The Rosenbaum Law Firm P.C. Blog

Of all the articles I have written, the recent one about The Worthlessness of 401(k) Fiduciary Warranties has gotten the greatest response. I thank all my readers who have had a hand in building my national ERISA/ retirement plan practice.

Two things that people have mentioned about the article:

1. Several people including a former ERISA litigator said that a plan sponsor will never be sued for failing to make a broad range selection of investments under ERISA 404(c). While I respect their opinions, I never like speaking in absolutes. As Obi Wan Kenobi said in Revenge of the Sith, only the Sith speak in absolutes.

2. A good friend of mine point out that the biggest purveyors of these warranties are insurance companies. The business of insurance companies is to insure risk. So he reasoned that what does it say about the risk when they give these warranties for free? Couldn’t have said it better myself.

When Eliot Spitzer was campaigning for the Governor of New York, he was well known in his role as a tough as nails Attorney General. In his campaign ads for Governor, Spitzer claimed that on “Day 1, everything changes”.

Having been a follower of New York state politics, I knew that Spitzer was going to a flop because he was too arrogant. Anything who knows anything about what goes on in Albany knows that very little changes, especially in one day as Spitzer promised. Change takes time; it takes tweaking; it takes trial and error. Of course, Spitzer lasted about 14 months as Governor because of his penchant for his prostitutes.

I’m sure than when fee disclosure regulations for retirement plans were finally implemented last July, many people thought that also on Day 1, everything was going to change.  Fee disclosure is a game changer for the retirement plan industry, but it’s a change that will take time.

There needs to be tweaking as the Department of Labor (DOL) is noticing that most plan sponsors don’t understand the jargon of the disclosures.  The DOL is considering adding a guide requirement so that plan providers can explain the fees in the fee disclosures that were supposed to explain the fees. The plan providers who used to hide the expenses they were receiving are still getting away with it, by just disclosing their inflated fees.

Most of all, plan sponsors need to be trained over time to expect these fee disclosures and the need for them to benchmark their fees. Like the usage rate of seat belts in New York, it took over 20 years for 90% New York drivers to use seatbelts even thought it’s the law (rate of usage right before the law was 16%). It will take quite a but of time for plan sponsors to understand disclosures and what to do with them.

Fee disclosures will have a profound effect on the retirement plan industry; it will just take more than a Day to change everything.

My latest JDSupra.com article can be found here.

The New York Times had an interesting article regarding the tyranny of law firms using the billable hour.  I worked for a couple of law firms for a couple of years and it wasn’t my cup of tea. I’m not a big fan of any business that is predicated less on the quality of service and more on how much you bill.  Billing by the hour leads to abuse, I know because I was told by a managing attorney once that I did my work too quickly and I should drag it out for billing purposes. My lack of billing is probably the reason I left.

For my national ERISA law/ retirement plan practice (cheap plug here), I bill 95% of my work through a flat fee.  I like it because the client doesn’t have sticker shock; the bill has an ending, which is open ended when billed by the hour, often predicated on how much the law firm can get you for.

Luckily, financial advisors don’t bill by the hour. Typically they charge a fee based on a plan assets. Some financial advisors have resorted to billing on a flat fee basis and other advisors considering the move. I applaud any flexible billing options and the advisors who do that.

I’m not saying that all advisors should utilize a flat fee. Unlike a lawyer’s billable hour, an asset-based fee knows an end, which is the limit on plan assets. For the advisor considering a switch to a flat fee basis, it’s all a numbers game. Developing a flat fee that will compensate you and not undercut yourself. This is advice from a former employee who undercut his own salary time and time again. In addition, do you have the clientele that will understand the value of a flat fee or have absolutely no interest in how you bill. Flat fee billing is also a nice marketing gimmick, can you market that effectively?

Again, it’s not for everyone. Probably a better fit for those getting into the 401(k) space for the first time rather than someone entrenched because a change to a flat fee can unwittingly give an advisor a huge pay cut.

As with any business decision, an advisor considering a flat fee needs to determine where it makes sense and where it doesn’t because you don’t have to pick an asset based fee vs. flat fee, you can offer a mix of both.

My newsletter geared towards financial advisors and third party administrators can be found here.

One of the many projects that the Department of Labor (DOL) is working on; gets us back to the Section 408(b)(2) disclosures.

Shortly, the DOL may amend the disclosure regulations to require a guide or supplement should be issues to accompany the fee disclosures that service providers hand out to their plan sponsors.  Apparently, the DOL thinks that the disclosures or multiple forms handed out to medium or small sized plans have been confusing.

Of course they are, these plan provider disclosures were most likely written by lawyers whop get paid hourly to write documents in legalese and then get paid hourly to interpret these legalese documents. I know, I used to work for some of these firms.

So if you are a plan provider, you may want to look at your current disclosures and see what’s in easy to understand English and what’s not. The guide that the DOL may require is probably some form of index that will allow plan sponsors to identify where the required fee disclosures are in the disclosures.

I think that if your disclosures need some sort of map, then there is something clearly wrong. While we all need legalese to limit our liability, it’s important that plan sponsor understand your fees, to allow yourself to be competitive in the marketplace because confused clients aren’t particularly happy clients.

If there is any guidance from the DOL on any guide requirements, I’ll let you know.

My latest JDSupra.com article can be found here.

When a rock band goes into a studio to record an album, they start writing new songs. Some members of the band will start a riff that can become the next hit, become part of the album, or left behind as something that doesn’t get finished. Sometimes, the band will go back to some of their unreleased material, rework it, and release this unreleased stuff as a new album.

When it comes to networking with other retirement plan professionals, you need to know that you rarely get referrals that lead to clients right out of the block. Relationships with other providers take time and don’t necessarily lead to leads that directly lead to clients. Sometimes you’re given an opportunity that gets a phone call with a prospective call and nothing else. Some opportunities get cold and then get warm again.

The point is that when you network with other providers in this space, whether it’s a TPA, an ERISA attorney, or an auditor, it’s more than just an opportunity to get clients. Developing a network of highly competent retirement plan providers can augment your practice. Instead of hiring an ERISA attorney or an expert on plan administration, you can pick up a phone and call an expert, most of the time the advice is free. When you have existing and potential clients, a good relationship with plan providers can get you the help you need in managing your clients. They can help you with plan design issues, plan document issues, and spotting problems that can be nipped in the bid before causing the client potential harm.

Networking is about developing relationships; it’s not about the quick score. Referrals and opportunities can come indirectly as the result of relationships with these providers; you can be surprised how the power of the word of mouth works.  Finding the right team of plan providers can help you in ways much more fruitful than just clients.

I was featured in a benefitspro.com article which can be found here.

The movie Seven taught me that the seven deadly sins are wrath, greed, sloth, pride, lust, envy, and gluttony. Over time, I’ll develop a deadly sin list for retirement plan providers. I have touched upon the first deadly sin for plan providers, which is arrogance, which I have covered before.

The second deadly sin is complacency. Complacency is a two fold, being complacent in the retirement plan industry and being complacent with your clients.

Any business whether it’s retirement plan based or not, has to change with the time because fact is that no industry is immune to change. You need to be ahead of the game and understand any new changes that go on. Ask the folks at Blackberry about complacency. If you park your car on the raceway oval, don’t be surprised everyone else passes you by.

Working with your plan sponsor clients, complacency is all about taking your clients for granted and not reviewing their plan for new plan design studies, cost analysis, or plan provider searches. I’ve seen too many plan sponsors lose clients because these reviews come from a competing provider. Time and time again, I would hear the client ask why their current provider didn’t think of a new plan design first or review of plan fees.

Retirement plan and the retirement plan industry are fluid, which means what is good today maybe not good for tomorrow. You can never be too complacent because losing your client or your competitive edge is just around the corner.