The Rosenbaum Law Firm P.C. Blog

My latest JDSupra.com article can be found here.

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My latest JDSupra.com article can be found here.

Hard to believe but 20 years and 29 seasons later, The Real World is still airing on MTV. The Real World ends their opening intro with “to find out what happens… when people stop being polite… and start getting real.” As an ERISA attorney working with retirement plan clients I often find that what determines a good third party administrator (TPA) from a bad one is when we find out what happens, when the TPA gets fired, and we start getting real.

TPAs get fired for a multiple of reasons and for a good chunk of the time, it’s not for a lack of competence. TPAs can get fired for higher fees, change of advisors/brokers (who want to make the change), or because the brother of the law firm’s partner works for the mutual fund company that will now be the new TPA. So it’s business, not personal.

Again, it’s easy to determine who the good TPAs are from the bad ones. The good TPAs will not take it personally and will try to make the transition to a new provider as seamless as it can be. I think reputation means everything and since it’s such a close knit industry, making it easier for a former client to transition business away from you will only help your reputation. Also, there is always the chance that the former client maybe your client once again, especially if the new TPA fouls things up. I always believe in the concept of paying it forward, that making it easier for former clients to leave will only make it easier for new clients to come in. The good TPAs will also spell out in their original service agreement with the client, the exact cost (if, any) of the de-conversion when the TPA is replaced.

The bad ones are easy to spot out. They take things so personally and they feel the need to take out the frustration of being fired on the former client. Again, it’s business, not personal. I had a client who changed TPAs a few years back. During the change to a new TPA, an IRS audit discovered that the Top Heavy test was done incorrectly because a couple of law firm partners were misidentified as non-key employees. Rather than admitting the error, the TPA placed blame on the client for the error and then whined that the client still did not pay all their invoices, forgetting that the client had spent thousands in legal representation to correct that Top Heavy error.

Divorce can be difficult, changing TPAs should not. I think it’s important for TPAs to maintain a high level of professionalism, especially when it comes to the time when the TPA is being replaced because it’s at those times that delineates the good TPAs from the bad ones.

As a student of law and in practice over 15 years, I understand that litigation takes time and legal opinions also change over time.

Over 160 years ago, the Supreme Court claimed an African American did not have the right to sue in Federal Court in the dreaded Dred Scott decision. The Civil War and the Constitutional amendments changed that. 25 years ago, if people heard that homosexual couples wanted the right to be married, they would have laughed.  Laws and legal opinions changed over times.

The same can be said about retirement plan/ERISA litigation. When there was class action suits against plan sponsors and providers over fees and revenue sharing 12-15 years ago, plan participants would lose. Thanks to a down stock market and creative arguments by ERISA counsel, the tide against plan sponsors and providers are changing.

As of now, plan providers who offer fund menu lineups have typically won lawsuits where the participants’ arguments were that the provider was a plan fiduciary (when contractually, it said otherwise). Well, that may be changing too.

In Connecticut, a Federal District Court ruled that ING is a plan fiduciary because it had the discretionary authority to substitute funds on their fund menus and that the revenue sharing they received from such investments was a prohibited transaction.  Whether ING exercised the discretionary authority or not was irrelevant for the Court. This decision may be an aberration to current and recent cases where providers in the capacity aren’t held to be a fiduciary, but this maybe a new view that might be adopted by other Federal Courts in other jurisdictions. Time will tell whether Healthcare Strategies v. ING Life Insurance and Annuity Co. will have any teeth in the future as it may or may not go to trial.

Regardless, plan sponsors need to be more vigilant in the selection of plan providers and selection of plan investments.

The Southern California Institute of Law has a bar passage rate of 7%, which means 93% of their graduates failed. They sued the California Bar on free speech grounds because they didn’t want to be forced to state that 7% amount in their materials. According to the law school, the bar passage rate is a meaningless statistic.

Of course, the only people who claim a statistic is meaningless are those that don’t do well in these statistics. Yes, I remember my issue with billable hours for law firm associates.

In the retirement plan industry, providers who don’t do well in specific instances will just dismiss their poor placement or lot as something meaningless. I remember hearing a financial advisor who lost a plan sponsor client to fiduciary heavyweight James Holland that ERISA 3(38) fiduciary services is just marketing. How many providers dismiss their client retention rate or claim that fees aren’t so important because they just want to hide the ball and/or the truth?

If a provider glosses over a specific statistic or dismisses a notion rather quickly, don’t take their word for it and find out why. Maybe the statistic really isn’t that meaningless and it’s relevant. Just don’t take the provider’s word for it.

My latest JDSupra.com article can be found here.

When I was in college in the early 1990’s, I was heavily involved in student politics. I would go and buy things that made me look important even when I really wasn’t. I got the beeper that no one really called and I had one of those Day-Timer organizers.

People who grew up today have their IPads, but the Day Runner was the IPad of its day because it would include my contacts, notes, calendar of events, etc. I used to call my leather Day-Timer, the “football” in honor of the military briefcase that has all the nuclear weapon launch codes that a military attaché was attached to by handcuffs. Again, sounding more important than I really was.

Plan sponsors need their own “football”. They don’t need nuclear launch codes, but they do need to keep copies of their plan documents, fiduciary meeting minutes, investment policy statement, investment education materials handed out to participants, fiduciary bond, liability insurance binder, enrollment meeting attendance sheets, and valuation reports. Thanks to technology, they don’t have to be in a Day Runner or a binder, then can be electronically saved after being scanned. Since paper doesn’t too well to paper, fire, and the trash, a plan sponsor should save all plan information to a USB flash drive and some sort of cloud.  This “football” will make sure the plan sponsor has all the information they need to defend themselves in an audit and/or litigation.

The plan sponsor “football”. It’s just one thing that if they have, they can’t fumble away. Even Tiki Barber can’t fumble that.

For me, one of the worst things that any business can have is a sense of a complacency; I have spent too many years working at places that were just way too complacent in their work, where so much time was devoted to proclaiming how everybody was so wonderful and so great. If I am so complacent in business where I think I’m so wonderful, I’m going to retire or ask someone to put me down like Old Yeller.

I don’t think any retirement plan provider can afford to be complacent. The industry is consistently changing and any change breeds more competition.  Unless you’re a payroll provider TPA or one of the large consulting companies like Buck or Towers Watson, you can’t afford to hire a top-notch marketing firm. If you’re like me, you weren’t taught marketing in school. So when I say that TPAs as a whole have lousy marketing, it’s not an insult because most professional firms have lousy marketing because of a lack of resources.  Heck, most law firms have lousy marketing and there are quite a few TPAs who have excellent marketing. As a whole, it needs improvement.

So when I say that TPAs as a whole have lousy marketing, I see it less as an insult and more of challenge for TPAs to get better at communicating with plan sponsor clients and potential clients. Just saying that a TPA can’t do much because it’s a competitive business and this is just how the business they chose to go into operates is just a lazy man’s argument.

I decided long ago that I wanted to build a national ERISA practice, to work with plan sponsors, advisors, and TPAs around the country at a flat fee. I was surrounded by an attorney leadership who thought that my way was the wrong way and that is not how a law firm operates and markets itself. Of course, I went on my own and proved them wrong. I could have sat back and just written it off like Hyman Roth did in Godfather Part II by saying that this was the business I chose. If I did that, I’d hate to think where I would be now.

TPAs can just sit back and be bitter on how the TPA business has turned into, but bitterness and complacency don’t get clients. Thinking outside the box, being bold and being creative goes a long way into getting clients. That’s why I thoroughly enjoyed speaking at a panel of Great West TPAs because TPAs giving each other good bits of information to get more competitive. Sitting back and feeling sorry for yourself is a lot easier than doing something.

Reminding me of that coffee scene in Airplane II, I worked at a place where we didn’t the greatest benefits and the raises were not the greatest. When it came to information, we were always on a need to know basis, so we didn’t need to know anything until it happened a few weeks before. The employees there (except for a few of us) were lambs ready for the slaughterhouse, but they did raise rancor when management stopped providing milk for the Keurig machine (which the employer did provide). We all have priorities and for some employees, free milk for coffee is the higher priority than health insurance and retirement benefits.

So when a friend of mine who is a financial advisor taking on a fiduciary role, telling me that plan sponsors aren’t interested in improving their plan and saving $30,000, I’m not surprised. The $30,000 in savings would go back in the participant’s back pocket, so some employers may not consider that a big deal. But the fact is that even with fee disclosure and increased litigation and plan sponsor liability, many employers just haven’t made improving their plan a high priority. When they already decided to pay $30,000 more, it’s very hard to convince them that improving the plan through the use of an independent fiduciary and saving money is a good thing because clearly that’s not their priority.

Getting new clients and convincing plan sponsors to hire excellent plan providers such as you isn’t easy. It takes a lot of convincing and a lot of conversations to get plan sponsors to think that improving their plan and saving plan expenses is a good thing. That’s why conversation and communication with potential clients is key. If you already know that you can help plan sponsors out. make sure the conversation surrounds what they can do to improve their plan and why it’s important they do that. It’s all about trying to convince plan sponsors that improving their plan is as high priority as it is to provide free milk for the employees’ coffee.