The Rosenbaum Law Firm P.C. Blog

For a brochure of my 3(16) service, please click here.

International Paper is paying $30 million in a settlement for a class action lawsuit concerning their 401(k) plan for claims resulting on having their own stock in the plan, unreasonable hidden plan expenses, and fraudulently reported performance histories. Cigna paid $35 million in claims over their Plan.

Most plans aren’t big enough to have a class action lawsuit against them, but they have other fears that plan sponsors aren’t even aware of. While a $1 million plan isn’t going to be sued by an ERISA attorney in a class action lawsuit unless they’re starving, retirement plans can be targeted by an employee or two to get a quick, inexpensive settlement or the government can audit them.

In the old days, it was kind of a blue line that most plan participants never crossed and the courts didn’t recognize a participant’s right in making sure that plan expenses are reasonable.

It’s been quite some time that unreasonable plan expenses have been an issue for plans and it went from plan sponsors winning on every turn into what looks like a Washington Generals type losing streak.

The days where plan sponsors can look the other way about their retirement plan is long over. They either need to shape up or get shipped out by participants and/or the Department of Labor.

My latest JDSupra.com article can be found here.

My latest JDSupra.com article can be found here.

The best way to keep clients is to look at what you’re doing as a plan provider and what is out there in the marketplace.

If you are a third party administrator (TPA) and the competition is having much success offering ERISA §3(16) administration, you might have to offer it yourself or allow a third party offer it (cheap plug here for my Austin 3(16) service).

If you are a broker and you have registered investment advisors touting their fiduciary status or a §3(21) or 3(38) service, it might be a good idea to partner up with Mesirow or a friend of mine, James Holland from Millennium.

The worst thing you can do is scoff at what is out there. Saying a §3(38) service is just marketing is missing the point and just attacking the service because you are losing clients to providers that offer isn’t going to get those clients back in the door.

It’s so easy to attack others, but you need to look within if you are losing clients to the competition.

Don’t be a deer in the headlights and don’t be like my old Managing Attorney and just think your way is the right way and that you’re better than everyone else. Happy clients never leave. Satisfied clients never leave. If you are losing clients, look at what you’re doing or not doing.

The retirement plan industry is very close knit. Everyone knows who does great work and the few that don’t. Word travels fast about the good, the bad, and the ugly in this business.

Whether you are a financial advisor, third party administrator (TPA), an ERISA attorney, or another plan provider; chances are you will have to work with other providers. You will meet other plan providers one way or another and one thing you have to realize is that these other plan providers are there to network with and they can be great help in growing your practice.

Too often, I would meet other plan providers (9 times out of 10, they were brokers) and their question is whether I can get them clients. I’m sorry, I’m in the business of getting clients and most of the time, other financial advisors refer these clients and you can’t stay in business very long as an ERISA attorney if you are costing business for the folks that referred you. In addition, I get very few plan sponsors clients directly that have no financial advisor and I’m really not in the business of steering business to particular advisors. If a plan sponsor who needs a financial advisor contacts me, I would present a handful of names of advisors in their area to contact and let the decision rest in the hands of the plan sponsor. Most of the time it works and there was one time it didn’t, when my law firm selected an advisor I didn’t recommend. 5 years later, I’m still pissed off.

When it comes to helping plan sponsors get a TPA, again, I always like to give recommendations on a handful of firms to consider because it’s ultimately a plan sponsor decision and I never want to be suspected of greasing the selection in favor of one provider.

Yet, that happens a lot in this business. Plan providers pushing plan sponsors to specific other providers just because that provider change is helping the advisor who made the recommendation.

I once asked why financial advisors steer so many plans to the payroll providers and the answer was that because the payroll provider TPA was very generous in referring new clients to those financial advisors who steered business to them. Heck, there are plans that are a good fit for a payroll provider TPA, but should they be picked as the TPA just because the advisor gets to wet his beak (Don Fanucci rules) by referrals by the payroll provider.

Transparency is an important part of this business so that I stay clear of making a provider choice for the plan sponsor. I never want to be accused of steering a plan sponsor to one provider because I do plan documents for them or because I got some business from that TPA or advisor.

Plan providers should seek out relationships with other providers and the help they can provide you isn’t particular new clients, but it can be with information to get a better chance at getting that new client or keeping that current one. There is more to life than just getting clients, it’s more important that your clients gets the best possible providers for their plan and not because it benefits you in the short term.

My latest JDSupra.com article can be found here.

If you ever want to know what the top mutual funds were 3-5 years ago, you can look at the mutual fund lineup of many 401(k) plans today.

While it may sound like a joke, it isn’t. Too many 401(k) plans don’t have a financial advisor or don’t have a competent financial advisor who helps them manage the fiduciary process in pruning the mutual funds that were yesterday’s winners.

I’ve been in this business long enough to remember when everyone wanted to be In Janus Twenty and ever other Janus fund out there (which back in 1998-2000, pretty much had the same investments in each fund) as well as when American Funds was the big deal.

As anyone with some financial sense can tell you, very few actively managed funds stay on top forever. Actually, no actively managed stays on top forever, Heck, I remember when Legg Mason Value Trust beat the S&P 500 for about 15 years before coming down back to Earth pretty hard.

A great way to minimize liability is to develop an investment policy statement that dictates which mutual funds to hold, which mutual funds to fold, which mutual funds to walk away, and which mutual funds to run from. Not having such a policy statement or not following that statement can be a huge billboard for a participant to sue you.

That is why as a plan sponsor, it’s important to have financial advisors to guide through the process of selecting funds to make sure that yesterday’s top mutual funds are not in today’s fund lineup.

Thalidomide was supposed to be the wonder drug that helped women manage morning sickness until they discovered it caused birth defects. Asbestos was supposed to be the ultimate fire resistant material that was later found out to cause mesothelioma when produced or when disturbed. When companies decided to ditch defined benefit pension plans for a cheaper alternative in the 401(k) plan, they also had a hidden danger with a 401(k) plan, but it doesn’t have to be that way. If managed correctly, a 401(k) plan is an effective retirement plan for the employer and employees. If not, it’s a retirement plan thalidomide except the plan sponsor doesn’t know the danger.

The switch from defined benefit plans to 401(k) plan switch the burden of funding retirement from the employer to the employee. If the plan is participant directed, it also switched the selection of investments from employers aided by financial advisors to the folks who have the least amount of background to make these tough decision, the plan participants. Too many plan sponsors don’t educate their plan participants to make informed investment decisions and too many plan sponsors don’t have a proficient investment advisor to guide them through the financial process. It doesn’t have to be this way. Getting investment advisors who know what they’re doing and getting participants enough investment education/advice isn’t hard, but too many plan sponsors are too lazy to manage. But it doesn’t have to be this way.

Defined benefit plans have pretty straightforward fees. You know how much annual administration is and you don’t have that luxury with participant directed 401(k) plans that have multiple fees that can confuse anyone including retirement plan professionals. Too many plan sponsors have been sued because the 401(k) plan fees are too high since plan sponsors have a fiduciary to pay reasonable fees. But it doesn’t have to be this way.  Plan sponsors can benchmark their fees to see if they are reasonable, actually they have no choice; they have that duty.

401(k) plans don’t have to be a hidden danger; all they need is a plan sponsor who understands their pitfalls and wants to avoid the liability that goes with it. That’s the tallest order