for a referral for a third party administrator or an ERISA attorney.

The problem with referrals is when they come back to bite you. A request for a referral by a client is something based on trust, they trust that you know who is good and who is not. When you give a referral to a good provider, you look that much better in the eyes of your client. If you give a bad referral, you look terrible and I have run into providers who have lost business just because of a bad referral.

So it’s important that any referral is based on first hand knowledge of a provider’s competence. Referring to a provider because they may refer you back in business is a bad idea and using a referral, as some sort of tryout to network with other providers isn’t either. Your word is your bond and a bad referral is almost the same as breaking your word because it’s a break in trust. Trust is one of the most important things that a client should have in their provider. So be careful with referrals.

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 Fidelitys and American Funds 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 sponsor 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.