The Rosenbaum Law Firm P.C. Blog

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I used to spend much time trying to explain irrational behavior through rational thought and it’s really impossible. If you’re a plan provider, don’t waste your time doing that.

There are some plan sponsors out there that would rather cut their nose to spite their face or continue with a bad plan provider because of a crazed notion of “loyalty”.

Most of the time, the plan sponsors you will meet will make rational decisions in selecting plan provider and making any plan changes. Some just won’t because of an irrational choice or decision.

Seven years ago, I helped a plan sponsor out with their 401(k) plan.  They had no financial advisor, they had no investment policy statement, they had no investment education provided to plan participants, and hadn’t changed funds in a decade. They eventually fixed the plan, but they hired new plan providers without consulting me. I was offended by that because the same trustees who neglected their plan now all of a sudden thought they knew better than me because they didn’t seek my opinion. They also changed third party administrators and picked one that wasn’t suited for a plan that size. It’s irrational, but that’s what people do.

Present day, the plan has a huge compliance problem that may cause the plan sponsor over $100,000. One of the trustees reached out to me while the other one spurned my services, probably because of a grudge or because they didn’t want to me say: “I told you so.” I’m not like that, my position is to help plan sponsors out as much as I can at an affordable price. This plan trustee would rather pay three times as much in legal fees because of a grudge. People who make bad choices usually consistently make bad choices.

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One of my favorite genres is the Western.  While I prefer the works of Sergio Leone and Clint Eastwood to those of John Ford and John Wayne, I have always been a big fan of these films. I always like the idea that the good guys wore white hats and the bad guys wore the black hats.

Of course, my favorite Western, Unforgiven, shakes all that up because the people wearing the white hats aren’t necessarily that good (Gene Hackman’s Little Bill) and the people wearing the black hats aren’t necessarily that bad (Clint Eastwood’s Will Munny).

When I talk to advisors and third party administrators who do terrific jobs at fully, transparent fees, I always state: “that since we all wear white hats, we all should stick together.”

The problem is that with fee disclosure, there are a lot of folks wearing what I call gray hats. Gray hats meaning that these were former black hatters either trying to reform the way they handle the retirement plan business or those pretending that they are one of the good guys.

That may mean providers that were always hiding fees or were just too expensive offering “fiduciary services” like a fiduciary warranty or the use of an ERISA 3(38) service through a third party.  Perhaps these providers have seen the error of their way and are now going to be good retirement plan industry “citizens”, and maybe they haven’t and this is some marketing gimmick. How will plan sponsors know the difference?

We live in a Google world, which means things are certainly more transparent. So if a financial advisor writes an article on an RIA website telling advisors how to get their clients out of fiduciary trouble, Google will let you know that this fellow doesn’t have a sterling reputation and he was accused of some of the things he was warning against which landed plan sponsors in fiduciary trouble.  I believe that people and plan providers have it within themselves to change and improve their services and business model, but it must be judged by deeds and not by words or articles or fancy pamphlets.

If I’m a plan sponsor, I need to do my due diligence on the providers I’m considering. However, would I be better off with providers who practices full transparency before it was fashionable and required, or to do I hire a provider that had a poor reputation in this industry who is trying to change their ways and not try to acknowledge their past? Despite Unforgiven, I feel safer with the folks in white hats.

My latest JDSupra.com article can be found here.

10 years before I went on my own and started my own practice, I started The Rosenbaum Law Firm P.C. It was a side venture, kind of an attempt to see if I can start my own practice without actually having to leave my day job. If this side venture would be an indicator whether I could go on my own, then I shouldn’t go on my own because it was a flop. I started a law practice that was going to be the Wal-Mart of legal services, charging low flat fees for wills, incorporations, and contracts. It flopped because people didn’t think that legal services are something they should buy on a deep discount.

Since fee disclosure has been on everybody’s minds for years, I think there are plan providers that focus too much on fees. While excessive plan fees are evidence that there is a breach of fiduciary duty and part of the problem affecting 401(k) plans, to me, it’s not the most important issue that negatively effects retirement plans today.

To me, the greatest issue is the fiduciary process or lack thereof.  The issue is about placing the control of investments in the group with the least education to make informed decisions, the participants. This isn’t a criticism of the participant directed model under ERISA 404(c) that is supposed to limit a plan sponsor’s liability for losses sustained by participants in their investment direction. The problem is that most plan sponsors aren’t aware that they are losing the protection of ERISA 404(c) by neglecting their fiduciary duty. Picking a financial advisor who doesn’t help the plan sponsor in the fiduciary process, namely developing an investment policy statement and educating plan participants does a lot more harm than good.

An advisor friend of mine once was prospecting a case recently where the plan had an ERISA 3(21) fiduciary as the advisor, who didn’t change the fund lineup in 5 years, had investment options that were duplicitous, and is missing certain areas of the market for investment. Yet the current advisor was an ERISA 3(21) fiduciary. Let’s face it, the number sound nice, but an ERISA 3(21) fiduciary not doing their job is as Dean Wormer would say: an ERISA “0.0” fiduciary.

Plan sponsors as a whole don’t do a very good job with providing participants with enough education, so that the participants can make informed decisions. While the Department of Labor allowed advisors to provide investment advice, very few have offered it because of the expense and very few know of other provider like RJ20.com that can offer the investment advice for a very reasonable per head charge.

So while so many advisors see fee disclosure as a win-win opportunity to gain clients, one should also look at potential clients with ineffective or missing in action advisors. However, plan paying excessive fees are probably more likely to have other fiduciary issues than companies that are paying reasonable fees. At least, that’s what I think.

So excessive fees are part of the problem, but I think the lack of participant education and lack of fiduciary oversight are bigger problems that won’t go away anytime soon.

ERISA §3(38) investment managers has been a hot topic in the marketing of retirement plan providers and for the most part, it’s a good thing because plan sponsors who have no time to handle the fiduciary process of their plan can have someone else do it for them.

The problem is that there is no requirements to be an ERISA §(3)(38) advisor as long as the advisor is a registered investment advisor, bank, or trust. So someone without any retirement plans on the books can simply prop a sign on their lawn and proclaim themselves as one.

In addition, there are §3(38) advisors that you have to question their independence. That could be the popular investment manager who ha become the McDonalds of 3(38)s by providing that service for 5 basis points, but being promoted by a third party administrator. Where is the independence?

I even just hear about an ERISA §3(38) investment manager who will charge nothing as long as the plan invests a portion of their assets in the managed accounts they offer. Where is the independence? Isn’t this no-fee service (but charging a back end fee) what we have all tried to avoid since fee disclosure was implemented.

A plan sponsors needs to know that §3(38) should stand for something more than a number. They need to hire an investment manager that is competent and independent.

Two years ago, I had the worst call with a prospective client in the 14 years I have been an ERISA attorney.

Without divulging any information about this prospective client, this 401(k) plan sponsor was like many prospective clients, poor participation and paying too much in fees. The plan sponsor was using a reputable provider, but a provider that would be a better fit for plans 10 times their size. Client was paying $100 or so a head plus what looked like an additional 3% in an asset based fee. Clearly, this is a plan that is paying way too much.

Why the call was such a disaster was because the person on the call was the one who designed the program with this expensive provider and he basically stated that he had absolutely no interest in changing providers, Funny, the call with the interested advisor was not concerned with changing the third party administrator at the time because you can always have the discussion with the current provider bout reducing. I am provider neutral, heck if the current third party administrator is charging a decent fee and doing a good job, I have no issue with that. You’ll be surprised to know that I still had a couple of clients being serviced by that former employer that I had always railed against.

So why was this underling in the human resources office so serious? Well, if he designed the program and we have issues with its cost or poor fund lineup or poor participation, he is obviously going to take any criticism as an attack. While plan fiduciaries don’t necessarily have to change their providers, they certainly have s fiduciary duty to check whether fees being charged are reasonable or not.

I know what I know in life, but if I made a technology decision or a financial decision that an expert may question or offer suggestions for it, I’m not going to take offense. But then again, I’m on my own boss. So if we are a plan provider or a plan sponsor’s decision maker, we should understand that sometimes people are so resistant to change or just considering so constructive criticism, because they get defensive as if there job depends on it and maybe it does. That is why we should always consider who we contact about looking at their plan and doing a review.

Post script: Two years later, the human resources officer was no longer there and they finally opted to change all plan providers, but did not use the advisor that was initially on the call. The ERISA attorney who drafted the plan? Yours truly. Sometimes, you need a change in the decision makers to get the right decision in changing plan providers.