The Rosenbaum Law Firm P.C. Blog

People ask me all the time how I can write so much about retirement plans. The answer is that I worked for my college newspaper called the Statesman. When you have an empty 16 page newspaper and about 12 hours to write, you have to be quick on your feet. The motto of the Stony Brook Statesman was “Let Each Become Aware”.

Let each become aware to me is not only the motto of my school paper, it’s my belief that through information eventually will come knowledge. I have always been a proponent of 401(k) fee disclosure for plan sponsors and participants because plan sponsors and participants should become aware.

While information can become knowledge, it can only become knowledge if it is spread and taught to those who should know. A recent study by Sharebuilder shows that retirement plan providers have long way to go in educating plan sponsors about the fees they charge.

45% of the plan sponsors in the study thought 4% was a reasonable fee to pay for a 401(k) plan. The average all-in 401(k) fees paid by plans with less than $1 million in assets is between 0.99 percent and 1.83 percent.

In addition, while a large majority of providers provided the required disclosure to plan sponsors, only 50 percent of the companies in the study recalled receiving fee disclosures.

When New York State became the first state to require seat belts for drivers in 1984, compliance was low. Eventually, all new drivers had to wear them in order to pass the road test for a license, so any driver taking drivers education after 1984 only started driving while wearing seat belts. Over time, compliance grew from 12% in 1994 to almost 90% in 2010. That is how I see plan sponsors understanding fee disclosure, it will take time and plenty of education.

I still can’t get over that 45% of plan sponsors interviewed thought 4% was a reasonable administrative cost for 401(k) plans. 4%? We have some work to do.

My latest JDSupra.com article can be found here.

The question has been asked by many financial advisors, and third party administrators (TPA), and a reporter: “have you heard from any plan sponsors who didn’t get their disclosures from their plan providers?”

The answer is no. While I don’t think the disclosure compliance rate is 100%, I’m sure it’s more than 98%.

For the plan providers that didn’t get the required disclosures, I’m sure we will hear from them later. The reason is that too many plan sponsors are reactive, rather than pro-active. That means that if they haven’t received their disclosure, they aren’t going to bother to ask the providers for one and they won’t. They’ll let the Department of Labor (DOL) get them one after being slapped with a prohibited transaction on audit.

In addition I am sure that there are plan sponsors that still don’t know what disclosures are and the Section 408(b)(2) regulation requirements just like there were Japanese soldiers still fighting World War II 25+ years after the war ended. Again, the only way this is unearthed if another plan provider or sponsors tells them or they get socked by the DOL.

So while I haven’t seen a plan sponsor that hasn’t received a disclosure from their provider or failed to provide disclosures to participants under Section 404(a)(5) regulations, I’m sure they do exist.

While plan providers deserve a pat on the back for getting these disclosures out, I’m awaiting the impact of fee disclosures. Will there be price pressure for providers? Will the lowest cost providers win out? Who will suffer from fee disclosure? Which provider is going to be the first one caught for not providing fee disclosure or providing false information? Looks like it will be some time before we see the winners and casualties of fee disclosure.

An article on benefitspro.com that I was featured in can be found here.

A third party administrator (TPA) that has its own affiliated registered investment advisor business is called a producing TPA. What they produce, I still have no idea.

I always have trepidations regarding producing TPAs because of my experience with one I worked for and the abuses that went on when the RIA arm was directing the selection of mutual funds, mainly for revenue sharing and pocketing that revenue sharing without letting the client know.  In addition, we were known for stealing business from the brokers and advisors who brought us clients.

Of course, folks who work for producing TPAs will point out these abuses are a rarity and that the bulk of producing TPAs don’t target mutual funds for revenue sharing and don’t steal business from referring brokers and advisors. I’m sure that’s true and I believe the fee disclosure regulations will curtail most of the potential abuses when plan sponsors get a disclosure of real plan administrative costs.

So the Department of Labor (DOL) recently came down on a TPA affiliated RIA for revenue sharing abuses prior to the Section 408(b)(2) regulations. USI Advisors Inc., a subsidiary of Goldman Sachs owned TPA, USI Consulting Group has agreed to pay $1,265,608.70 to 13 defined benefit plans.

The crux of the DOL’s complaint? From 2004-2010, the RIA arm made investments in mutual funds on behalf of defined benefit plan clients and received 12b-1 fees from those funds. The RIA failed to fully disclose the receipt of the 12b-1 fees, and failed to use those fees for the benefit of the plans either by directly crediting the amounts to the plans or by offsetting other fees the plans would be obligated to pay the RIA arm or TPA arm.  So they steered investments towards 12b-1 paying mutual funds and just pocketed the money without letting the clients know about it.

To be honest, what USI did in my opinion was more egregious than what my old bosses did because unlike participant directed plans, defined benefit plans are trustee directed which means that USI certainly had more influence in which actual plan investments were made. A participant directed 401(k) plan could potentially have far less revenue sharing than a defined benefit plan if participants chose more mutual funds that don’t pay revenue sharing.

Going forward, USI will have to abide by the plan sponsor disclosures by acknowledging their fiduciary role, outlining the services they offer, and the fees they are compensated by the plan or by a third party.

So this was just another reason why we need fee disclosure.

My latest JDSupra.com article can be found here.

What you are about to read is a true story and probably summarizes my two year stint at a semi-prestigious law firm. When I first started there in 2008, the Managing Attorney For Life asked the human resources director to contact me about the Firm’s 401(k) plan.

My idea in joining that law firm was to start a single employer retirement plan ERISA practice since the Firm only had a multi-employer (Union) practice. The idea was to go national and reach out to financial advisors and third party administrators that was going to use my writing and social media to build a brand. Sound familiar?

Well the H.R. director told me that she along with an ERISA partner and a property tax partner were the trustees of the plan, with the ERISA partner just leaving the firm as his office was spun off as a separate firm.

I was given a mutual fund lineup and while it was 2008, the lineup was 1998’s greatest hits. The fund lineup wasn’t updated in 10 years, the plan had no financial advisor, there was no investment policy statement, and plan participants got no investment education other than some Morningstar profiles. In addition, they never reviewed the third party administrator’s work or benchmarked the fees.

I told them that they were breaching their duties as plan fiduciaries by running the plan this way. I suggested they hire a financial advisor and I recommended a few advisors that I knew did quality work.  The TPA’s fees were unusually low and I advised them that the TPA was getting revenue sharing payments from the mutual funds in the Plan, which the trustees swore was not true (but actually was).

I gave them the names of a few advisors who were interviewed. In addition a mutual fund company TPA that I recommended as a potential fit for the firm recommended an advisor they should speak to.  Of course, they hired the advisor I didn’t recommend and I was given no insight into their decision-making nor was I consulted in any way.

When it came to changing the TPA, I was completely left in the dark. The mutual fund company TPA I initially recommended was interviewed along with an insurance company TPA which I found a little odd since the plan did have $25 million+. I had other TPA suggestions, but I was never consulted. I never knew TPAs were being interviewed until the rep. from that mutual fund company told me. Well at the end of the day, the insurance company won out even though the advisor that the mutual fund company TPA recommended was hired and apparently didn’t return the favor if you know what I mean. Other than getting a few jabs in a few years later, my point is that the folks who were comatose for 10 years were probably the least informed in making any decisions. The problem is that this was a place where associate attorneys should be seen and not heard even though I was slowly becoming a National expert on 401(k) issues revolving fiduciary liability and plan expenses.

Plan sponsors who seek out guidance from an independent retirement plan consultant, a TPA, a financial advisor or an ERISA attorney should actually listen to that guidance and use that guidance as a template in making informed fiduciary decisions.  What’s the point of hiring such professionals if you won’t keep an open mind and hire a plan provider who is so clearly not a good fit? Look at the experts you surround yourself with, look at their background, determine whether they can give you advice, and listen to it if it’s sound. If you decide to go another route, that’s fine because you are on the hook if things do go south, but at least you consulted with the retirement plan experts who likely know more than you.

A friend of mine who is a salesman at a TPA that I would have recommended if I asked told me he knew I wasn’t going to last there when he heard the story about the plan provider selection.  He was right, I am in a far better place.

My latest newsletter geared towards financial advisors can be found here.

My latest JDSupra.com article can be found here.

A veteran of the retirement plan space has started a new company that will offer registered investment advisory services, along with ERISA fiduciary services as well. The website looks nice, the fees look reasonable (20 basis points), and the advisor has an advisory board of names you know in the industry even those board members have no pay and have no say. It all looks nice for the plan sponsors so interested in hiring such a professional with over 25 years in the industry.

It all looks good, just too good. Well usually, if it looks too good, it often is. So if a plan sponsor would Google this advisor’s name, they would find some un-pleasantries about this advisor, namely this advisor was accused of many of the same issues regarding excessive fees that he is trying now to protect plan sponsors from.  Even an article denoting his return, mentioned this issue. Sort of like the fox guarding the henhouse. However, I believe in the power of redemption and if this advisor has decided to turn into a good retirement plan industry citizen, I’m all for it.

The point really here is that as a financial advisor and also working with other retirement plan providers, you should concentrate less on the fluff and more on the stuff.  Just because something about retirement plans is nicely done by an advisor, a third party administrator, or even an ERISA attorney, doesn’t mean that they actually have the experience or skill set to accomplish the services they are promising to plan sponsors.

So as a retirement plan provider or referring one to your plan sponsor clients, concentrate on those that are competent, rather than those who have flashy websites, or vague promises that their TPA services integrate with payroll.  Maybe a daily valued TPA doesn’t have a participant website that is eye candy, but maybe their fees are reasonable and their service is incomparable.

There is nothing wrong with nice websites and fancy brochures, it’s just that you have to have the background to fit the claims and services touted in your marketing materials as well as making sure that the providers you have aligned with can actually do the job that they have promised to do.

Too often, plan sponsors and retirement plan providers get burned by buying the “fluff”, hiring a provider just based on the materials and claims without digging to find out if the provider is any good. We all know too well  (for some of us, too well) of the fiduciary who was a great advocate for plan sponsors and participants because he said he was, but this fiduciary had no clothes or is accused of stealing some clothes. That being said, you have to have the background to support your claims, you have to make sure that the providers your work with are competent and aren’t known for being a lousy plan provider.

Sizzle is nice; just make sure you have the steak to go with it.