The Rosenbaum Law Firm P.C. Blog

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

Any type of item that keeps you in health is a good thing as long as you use it. So the floss I bought after my last checkup and the treadmill that I bought my wife a few years ago that is collecting dust are meaningless if they are not being used.

The same can be said about an educational policy statement that many retirement plan financial advisors are trying to draft for their clients or use as a way to solicit business.

In a nutshell, it’s a gimmick. Not a rip-off like the fiduciary warranty, but it’s not magic because any advisor could help plan sponsors draft one.

An educational policy statement (EPS) mimicked of course after the investment policy statement is really cute marketing, but absolutely of no use if the plan sponsor isn’t going to abide by it.  I like the idea behind the EPS, it’s always a great idea to memorialize fiduciary decisions with paperwork. I just worry that plan sponsors won’t actually provide the investment education that plan participants need in a participant directed 401(k) plan. An EPS is a nice idea on paper, but only effective if it’s not just on paper and being used to offer education.

What makes a good retirement plan financial advisor? Well it takes an attention to detail, an understanding of what the role to entails, and a dedication to the client. In addition, what I find is the way a good financial advisor handles other retirement plan providers.

A good financial advisor will use other retirement plan providers to act as part of their team to offer the best overall retirement solution to their client. They will lean on the third arty administrator (TPA), ERISA attorney, or auditor to assist with their clients and use them as a resource for any questions they may have, as well as a sales resource for potential clients. When I was working for a New York TPA as well as in my practice today, I have helped advisors with potential clients. It’s a feather in an advisor’s cap as it shows a potential client that they offer white glove treatment if they can get a TPA and/or ERISA attorney to offer assistance without being retained first.

The not so good financial advisor sees themselves as an island, they are very possessive of their clients and are very wary of any provider encroaching on that client. They also have no use for any other retirement provider because they don’t value what they bring to the table. They only see other retirement plan providers as referral sources which they are not because most of the referrals that these providers receive are from other financial advisors and in the rare case that they get a direct referral from a plan sponsor, they are only going to refer that client to financial advisors that they have a longstanding relationship with.

Financial advisors should target a few TPAs that they can work with and rely on with any proposals or any questions for potential clients and to assist current clients. They should also seek out an ERISA attorney who has an eye in developing relationships with the hope of getting business later, rather trying to charge for every phone call and every consultation. See them as part of your team to help augment your sales team, but they likely won’t be your sales team.

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

The two greatest people I ever knew were my maternal grandparents, Emil and Rozalia Berla. They both survived the Holocaust, both surviving their parents and siblings. My grandfather lost his first wife and young daughter; the Americans at Buchenwald liberated him.  My grandmother was liberated from the concentration camp by the Soviets and they left her to die because she suffered from typhoid. The Soviet soldiers were surprised to see her still alive three days later because my grandmother had a will to live like no one else.

They were truly an inspiration to me; they both survived one of the most horrific and barbaric events in human history to live fairly normal lives, full of love and selflessness. As a father, I try to pay that love and selflessness forward.

One of my favorite places on Earth is Stony Brook University or as I still call it, the State University of New York at Stony Brook where I proudly graduated in 1994. The place sort of reminds me of my grandparents in the sense that the place did a lot for me and taught me lessons that I carry to this day (meeting the right friends there helped as well) and never asked for anything it returned. Like my grandparents, Stony Brook never made itself out to be more than what it was, it allowed me the freedom to grow and let my voice to be heard.

So what better way than paying back the debt I owed to my grandparents and Stony Brook (which I never will fully repay) by combining the people I love with the place I love?

So I started The Rozalia and Emil Berla Memorial Scholarship Fund that will benefit a Stony Brook undergraduate who has shown excellence in history, primarily the history about the Holocaust.  The first year for the scholarship is fully funded, but I’d like to raise more money so that the fund can grow and continue into the future.

What’s the point? I’m not the guy who is going to hit you up for golf outings, charity events, etc. This is the one cause I am going to solicit money for.  I’m going to be Man of the Year somewhere where I’m co-sponsoring the event (sorry, Lois) and begging you all to attend.

So if my articles helped you in anyway or got you a client or my free phone call of advice benefited you or if I made a connection that benefited you or made a speech at your event, I only ask that you consider giving something to this tax-deductible scholarship fund. Not asking for $1,000 or even a $100, a $5, $10, or $20 donation would suffice.

They are working for an on-line donation link. Until that’s up, make checks payable to Stony Brook Foundation.  The Berla Scholarship should be noted on the memo line.

Send to Jane McArthur c/o College of Arts & Sciences, E3320 Melville Library, Stony Brook, New York  11794-3391.  All gifts will be noted with a tax receipt.

If you make a donation, please let me know because the University won’t let me know (their privacy guidelines). I truly appreciate the consideration.

We are a nation of over abundance and we should be grateful for that. The problem is that over abundance can lead to a life of excess. We are often told that more is more and the problem is that there are many times where less is more.

When it comes to participant directed 401(k) plans, one of the greatest examples of over excess is a fund lineup.  There are thousands and thousands of mutual funds out there, so many financial advisors and plan sponsors think they should contain as many funds as they can. You often find plans with 20+ mutual funds in the lineup and I once came across one plan with 53 different investment options. Why so serious about this issue? It’s pretty simple.

Studies have shown that too many funds on a plan’s investment lineup actually lowers the rate at which participants defer their salary in a 401(k) plan. Why? Too many funds, especially in one asset class have the ability to confuse and overwhelm plan participants and overwhelmed plan participants are less likely to defer than those that aren’t.

The solution? Start pruning a plan’s fund lineup. I think 12 are more than enough funds in a lineup, maybe 15 at tops. No need for 25 or 53, there is any reason for three large cap growth funds in any lineup.  Plan sponsors need to have their employees defer in a 401(k) plan for a wide variety of reasons, so why get in the way with too many funds on the investment lineup?

A good friend of mine in the business, Al Lutfy, CPA (one of the best auditors out there, especially at the price) sent me a short note regarding plan audits that certainly piqued my interest.

For those who are unaware, any retirement plan with 100 or more participants (I will forego the 80/120 rule for this discussion) is required to include an independent audit report from a certified public accountant with their Form 5500.  There is a lot of confusion of what the audit covers and won’t cover.

The plan audit is a set of audited financial statements for the Plan, complete with the auditor’s opinion, footnote disclosures and supplemental schedules required under ERISA. These financials will be attached to the Plan’s Form 5500 filing. A plan that should have an audit that doesn’t include one is treated as if they didn’t file that Form 5500, which means no statute of limitations and huge penalties.

The auditors will use their judgment to determine the nature and scope of the audit tests to be performed, based on their knowledge of the Plan’s control environment, nature of the Plan and other various factors. The auditors will look at contributions to the plans (amounts and timeliness of deposits); distribution from the plan; participant loans from the plan; a look at plan expenses; plan investments and income; participant data; any related party transactions; and participant data.

The audit covers a lot of areas, when it relates to the financial health of the plan. It won’t review plan investments for prudence; it won’t address the overall fiduciary process; the prudence of the plan’s design; or care that much about fee disclosure. An audit is an audit; it is not a review of the service providers or the plan as a whole.

Al pointed out that the Department of Labor (DOL) has been concerned for the past couple of years with the quality of audits. I know this from personal experience as the DOL effectively shut down a CPA a few years back from ever doing plan audits again because of its lack of quality (81 audits performed by 3 auditors) and ties with a third party administrator (TPA) that questioned the CPA’s independence. While the independence issue was a biggie for the DOL, there was a greater concern that the actual testing hat the auditors should have done to review the TPA’s work wasn’t being done.

Al’s concern is that the DOL is know more interested in the testing of documents than they were in the actual financial statement numbers. Bottom line is that the DOL is more concerned with the testing and the work-papers than they are with the actual financial statements.

What does this mean? It means that plan sponsors need to find quality auditors because deficient audits can be a big problem for the plan sponsors that need it. Plan sponsors need to find auditors who have a knack and expertise in retirement plans and it should be noted that there is a lot of great auditors out there (including Al) that can perform the audit at a great quality and price that aren’t part of the Big 4. While the Big 4 have a nice ring to it, their fees are in the high end and I have seen a couple of deficient audits from that part of the accounting world.

My latest JDSupra.com article can be found here.