The Rosenbaum Law Firm P.C. Blog

There is a tendency to shoot the messenger because folks don’t like the message. I ought to know. Whether it was in college, law school, or working at a third party administrator, I was the messenger of some terrible news.

I have learned that sometimes life is close to the ‘It’s a Good Life” episode from The Twilight Zone where Billy Mummy as Anthony banishes people to the cornfield for thinking bad thoughts. However, when providing an unflattering message, you should think how you prepared that message and how it will be conveyed.  You need to make sure that nothing about your message is suspect.

Two-law school professor finally released their study on 401(k) fees and fiduciary breaches. After causing a stir last summer with letters to plan sponsors that cited that the sponsors’ plans were high cost despite using old data. Ian Ayres, William K. Townsend Professor at the Yale Law School and University of Virginia School of Law associate professor Quinn Curtis released their reports and got the usual backlash from the industry.

The pair of Professors claim to “provide evidence that fees lead to an average loss of 86 basis points in excess of low cost index funds.” They state that: “In 16% of analyzed plans, we find that, for a young worker, the fees charged in excess of an index fund entirely consume the tax benefit of investing in a 401k plan.” Ayres and Curtis recommend, “the requirements for default fund allocations be enhanced to assure that the default investment is reasonably low cost.”

They also recommended “the Department of Labor (DOL) designate certain plans as “high cost” and mandate that participants in these plans be given the option to execute in-service rollovers to low-cost plans.” In conclusion, the two law professors recommend “participants be required to demonstrate a minimum degree of sophistication by passing a DOL-approved test before being allowed to invest in any funds that would not satisfy the enhanced default requirement.”

These two professors have a point and they have done a terrible job of proving that point. First off, the report doesn’t cite what plan data they used to determine whether fees are reasonable or not. If they are using that same old data that they used on contacting plan sponsors, then the entire study is flawed since fees have been going down since the DOL promulgated fee disclosure regulations that finally went into effect in 2012. The study doesn’t take into the effect these regulations have had on plans as a whole.

Their correspondence to plan sponsors was poorly written and came off as threatening. The fact that they were using 2009 was troubling because it took into account information that was stale because fees have gone down and some plan sponsors had changed providers since that time. Citing fee data only miss the whole point that plan sponsors may only pay reasonable plan expenses for the services provided. So plan sponsors could opt to pay higher fees if they get a higher level of service.

So while the study has some interesting points, the way these professors got around into making that report completely undermines its effectiveness. Their message has been lost since people are more concerned with their use of old data and those letters to plan sponsors. I give them a failing grade even though their aims seemed noble.

My latest JDSupra.com article can be found here.

How many times as a retirement plan provider that you contact a retirement plan that is paying too much money and getting too little back in plan services? If you’re a registered investment advisor offering 3(38) service and you’re charging 20 basis points, you’re perplexed that you get the brush back when the potential client has a broker charging 60 basis points.  If you’re a great third party administrator (TPA) you maybe shocked that a plan sponsor still wants to use the TPA who’s charging double and not even doing a great thing.

If you spoke to 100 rational plan sponsor, 99 of them would probably sign up for your services that helps limit a plan sponsor’s liability at a better price. However, as you know, relationships aren’t about rationality, there are just ties that bind for one reason or another.

When I was at that semi-prestigious law firm on Long Island, I was approached by a union client that wanted to go with me because I was going out on my own. They were unhappy about me leaving and were not taken with my replacement. They even goaded me into drafting a retainer agreement and I was wary because it is questionable whether signing that client was an ethic violation because they had counsel. Ultimately, they didn’t pull the trigger just because they were afraid of the repercussions of firing a law firm that was a firm that used to hold weight in city politics. When my replacement didn’t last long, they thought about hiring me again, but didn’t. They would rather be unhappy with the attorney and law firm they had, just because they were afraid of the heat they would get by ditching that law firm. Again, it’s irrational, but it’s the ties that bind.

I had an advisor trying to work with a potential union client where the 401(k) plan was extremely high in fees and the plan providers were not offering plan participants any investment education. Plan participation was poor and the advisor showed he could shave costs by 2/3. The union client didn’t hire him and was offended when he tried soliciting them. Years later, they hired an investment advisor who was heavily linked with unions. Again, the ties that bind.

When a potential client rejects you where it was so clear that they should have hired, don’t be offended. Most of the time the incumbent plan provider is juiced in, maybe the plan provider is related to a decision maker. Maybe the broker is kicking back money to the new chief financial officer (I saw that happen) or maybe the plan provider and the decision maker go to the same house of worship or golf club, While you may claim that the plan sponsor has blind loyalty to their plan provider, sometimes that the loyalty is just based on a tie that binds and that is nearly impossible to break.

As Michael Corleone said: “it’s business, not personal.”

When I was a kid, I remember my parents were shopping for a car and the sticker price had a base fee for the car with so many add-ons that I seriously wondered whether they would charge you for the steering wheel.  As with any large purchase, any fine print may make that incredible low quoted fee impossible to attain.

A client of mine informed me that there is a third party administrator (TPA) that is publicizing its fee of $550.

As an ERISA attorney, I will always say that picking a TPA just based on price is a losing proposition, but here is another story.

For the plan sponsor who may not know that a TPA base fee is just a base fee and any additional charges for their work will add up and that $550 base fee may just be like the car that comes without a steering wheel.

The fees that the TPA listed, adds up with their a la carte pricing. There is a $500 initial fee and a $500 conversion fee, a $250 charge per allocation group if the plan offers cross testing/ new comparability. A $500 charge if you are not using their prototype document; $400 testing fee if the plan is not safe harbor; and $200 for each complex plan provision (whatever that is). There is a charge of $150 for a late 5500 and $300 for what they call incomplete data.

When you go to a restaurant, nothing wrong with a la carte pricing when you just want the meal. For the plan sponsor, a la carte pricing is deceptive because a plan sponsor doesn’t know what a TPA typically does. They know a car needs a steering wheel, they don’t know that if they have a four group cross tested allocation, that TPA will charge them $1,000. Unless they get guidance, a plan sponsor may switch to this low base fee TPA without realizing that they may be paying more in the long run with these line item add-ons. A good bargain is only a bargain when you are paying that advertised fees. Whether the TPA is any good is another debate (see above).

This TPA reminds me of the song, Master of the House, from Les Miserables.  The innkeeper Monsieur Thénardier kept on adding surcharges. He sang:

“Charge ’em for the lice, extra for the mice

Two percent for looking in the mirror twice

Here a little slice, there a little cut

Three percent for sleeping with the window shut

When it comes to fixing prices

There are a lot of tricks I knows

How it all increases, all them bits and pieces

Jesus! It’s amazing how it grows!”

Imagine Thénardier with his own TPA; imagine what he could have charged.

I always talk about how plan sponsors need to work with experienced financial advisors, third party administration (TPA) firms, and ERISA attorneys on their plan needs.

Like with reasonable fees, I believe that the term “experienced” is vague. Experience doesn’t just mean years of service as a service provider. Years of experience are just one measure of retirement plan experience. Retirement plan experience could be number of plans that a provider is currently working on or even something as performing good practices in an industry where not many providers do that. So I was kind of taken back when a financial advisor I assumed that I said experience means years because this advisor (who has made a name for himself as being excellent) protested that he had 3 ½ years experience and his commitment to his clients in doing the right thing was better than what many with 35 years experience as a financial advisor who put their needs ahead of the client. I told him that he was preaching to the choir because I’ve been there and done that.

I worked at a law firm for 2 ½ years. You had some law firm partners who were excellent and then you had some that you knew that either fell through the cracks or more likely, were “juiced in” because a senior partner took their fancy. At one point, our firm had about 5 ERISA partners. All of these partners were from the multiemployer world (union Taft Hartley plans), which is a different creature from the single employer world. I bet none of these attorneys knew what revenue sharing was or how a single employer 401(k) plan because one of these partners was our 401(k) plan’s trustee and he never bothered to hire a financial advisor or review investments with the other two trustees or have participants in the plan get investment education that only increased the law firm’s fiduciary liability as a plan sponsor. So if you sponsor a 401(k) plan, would you hire one of these ERISA attorneys? At another firm, I once worked for one of the best ERISA attorneys in the country (in the multiemployer world) and didn’t know what revenue sharing was an why plan sponsors need to be concerned about administrative costs.

The same can be said of financial advisors. A financial advisor may have a billion dollars or management or have been in the business for 30+ years, but it’s irrelevant if they don’t have more than one retirement plan on their books. Even if they have a load of retirement plans on their books, it doesn’t mean anything if they don’t help their clients with an investment policy statement or giving education to participants in participant directed 401(k) plans.

Same with TPAs. Some can’t handle daily valued 401(k) plans, some can’t handle defined benefit plans, and some can’t handle any retirement plan outside of the box like new comparability form of allocation.

The point is that levels of experience may vary and it’s important to find the retirement plan provider with the right experience. It has to be the right fit for the plan based on the plan’s size and type. How do you that?  Nothing beats word of mouth and asking the potential retirement plan provider the right questions, especially if they have the experience to handle your type of plan.

I always say that as bad as 401(k) plans may be, 403(b) plans are in much worse shape. It didn’t help that the Internal Revenue Service only issued regulations that governed them only 30 years too late, back in 2008. It also doesn’t help that still many 403(b) plans (such as those that offer deferral contributions only) and governmental plans aren’t subject to the Department of Labor’s oversight under ERISA.

While many like the idea of retirement plans not subject to the provisions under ERISA, it’s needed. Good retirement plan regulation by the Internal Revenue Service and the Department of Labor have helped the rights of plan participants, as well as lowering plan expenses.

403(b) plans not subject to ERISA are governmental plans and plans where the non-profit employer has absolutely no fiduciary control of the Plan. From experience, plans not subject to ERISA are costlier and are poorly run. Heck, up until those regulations, they didn’t need to have a written plan document.

One of the biggest problems with non-ERISA 403(b) plans where there are multiple plan providers. For example, a school district may offer 5-6 different plan custodians who maybe an expensive insurance company or a low fee mutual fund company. The problem is that while everyone loves choice, too much choice drives up cost because a plan custodian/ investment provider isn’t going to offer the best pricing if they have to compete against other providers in each school district. I know because I worked for a union that wanted to offer its own 403(b) option to plan members, but the low fee plan providers exited stage left when they discovered they had to compete against 5-6 providers in every school district in a state with over 750 school districts.403(b) plans that are not subject to ERISA are like the old days of the Wild, Wild West because where there are no rules, outlaws run rampant and the outlaws in the 403(b) space are plan providers charging 200 too 300 basis points in an environment that allows it.

My two cents is that 403(b) plan would be in better shape if they were all subject to ERISA and Department of Labor (DOL) oversight.  I won’t be surprised if the DOL will try to regulate this characters from the Wild, Wild, West.

My latest JDSupra.com article can be found here.

I joked in many of my writings and I believe in my new book, available on Kindle (cheap plug here), was that when my Managing Attorney at that semi prestigious law firm (sorry, Lois) wanted to quell a topic, she’d create a committee for it.

Plan sponsors can’t be managing attorneys for life; they need to have some sort of committee or apparatus to handle the management of their retirement plan. Being like Lois’ committee on social media for lawyers that did nothing and had no members who knew what social media was is going to cut it.

Plan sponsors need to develop a committee to handle their retirement plan and the committee needs to actually function. It needs to have an agenda and enough members to pursue the action of handling the fiduciary process, the administration, and the fiduciary duty of prudence and paying reasonable expenses. But the committee can’t have too many members because being a former President of a college club and a current trustee of my synagogue, I can attest that too many members on a committee won’t get anything done because half the committee who don’t do anything spend their time complaining about the half that does their job.

A further discussion about this topic can be found here, as I discuss the role of investment committees with Chuck Hammond from the 401(k) Study Group.

My latest JDSupra.com article can be found here.

Thanks to my friends at 401khelpcenter.com for covering my e-book’s launch.