The Rosenbaum Law Firm P.C. Blog

The Office and Management Budget received a proposed regulation from the Department of Labor (DOL) , that will be released in 3 months. The assumption is that this regulation will be further clarification under Section 408(b)(2) fee disclosure regulations. This will add further work and headaches to plan providers.

Rome wasn’t built in a day, and the process and impact of fee disclosures was going to take time. Everything in the retirement plan business of often trial and error and the DOL has had a year to reflect on fee disclosures.

It should be no surprise that absent a model form of plan provider fee disclosures in a language that plan sponsors would understand, that plan fiduciaries would find the disclosure to be confusing.

That is why the proposed regulation may have to do with creating a guide to fee disclosure that could further explain the fees. As I call it: a guide to the guide of plan expenses.

If you are a plan sponsor, consider reviewing your disclosures to make sure they are easier to understand and easy to adapt to a summary or guide for plan sponsors to easily decipher. As always, I know a good, inexpensive ERISA attorney (cheap plug here).

When I started my own National ERISA/ retirement plan law practice more than 3 years ago, it wasn’t easy. It still isn’t easy, but I could no longer see myself working for people who were either too arrogant or too blind to see what the retirement plan industry was turning into.

One of the things I’ve learned over the past 15 years that no matter what happens to you in business, you can’t change who you are. You have your way of doing business, both professionally and ethically, and as long as they you are on the up and up, never change that.

One of the things about my practice is that I want to be paid for legal services only, so I’m not going to receive a fee for pushing clients to seek certain providers or advisors I recommend. So when advisors have come to me with these “finder’s fee”, I tell them: ‘thanks, but no thanks.” My legal fees compensate me for my independent legal advice, any other fee is a conflict of interest to helping my clients first.

There may be competing advisors who are unethical (I know of far more successful ERISA attorney who received paid solicitor fees for referring clients to specific providers) or clients who either don’t pay bills (you should be see my list) or drive you crazy, but you should never change who you are.

Never change who you are, no matter the few who treat you badly or act badly in this industry.

When I was in law school and the Executive Editor of the student magazine there, I uncovered a scandal where the bulk of editors and staff members of a student run law journal did not fill out and verify they completed the hours of work necessary to receive academic credit for that work.  There was never explanation of why that was so, just attacks on my credibility. Rather than admitting their mistakes, the law journal’s editors tried to change the subject, but the scandal was still there. Substantive change was implemented by the law schoolafter the scandal to alleviate the concerns I raised.

A Yale law professor by the name of Ian Ayres sent out 6,000 letters to plan sponsors around the country that he targeted as having high fees.

The tone of the letter wasn’t particularly nice, but I haven’t met many professors (especially law professors) who know how to write anything other than a law article very well.  The letter stated “Using data from the form 5500 your company filed with the Dept. of Labor in 2009 and BrightScope Inc. I have identified your plan as a potential high cost plan. We recommend that you improve your plan menu offerings, including adding lower fee options, both at the plan and fund level, and consider eliminating high-fee funds that do not meaningfully contribute to investor diversification.” Ayres then claimed he would name these expensive plans on Twitter in 2014.

Of course, advisors, ERISA attorneys, and plan sponsors are in an outrage, but everyone is missing the point.

I’m sure Professor Ayres is doing some type of research regarding plan expenses and his manner in writing to plan sponsors could be a lot nicer and he could be a lot more current than Brightscope’s 2009 ratings.

The point is that information regarding plans and expenses are public information. Anyone wishing to target expensive plans can do so, whatever service they want to use including the Department of Labor’s efast Website. So plan sponsors need to take into consideration that if their plan pays too much in fees, someone out there in the public can easily access that information.

In addition, only a poorly written letter threatening to shame plan sponsors got their attention. I have met so many plan providers who tell me that they have reviewed the expenses of a plan sponsor and get blown off by that sponsor when the fee discussion comes up. Plan sponsors don’t have to be shamed into doing their job in making sure that plan expenses are reasonable for the services provided.

Instead of crying about the effects of a poorly written letter, a recipient of this letter should take this letter from Ayres as a call to action to improve their plans. If Ayres sees it based on old data, plan sponsors should see the same problems using current data. The Ayres letter is no a scarlet letter, it can be removed by a little action by the plan sponsor.

Everyone in the industry shouldn’t just attack the messenger, but check the message.

My latest article on JDSupra can be found here.

When I started my practice 3 years ago, I had a public relations director on retainer. He was a nice guy, but he was more interested in promoting himself than in promoting me (at least I thought so). He had a nice base of clients and one of his ways was to try to network clients amongst themselves. He did have a third party administrator on retainer, but he tried to have me network with attorneys who would never refer clients to me (i.e., negligence attorneys).

The first few months of starting my practice were not good. I had very few clients and very few legal bills to send out. A nice article in a business newspaper after I started my practice did nothing to generate business.  The p.r. director also insisted that my dream about being in the Wall Street Journal would take time because I needed to build a reputation by appearing in other articles. The p.r. director did very little in getting me articles to appear in, he simply referred me to links from these websites that reporters use to get expert opinions.

I told the p.r. director things were not going well and he told me to take time off, which is not someone who has to pay a mortgage wants to hear. I was looking to trim costs and that $900 per month retainer that this p.r. guy was getting looked right for chopping.

I looked at the $900 a month and divided it by 30 days to get $30 a day. I asked myself whether the p.r. guy was doing $30 of work in promoting me every day. I determined that he really wasn’t. After reading a book on social media and talking with Mike Alfred of Brightscope (who suggested I post articles through LinkedIn), that I realized that the $900 a month was a waste. The p.r. director got fired and within two months, I was quoted in the Wall Street Journal because of something I posted on my blog (the power of social media).

Retirement plan providers need to look at their fees and determining what work they are doing for their retirement plan clients because like me, they may try to break down their plan expenses into a day rate and try to figure out what their providers do for them.

Value is one of the more important concepts in business and plan providers (thanks to the transparency of mandatory fee disclosure) are under pressure to show their value to plan sponsors. By showing value, plan providers have the power to dissuade plan sponsors from every contemplating someone else from taking their spot as a plan provider.

When I talk about the Retirement Plan Tune-Up (the legal review for plans for only $750, cheap plug here), I always talk about the client who asked me to do one for them.  Plan was safe harbor 401(k) and administration looked good. On this $14 million plans, broker was being paid about 60 basis points, which was pretty high for a plan of that size. When I asked for any plan education materials, investment meeting minutes, or an investment policy statement, I was told that the broker never provided them to the client. Let’s just say that based on my advice, the broker was replaced by a 3(38) fiduciary for about half the cost. Needless to say, this broker didn’t show value.

Showing value is one of the most important concepts in retaining clients.

The Major League Baseball All Star Game was something I always looked forward, especially when my Mets were doing well in the mid-1980’s.  Since 1933,it has been the Mid-Summer Classic. This year it’s at my home ballpark Citi Field and the last time, it was in Flushing, it was across the way at the since demolished Shea Stadium in 1964 that the National League won on a Johnny Callison Homerun. Since it’s been 49 years since the Mets hosted an All Star Game, I took it upon myself to buy tickets for this year’s game in the possible likelihood that I may not be around the next time they host it.

The starters for the All Star Game (except for the pitcher) are selected by the fans through voting. Based on who is playing this year, I think fans picked it on merit. When I was a kid, there was a lot more popularity involved. My favorite player (until I met him) was Reggie Jackson and there were some years that Reggie’s numbers didn’t warrant a starting bid. In addition, the reserves are selected with a rule that each player must have been a representative. So I remember the years when John Stearns or Joel Youngblood were selected to the National League All Stars only because the Mets had to have one All Star.

When plan sponsors select plan providers, they need their own All Star team. Unlike the Major League All Stars, all selections must be based on merit. So picking up a provider just because they have so many plans (I’m looking at you payroll providers) isn’t a wise idea and neither is picking up a financial advisor just because he or she has a $1 billion under management. Picking a plan provider because their affiliated bank gave the plan sponsor a credit line isn’t a good idea either. Like a major league manager, plan sponsors need to evaluate all plan providers through a process to see who is the best fit for their plan. Just going with a big name isn’t a process; it’s a recipe for disaster if things don’t go right.

Principal Life Insurance Company wanted an advisory opinion regarding revenue sharing, probably because of concerns with how these payments are used to offset plan expenses as well as changes dealing with plan expenses and Form 5500.

In Advisory Opinion 2013-03A, the Department of Labor stated that revenue sharing and similar amounts carried on the books of a retirement plan service provider as a credit due the plan, if properly structured, are not ERISA “plan assets” prior to receipt by the plan.

So that in English, means that as long as a plan provider is careful with how they credit revenue sharing payments, especially by not giving them to the plan outright, or by contract, giving the plan an ownership position in these revenue sharing payments, they are not going to be ERISA plan assets.

Principal didn’t have any issues that made revenue sharing payments ERISA plan assets because they maintained a bookkeeping account tracking the credit; these credits were general assets of the service provided; and there was no agreements that provided that revenue sharing payments were held for the benefit of the plan.

The Advisory Opinion reiterated the obligation of the responsible plan fiduciary under ERISA §404, to make sure that the compensation paid to and among all service providers is reasonable and to monitor any revenue sharing arrangements between these providers.

Did this Advisory Opinion change the world? Not particularly for plan sponsor because they always had that duty to review plan expenses. For plan providers, it is some comfort that if they act appropriately in the bookkeeping of revenue sharing, that they won’t be using plan assets, which would bring a host of other problems. However, I’m sure that there are recordkeepers that are not bookkeeping revenue sharing payments correctly and I think this Advisory Opinion is a good wake up call for all providers to make sure that they are handling revenue sharing payments correctly.

My latest JDSupra.com article can be found here.

The purpose of an audit for a retirement plan that requires one (generally, those with 100 or more participants) is to ensure that the assets are where the plan sponsors and providers say there are, as well as to ensure that the assets will be there to pay off the participant’s retirement benefits. So auditors are concerned about a plan sponsor’s internal controls as well as any issues that threaten the tax qualification of the retirement plan.

Most auditors were never interested in plan expenses of the plans they reviewed because quite honestly, up until a few years ago, no one else did either.  It used to drive a lot of retirement plan professionals crazy that auditors didn’t question plan fees (count me as one), but auditors contended that expenses were irrelevant to the purpose of their audit.

Well, things have changed and plan sponsors with audits have more work to do.

One of my RIA clients (cheap plug here) forwarded me a list of questions that one of their audit-required plan sponsor clients forwarded from their auditors. It was a litany of questions regarding 408(b)(2) fee disclosures; plan expenses, and whether the plan sponsor exercised their fiduciary duty in determining whether plan expenses are reasonable for the services provided.

So if a plan sponsor did nothing about plan expenses and truthfully told their auditor of their malfeasance of fiduciary duty, I am sure that those responses will end up somehow in the audit report, which of course is filed with a Form 5500 that is readily available to the government and to the public.

So plan sponsors with an audit have some work to do to show their auditors on whether they are exercising their fiduciary duty in only paying reasonable plan expenses.

Again, I didn’t make the fiduciary threat up; it’s already there.

The snowball fect is term for a process that starts from something that is small and builds upon itself, becoming larger and also perhaps potentially dangerous or disastrous. The idea is that an avalanche can be started by a single, rolling snowball, hence the term.

When it comes to retirement plans, we have a snowball effect. The effect is usually when the plan sponsor has a plan problem and decides to either try to fix it on their own or lean on legal counsel with absolutely no training in ERISA.

I have seen too many plan sponsors pay tons of penalties and excise tax to correct problems that could have cost them a lot less if they were represented by ERISA counsel.

I remember being contacted a few months back by a financial advisor whose client’s plan was disqualified by the Internal Revenue Service and was asked if I could possibly represent them in negotiating down any other Internal Revenue Service penalties. I told the advisor I should have been called a lot earlier because the transgression shouldn’t have led to the plan being disqualified if they had some decent ERISA counsel.

Too many plan sponsors think they can handle an audit or inquiry or investigation on their own and they’re wrong unless they are a third party administrator or ERISA counsel.

In the past, I have been able to negotiate penalties down for failures to file Form 5500 on time when plan sponsors not represented by counsel have paid through the nose in penalties. Too often plan sponsors are so more interested in saving on legal fees, that they end up cutting their nose to spite their face by paying more in penalties.

ERISA counsel have the experience to handle the government and I have found a deference by IRS and DOL auditors in dealing with professionals who understand the ramifications of the situation, which often leads to a better resolution.

Using non-ERISA counsel is a mistake, like hiring a dentist to do a colonoscopy. ERISA is a different animal than what most attorneys handle and I have found there is no room for lawyers who want to dabble in ERISA because it’s not something you can dabble in.

Once a plan sponsor gets that initial inquiry, they need to contact ERISA counsel and their TPA to draft an action plan on how to handle because often the IRS and the DOL may use an audit to investigate a major complaint. Having a lack of experience in handling a governmental audit can make things so much worse.