The Rosenbaum Law Firm P.C. Blog

I am a very opinionated guy, I’m sure you have noticed. I’ve never been one to go with the flow, heck I’m a New York Mets fan and I have never watched an episode of Game of Thrones, Mad Men, or The Walking Dead. My opinion has ruffled a few feathers over the last few years, but I am who I am and I don’t think I’d have a successful practice without my opinion.

Too many people in the retirement plan industry want to think that everything is great and I’m too honest to admit that everything is fine when it’s not. So I’m going to get something off my chest and I’m sure some feathers will be ruffled.

A year ago, the Department of Labor (DOL) issued an advisory opinion that decimated the use and value of what was once termed “open” multiple employer plans (MEPs). Basically, the DOL stated that for a MEP to be considered one plan and to have one 5500 issued that would cover all adopting employers, there would have to be some sort of nexus, a connection between all adopting employers and the connection can’t be that they all use the same provider.

The reason is that the advisory opinion was issued by the DOL was that one MEP decided to seek a ruling. When I was a student in college, I took a political seminar taught by Morton Blackwell’s Leadership Institute and Morton’s #1 motto was that you never give you a burecarat a chance to say no. If you ever saw how the MEP was set up and how high the fees were, you knew that being pigs at the trough, that a bureaucrat would say no to them if given a chance.

The plan sponsor of the MEP was affectively a prop set up by the plan provider; it essentially was the financial advisor’s later ego. The fees were huge, maybe because it used an insurance company platform, maybe not. An ERISA attorney who I have tremendous respect for submitted the Plan to get it approved as an Open MEP because the plan apparently wanted it settled whether an Open MEP could be recognized as a single plan (so a single Form 5500) because some DOL officials thought otherwise.

Thanks to this MEP for trying to get DOL approval, but it ruined the MEP business for everyone. Many providers including myself who put together MEPs that did what they were supposed to do, offer limited liability and lower plan expenses were forced to rearrange their plans in order to meet the criteria set forth by the DOL in that advisory opinion.

I believe the application by this MEP was reckless because this was not the type of Open MEP that should have sought approval because its fees were exorbitantly high (the opposite of what MEPs are supposed to offer) and the plan sponsor was a subsidiary of the plan provider, it essentially was a legal fiction, a puppet company only created to serve as a plan sponsor.

Did this Advisory Opinion cause the MEP provider much harm? Not really because they are at it again. Their MEP is now a MEAP, which they call a Multiple Employer Aggregation Plan (MEAP), which pretty means a MEP with a 5500 form for each employer and the plan sponsor serving as the ERISA 3(16) administrator. The fees are as high as ever. For example, a $900,000 plan that joins the MEAP as an adopting employer pays 120 basis points plus $23 a participant. The financial advisor gets a 40 basis points trail, but luckily that is embedded in that 120 basis point asset based fee. If you are an adopting employer who has no assets, well you’re out of luck because you pay 230 basis points. Remember that doesn’t even include the expenses of the investment options under the Plan.

A leopard can’t change its spots, so a MEP that charges sky high fees just becomes a MEAP charging sky-high fees. A year later, the DOL and IRS have still not resolved the discrepancy between the two of them on whether Open MEPs can exist as they did before last year’s Advisory Opinion. Unfortunately, the MEP leopard lives on while other MEPs who charged minimal fees and were great examples of how MEPs should be were forced to dissolve. Tag, they’re still it. Actually the adopting employers are it or are they just paying it? Feel free to discuss.

Last weekend was the final game for my daughter’s second grade soccer team in Oceanside, New York, which is nice because so much of the community is involved.  It’s been a trying season since so many of us including our family were decimated by Hurricane Sandy.

While I was at the game, I noticed the Human Resources Director at my old law firm and I never forget a face. I didn’t say hello because one of my shortcomings in life is that I can hold a grudge.  My grudge stems from the law firm’s 401(k) plan. When I got there, I was asked by the firm’s managing attorney to take a look at the plan with the plan’s trustees, which are the aforementioned HR Director and a property tax partner.

The plan was in absolute shambles, again under the direction of the HR director and this property tax partner (who I had a strike against already since he’s a New York Islanders fan). The 401(k) plan had $25 million in assets and a law firm partner who claimed to be an ERISA attorney (but had nothing to do with this plan). Yet the plan had no financial advisor, no investment policy statement, no investment education given to plan participants, and no change in the fund lineup. This was a disaster of a plan and probably one of worst run plans I have ever come across, especially for that size.

I scared the two trustees into action and told them they needed to hire a financial advisor because that could help with the bulk of the plan’s problems. I gave them quite a few names that would be excellent to talk to. I was never consulted about the advisor selection and they picked an advisor that I did not recommend.

While I suggested a third party administrator change (there was an excellent TPA two floors up from our Garden City offices), they made no change. They later made a change without letting me know until it was done. I felt embarrassed and betrayed because of my 9 years of working for TPAs and I could have given insight as to which providers might be a good fit. The fact is that I like the provider and the salesperson for that provider is a friend of mine is immaterial to me, I just felt it was a slap in the face.

Part of the grudge was that I was the 401(k) expert, yet the same people (the plan trustees) who ran the plan into the ground with no background in the retirement plan business thought that they knew better than me and it was best to keep me out of the loop especially when I had my money in this plan.

I left the firm maybe 4 months later and one of my best friends in the business, the salesman for that upstairs TPA knew I wasn’t long for that place especially after than “insult”.

Retirement plan experts are there for a reason. If you are a retirement plan sponsor or another plan provider, it’s important to listen to the retirement plan experts for their input. You don’t have to take their advice, but it’s important to listen and then make the decisions based on or not based on the advice.

I should be a better person and let it go, but quite honestly, I don’t think that I was insulted in my almost 15 years as an ERISA attorney as I was when that HR director purposefully kept me out of the process that I initiated to save our 401(k) plan.

My latest newsletter geared towards retirement plan professionals can be found here.

The fact is that sometimes, bad things happen to good people.  That can be said about retirement plans and the good plan sponsors and providers who do their job. No matter how great a job they do, the threat of potential liability is always there.

No matter how a plan sponsors takes of their fiduciary responsibility and no matter how professional a plan provider is won’t preclude someone from suing them.

Just because a plan participant doesn’t really have a case against a plan sponsor or a plan provider that is doing their job., doesn’t mean they can’t sue. Competence doesn’t preclude frivolous lawsuit or litigation that has very little merit.  Competence will only mean that there will likely be no liability, just the headache of  a lawsuit.

I know a fiduciary who was sued because the previous plan fiduciary stole money the year before. These things happen because sometimes when someone hires an overly ambitious litigator, people who get sued when they do nothing wrong.

We can talk about how plan sponsors and providers can minimize their potential liability, but they can never eliminate the threat of litigation.

When I was a junior at Stony Brook, I took a course on Government Regulation of Business. We had a textbook in class, I never knew why because all of the exams were based on the lecture notes. I took some great notes and got an easy A. Taking good notes was a key for me in passing three different state bar exams (I am a glutton for punishment). I believe that my note taking was the difference between passing the New York, Massachusetts, and California bar exams.

When it comes to being a retirement plan sponsor, it is incumbent for every plan sponsor to take good notes and keep good records. It can be the difference between being liable for a breach of fiduciary duty and having a successful defense against that claim.

Keeping records of any fiduciary meetings, all education/enrollment meetings including copies of the education materials, are a solid start. Copies of all plan documents, amendments, valuations, Form 5500s, and investment policy statements. A lot of financial advisors and third party administrators can help you by giving you a fancy binder with copies of all of these materials.

In Monopoly, a get out of jail free card is quite valuable. Good fiduciary records and practices are the plan fiduciary’s get out of fiduciary liability card.

My latest JDSupra.com article can be found here.

My latest JDSupra.com article can be found here.

You must know about the shoemakers’ children and how they go barefoot and have no shoes. In the retirement plan industry, we have retirement plan providers and their employees’ retirement plan.

I know, I have been there. The third party administrator I worked for didn’t have a great plan, it was often alleged we switched platforms to salvage our premier  pricing with a certain insurance company.

So for me, it’s no surprise that Fidelity is being sued by a former employee over their own 401(k) plan. While I don’t know all the facts and it will be decided in the courts, one fact (if true) fascinates me.

I often waste time analyzing irrational behavior through rational eyes and I always ponder: “what were they thinking?” So when I hear that part of the complaint is that all of the mutual funds in the Fidelity plan were Fidelity funds, I ask: “what were they thinking?”

When you have thousands of mutual funds out there and hundreds of mutual fund companies, it’s just amazing that any plan sponsor (whether it’s a mutual fund company or not) thinks it’s prudent that every fund on the plan’s lineup is from the same mutual fund company. It doesn’t look right and it doesn’t look prudent, especially when there is no mutual fund company that has superior success in every sector of the market. In addition, any plan that only has funds from the same mutual fund company are often being administered by bundled providers who are mutual fund companies (i.e, plan being administered by T. Rowe Price with only T. Rowe Price funds). How is a plan sponsor able to offer a rational explanation that it was prudent to select mutual funds from one company? I don’t think they can, especially when the mutual fund company is one of the plan providers.

Often in the retirement plan business, if it doesn’t look right, there is usually something wrong. Any plan using the mutual funds from only one mutual fund company is a plan with something wrong.

This is one of the very few times, I am asking for two cents on a specific situation instead of offering my two cents.

As I have discussed before, I believe that ERISA §3(16) administrator/fiduciary services can be one of the next big things out there. But it’s not the solution for all plan sponsors and it’s not a solution for some third party administrators (TPAs) to offer.

So my question is for TPAs. If for some reason you have no interest in offering 3(16) services (and there are a few reasons), would you offer the services of a third party who only offered 3(16) services? Just asking for a colleague of mine who is interested in offering a 3(16) service and does absolutely no TPA work.

Please let me know through e-mails, blog posts, or posts in LinkedIn.

Thank you.

As an ERISA attorney with a nationwide practice helping plan sponsors and plan providers, the most annoying thing is when you hear a plan sponsor (sometimes with the guidance of their attorney who has 0% knowledge of ERISA) tell you that they don’t believe that they have any issues with their 401(k) plan sponsor when it’s clear that they do.

These plan sponsors will tell you that they aren’t likely be sued or be under governmental scrutiny because they are one of the small plans and they only like to make examples of the larger ones.

I have seen a lot of stuff through my 40+ years, but one thing I know is that it only takes one. It only takes one person to destroy the entire “world”, the world being something other than the actual world. It takes one co-conspirator to turn good to sink a criminal conspiracy.  It takes one employee to complain to end a hostile workplace. So it will only take one plan participant to sink a plan sponsor who is not handling their retirement plan with the requisite fiduciary duty that the plan requires.

Plan sponsors have too much confidence in their position that they won’t suffer any harm in the mishandling of their retirement plan. The confidence is misplaced because a class action lawsuit is just one avenue where a plan sponsor can be harmed.

Having been involved in quite a few Internal Revenue Service and Department of Labor (DOL) audits, I can attest that only one plan participant to complain about a plan sponsor’s retirement plan is enough. Quite honestly, my two largest DOL audits were directly as a result of plan participants complaining to the DOL because of their claims that they were due benefits that they didn’t get. Sometimes, it’s better off for a plan sponsor to get sued through a class action that going through an audit. Thanks to the fee disclosure regulations, the DOL’s use of the auditing process will be ramped up. That is why a plan sponsor needs to clean up their act, despite their attorney’s claim otherwise.

Another threat is the vindictive former employee. Having worked for someone else for the first 11 years after law school, I have seen quite a few co-workers who were terminated. Some were as a result of a cut back in business, but there were a few who deserved it. Some of these employees go quietly and some don’t. Some of these former employees had to get back at their employers for letting them go.  I remembered a couple of former administrators who complained about discrimination for their discharge. Having worked with these administrators and having worked for the chief operating offer who was a miserable man, I can attest that those terminations were not as a result of any discrimination unless it’s illegal to discriminate against the incompetent.

That being said, a poorly run retirement plan can be the one weapon a former aggrieved employee could use to get back at a former employer. Call it blackmail or anything else you want to call it, but complaining or threatening to complain about a poorly run retirement plan could be used as a way to get a small (probably less than $5,000) settlement for the incompetent former employee. Again, it only takes one to make a plan sponsor’s world spin out of control.

Seeking the guidance of solid and cost effective plan providers is like going to the dentist. It may not be the most pleasant experience, but it’s a necessary one to maintain health now and avoid greater harm later.