The Rosenbaum Law Firm P.C. Blog

As I have always said, it would take some time to figure out the effect of fee disclosures on the retirement plan industry.

Things should get a little more interesting as ERISA Attorneys Fred Reish and Bruce Ashton have proposed to the Department of Labor (DOL) that the DOL should institute a voluntary correction program to let plan providers and registered investment advisors (RIAs) to correct errors in relation to fee disclosure and pay a set fee rather than get penalized in a larger amount  later by the DOL (which may equal all the fees that the provider or RIA received from a specific plan).

This program would be akin to the IRS’ Voluntary Compliance Program and the DOL’s Delinquent Filer Voluntary Compliance Program.

I’m all for it because I believe that voluntary compliance programs would ensure more compliance by allowing plan provider to correct errors and then punish those providers who don’t when they get caught on audit..

When it comes to retirement plans, inadvertent errors happen all the time. I know, I’ve made a career of helping correcting them.  Working on retirement plans doesn’t require use to be prophets, providers and plan sponsors don’t have to be perfect, they just need a method to strive to be. Allowing plan providers to correct inadvertent errors encourages compliance by having providers acknowledge them while no compliance program encourages them to bury their errors. The movie Casino told us about the holes in the Nevada desert where problems are settled and buried, let us not have a retirement plan landscape that encourages providers to bury their errors and problems when a voluntary compliance program can encourage them to correct inadvertent errors and punish those providers who defy compliance or make “advertent” errors.

My latest article for JDSupra.com can be found here.

It’s that time of the year as the Internal Revenue Service announced their 2013 Retirement Plan Limits.  Some limits stay the same, but some have increased.

• Annual Compensation:  Increases from $250,000 to $255,000
• Elective Deferrals

◦                      401(k)/403(b)/457:  Increases from $17,000 to $17,500

◦                      SIMPLE IRA: Increases from $11,500 to $12,000

• Catch-Up Contributions

◦                      401(k)/403(b)/457: Unchanged at $5,500

◦                      SIMPLE IRA: Unchanged at $2,500

• Annual Additions Limit

◦                      Defined Contribution Plan:  Increases from $50,000 to $51,000

◦                      Defined Benefit Plan:  Increases from $200,000 to $205,000

• HCE Determination:  Compensation unchanged at $115,000
• Key Employee:  Officer compensation unchanged at $165,000
• Social Security Wage Base:  Increases from $110,100 to $113,700

A recent article stated that with 401(k) fee disclosure, many mutual funds are starting to offer cheaper fund share classes, as disclosures are likely to have put some pricing pressure in the industry.

MFS, Putnam, John Hancock, Janus and Columbia separately began offering cheaper versions of some of the funds that are used in retirement plan accounts. Some of these share classes are more than 60% less expensive than the retail share classes of the same fund.

The article mentioned that cheaper share classes would have less revenue sharing payments to pay out that more expensive share classes. Less revenue sharing payments used to offset plan expenses, the article reasoned that administrative expenses would go up.

That’s nonsense because that presumes that every penny cut from administrative expenses are directed towards revenue sharing (whether that’s sub t/a, 12b1s, etc.) and that mutual fund expenses don’t matter in total administrative expenses.

The article stated that MFS now offers a retirement-plan share class of its $21 billion MFS Value fund, which costs investors $60 a year for every $10,000 invested. That compares to the company’s four other retirement share classes that charge anywhere from $69 to $169. If you were in the $69 share class and you then go to the $60 share class, was all $9 going to pay revenue sharing? Not likely since that $69 share class was bare bones and likely paying very little in revenue sharing. What if you switched from $169 share class to $60? Was $109, all revenue sharing? No, it can’t because funds don’t pay that much in revenue sharing.

Cutting out revenue sharing from Plan does not increase plan expenses because participants suffer more pecuniary harm with more expensive share classes. Revenue sharing is a slight of hand if the plan sponsor and their financial advisor believes that revenue sharing funds make plan administrative expensive less expensive than much cheaper funds like Vanguard that never pay revenue sharing.

There is nothing wrong with revenue sharing if it’s all disclosed, it just doesn’t reduce plan expenses more than using less expensive funds that don’t pay revenue sharing fees.

In addition, while this is a great step, it doesn’t mean anything if a plan sponsor is still working on funds that are in more expensive share classes The big Edison International case that held that a fiduciary has breached their duty of prudence by using retail share classes when cheater institutional share classes are available. I’ve seen too many plans over the past few years that have higher share classes in their Plans when cheaper share classes of the very same funds were available.

So while 401(k) fee disclosure will further put pricing strains on mutual fund costs, there are still quite a few 401(k) plans that will still not take advantage of it.

I remember when Honda unveiled their new Acura line of cars in 1986 and how the cars where befuddled with problems and I remember when IPhones had antenna issues. While we would like new products and services to be released without any issues, some things are a work in progress.

There have been many issues concerning 401(k) fee disclosures since disclosures to plan sponsors and participants were made mandatory.  When you have had a 30+ year old industry cloaked in fees, a transition to transparency wasn’t going to be easy.

A recent study of 500 small-business owners, commissioned by ShareBuilder, found that 80% of those who remembered seeing the disclosures still had questions after reading them. That means everyone in the 401(k) industry has some work to do.

While I have been a firm supporter of fee disclosure, I do see some issues.  I think the disclosures could be more reader friendly, but that will take the Department of Labor time to tinker with it.  I think there has still some issues that need to be work out on the plan sponsor disclosures. I do believe that some of the providers offering wrap products or annuity products may have some outs in disclosing all the fees. It’s great that a plan sponsor can see what their financial advisor and third party administrator (TPA) make in fees, but I think there are still some gray areas revolving around wrap products and even model portfolios where plan sponsors may not see all the fees that are out there.

In addition, we need to further educate plan sponsors on their responsibilities in analyzing the fee disclosure information they receive as well as the need to benchmark. What good is fee disclosure if plan sponsors use them to wrap fish or put it in the back of the drawer. It’s a work in progress and we should all work on it until it gets done right.

Being a retirement plan financial advisor is a never-ending battle to maintain your book of business while trying to grow it.

When it comes to networking and social media, I think the way you meet potential clients and potential sources of referrals is to try it as if you were dating, It takes time to develop relationships because relationships require trust and that requires time.

Did you ever succeed in dating by trying to take things quickly, trying to roll up a month’s worth of dates into one?  I don’t know about you, it never worked for me.  When you watch it on film and television, you’re kind of amused about the fellow at the bar with the really cheesy pick up lines and wonder how he ever achieved anything with someone of the opposite sex? But is it that different than the insurance agent I never heard from before who states on a business-networking site: “Lets meet to discuss what we can do together with your clients.”?  Do I know you? Do you think the advisors who referred me my clients will mind?

The greatest relationships that I ever made in this business whether it’s been clients or financial advisors or third party administrators that became great sources of referrals is that it has taken time. It has taken time because both sides need to develop trust and that takes time. In addition, I have never taken a meeting or had a phone call with any advisor or TPA with the idea that I had to sell them on being a client. The reason I have done that is because I’m more interested in developing a long-term relationship instead of a quick score for a legal bill.  If you have a good enough message about your practice, you don’t need a hard sell, the way you handle your practice will sell itself.

I have talked with hundreds of advisors over the years. A few have become clients; more have been sources of referrals. Most have not, but that’s fine because the funny thing about developing relationships is that you may not reap any benefit until several years later when that person you met may recommend you to someone who then recommended you to someone else, who then asked you to help them on a matter that makes them a client. Quite honestly, I have never received a client from someone who stated before I met that they can get me clients. Possibly because they don’t have any clients or more likely that they think that can easily get business from me and my spheres of influence by promising me that.

The point is that you shouldn’t try too hard. That means when it comes to networking with people either in meeting in-person or online, you should take things slow and not try to make a hard sell because are likely going to scare away someone that can be a valued partner to help build your practice or someone that can act as a referral of business.

You don’t need to cut fast to the hoop to score; you just need to get it in the basket.

For my latest JDSupra.com article, please click here.

As stated before, I started The Rozalia and Emil Berla Memorial Scholarship Fund that will benefit a Stony Brook University undergraduate who has shown excellence in history, primarily the history about the Holocaust.   This scholarship is named for the two greatest people I ever knew, my maternal grandparents who both survived the Holocaust.

$1,500 has been raised so far, so I understand that people are hesitant to given if they have to pay by check and mail it in. So the Stony Brook Foundation have informed that you can donate online through this link. All you need to do to make sure the scholarship gets the money is to type “Berla” in the fund designation. Again I appreciate any help in raising money for such a good cause.

I have been in the retirement plan business working as an ERISA attorney for 14+ years. Over the past 14 years, you hear a lot of new ideas, products, or services, and the fact is that most of them suck.

A few months back, I had the pleasure of meeting Marc Robinson from SaverNation and I think SaverNation the greatest idea since sliced bread. I take that back, what’s the big deal about sliced bread? A bread and a knife? It’s better than sliced bread and it’s probably the best thing to happen to 401(k) plans since 401(k) plans.

Kidding aside, SaverNation is an ingenious way for 401(k) plan participants to save for retirement by rewarding them for things they ordinarily would do anyway, shop.  Through their tested process, a participant’s online shopping can reward them with deposits in their 401(k) plan.  So it’s a cash back rewards program, sort of a UPromise for retirement.

We have a retirement crisis in this country as Social Security benefits are at risk and most companies have mothballed pension plans while 401(k) participants don’t save enough. So I like SaverNation because I like any program that will get participants to save more for retirement.

If you are a retirement plan sponsor, financial advisor, or third party administrator, you have the opportunity to get in on the ground floor on something that will change 401(k) plans and retirement savings for the better. Right now, it wouldn’t cost you to set this service up and it is a tremendous benefit for participants, plan sponsors, and plan providers. For more information, check out SaverNation and tell them Ary Rosenbaum sent you.

A Long Island business newspaper named my old law firm’s administrator as its Chief Financial Office of the year and the first thing I asked is: “How big was the ad?” That’s because my old law firm is a regular advertiser for this publication and I appeared in it a handful of times when I was there and I’m sure because my firm helped pay that newspaper’s bills. Maybe that law firm administrator is a really great CFO, I only thought his expertise was self-promotion.

The point is not to make fun of Right-Said Fred, but the point is that awards and recognition can be bought and sold. Sort of like your law firm being a co-sponsor of an event honoring you (sorry, Lois).

So when looking for plan providers as a plan sponsor, don’t be over wowed by some of these publication awards like the “100 Most Important People in the 401(k) industry” or some unknown certification because these credentials can be bought and sold.  If you don’t know the criteria for selection or the group of selecting it, you have no idea if the award or credential is real or not. It’s like Kosher food; there are now over 400+ different organizations that certify Kosher food. If you are an observant Jew, you’re not going to eat something certified by an agency where you have no idea who is actually doing the certification because some Rabbis are less reputable than others.

So when a plan provider is giving you their credentials and there are some credentials that aren’t from an organization you heard of, take it with a grain or salt or do some digging to determine whether that credential means something or not. Otherwise, you may be stuck with a CFO who claims he’ll help your practice, except he’s too busy writing articles about his work.  Sorry, Fred, but it was better the way it turned out.