The Rosenbaum Law Firm P.C. Blog

My latest JDSupra.com article can be found here.

A write up of the affordable $1,000 Retirement Plan Legal Solution offered by my Firm can be found here.

In England, many of the top pubs are owned by British breweries because watering holes are an effective means of beer distribution. Pepsico (owners of Pepsi) used to own what is now known as Yum brands (KFC, Taco Bell, Pizza Hut, etc.) for that very same reason.

The 401(k) industry is dominated by mutual funds, so it should come as no shock that many mutual funds companies offer services as a third party administrator (TPA) because it’s an effective means of distributing their mutual funds. Mutual funds distribution is extremely important for mutual funds companies because their bread and butter are the funds’ asset management fees and more assets under management equal more revenue for the mutual fund company.

While many mutual funds companies only offer TPA services for larger plans, there are a few mutual funds companies that have been rather aggressive in offering TPA services to small and medium size plans. While mutual fund companies do offer an attractive alternative as part of a one stop shop, plan sponsors are under misimpression that the mutual fund companies’ TPA services are free or close to free.

As stated in a previous article about 401(k) administration, there is no such thing as a free lunch or free 401(k) administration. Mutual fund companies make their money as a TPA through those very same mutual fund management fees that I had discussed earlier. Many of the same companies that offer TPA services are the very same mutual funds companies that offer revenue sharing or sub TA fees to TPAs for plans that use their funds. So by keeping plans under their roof, these mutual funds companies can keep their revenue sharing/ sub-TA fees to themselves. These mutual fund companies also guarantee the fees they make, by requiring that a percentage of a plan’s assets (up to 100%) be invested into their own proprietary mutual funds. I recently came across a 401(k) plan with a mutual fund company as a TPA that offered 12 mutual funds to participants for directed investment and all 12 funds were the fund company’s proprietary funds.

For plan sponsors and trustees who serve as fiduciaries under ERISA, it is a question of the prudence rule and whether it is prudent to offer investments into a specific mutual fund company, only because that mutual fund company is the TPA. While some mutual fund companies have sterling reputations, there are a still a number of mutual fund companies who have been tainted by the late trading scandals of the last decade, as well as poor performance and high fees. All plan sponsors that utilize a mutual fund company as a TPA should understand that there is a cost involved with their plan’s administration (check those disclosure forms), as well as being advised as to the standing of the mutual fund company within the entire mutual fund industry to make sure it doesn’t become the next Steadman fund family.

Plan sponsors should consult with their 401(k) financial advisor to determine whether a mutual fund company as a TPA is the right fit for them. Mutual fund companies may be an attractive option for some, but plan that offer what is known as out of the box provisions may not be a good fit, as well as a plan sponsor that wants unbundled options in the selection of mutual funds.

One of my favorite genres is the Western.  While I prefer the works of Sergio Leone and Clint Eastwood to those of John Ford and John Wayne, I have always been a big fan of these films. I always like the idea that the good guys wore white hats and the bad guys wore the black hats.

Of course, my favorite Western, Unforgiven, shakes all that up because the people wearing the white hats aren’t necessarily that good (Gene Hackman’s Little Bill) and the people wearing the black hats aren’t necessarily that bad (Clint Eastwood’s Will Munny).

When I talk to advisors and third party administrators who do terrific jobs at fully, transparent fees, I always state: “that since we all wear white hats, we all should stick together.”

The problem is that with fee disclosure, there are a lot of folks wearing what I call gray hats. Gray hats meaning that these were former black hatters either trying to reform the way they handle the retirement plan business or those pretending that they are one of the good guys.

That may mean providers that were always hiding fees or were just too expensive offering “fiduciary services” like a fiduciary warranty or the use of an ERISA 3(38) service through a third party.  Perhaps these providers have seen the error of their way and are now going to be good retirement plan industry “citizens”, and maybe they haven’t and this is some marketing gimmick. How will plan sponsors know the difference?

We live in a Google world, which means things are certainly more transparent. So if a financial advisor writes an article on an RIA website telling advisors how to get their clients out of fiduciary trouble, Google will let you know that this fellow doesn’t have a sterling reputation and he was accused of some of the things he was warning against which landed plan sponsors in fiduciary trouble.  I believe that people and plan providers have it within themselves to change and improve their services and business model, but it must be judged by deeds and not by words or articles or fancy pamphlets.

If I’m a plan sponsor, I need to do my due diligence on the providers I’m considering. However, would I be better off with providers who practices full transparency before it was fashionable and required, or to do I hire a provider that had a poor reputation in this industry who is trying to change their ways and not try to acknowledge their past? Despite Unforgiven, I feel safer with the folks in white hats.

My latest JDSupra.com article can be found here.

When I was at law school at American University, we moved to a new building a few blocks down and it was a drastic improvement from our original digs. One of my favorite stories is how the former Dean at the time were incredulous that students demanded a type of computer at the computer sync sites because he insisted the students never used it and it was like owning a Betamax. That computer was a Mac.

In 2006, Roth 401(k)s were finally allowed. The misnomer of Roth 401(k)s is that it was separate and apart from the traditional pre-tax 401(k), but all it is, is a 401(k) plan that allows a Roth feature. The Roth feature allows for after tax deferrals that will result in tax-free distributions at normal retirement. The Roth feature is treated the same away as the traditional pre-tax deferral for compliance purposes and the only real issue is letting the payroll provider know which deferrals are pre—tax or which are post-tax.

So in my mind, there is no reason why a plan sponsor wouldn’t offer a Roth feature to their 401(k) plan. It should not increase cost and cause any administrative issues; it allows participants to chose to defer some or all of their deferrals on a post tax basis. Freedom of choice for 401(k) participants is a good thing, a very good thing. Yet only 40% of all 401(k) plans offer it.

People who will doubt the sell of Roth 401(k) will point out that only about 10-15% of participants who have the option of the Roth 401(k) will use it. Heck, looking at the state of our economy and our tax load, how many folks could afford deferring on an after tax basis? In addition, to Roth or not to Roth bring up a host of other issues, namely theories of future tax policy, as well as trying to predict the return of the markets, as well as trying to figure out whether foregoing a tax deduction now is worth paying no taxes at retirement. Of course, age and future income, are considerations as well. So the low percentage of those using it is because of cost, as well as mathematical and theoretical considerations that make my head spin.

So while most plan participants will never Roth, there are those that will. Maybe like a Mac, the rate of those deferring on a post tax basis will increase and it will be more than just a niche product.

My latest newsletter can be found here.

My latest JDSupra.com article can be found here.

My latest newsletter can be found here.

I am serious and don’t call me Shirley.

It’s the first week of July and nothing has changed in the retirement plan industry. While June 30^th has come and passed, assuming all plan providers that were covered service providers made their disclosures to plan sponsors, now what?

We never thought the earth would shake on July 1, even though fee disclosure is a seismic change in the industry.  While it’s a seismic change, it will take months and years before we feel large tremors.

What are the tremors? Many plan sponsors (hopefully most) will take their fee disclosure and do their job by shopping the plan around. Of course, some will treat their fee disclosure like the map McCroskey gave Johnny in Airplane!

Steve McCroskey: Johnny, what can you make out of this?

[Hands him the weather briefing]

Johnny: This? Why, I can make a hat or a brooch or a pterodactyl…

Plan providers can use fee disclosure to their advantage as long as they have plan sponsors who either understand the nature of their duties to pay reasonable expenses or are willing to listen. Plan sponsors have to understand that overpaying for plan services isn’t like overpaying for that item at the department store, only to find out it was discounted 30% a few weeks later. Overpaying for clothes is a bummer, overpaying for plan services is a breach of fiduciary duty.

Further tremor will be by Department of Labor (DOL) enforcement. Don’t think the DOL implemented these fee disclosure regulations without intending some type of enforcement. Surely plan sponsors that aren’t doing their fiduciary duty by reviewing their fee disclosures or haven’t asked why they haven’t received their disclosures, will get penalized on a DOL audit. I am serious and don’t call me Shirley.

Getting plan sponsors to look at their disclosures and review those disclosures with other service providers will take some time, give it to six months to a year before you see any changes in the marketplace.

Fee disclosure is an excellent conversation starter, but it just starts a conversation. Plan providers should advertise the bigger picture; cost is a factor, but not the only factor. Consider quality of service and quality of price if you are a plan provider that can beat the current provider on both ends, go for it. I just think being cheaper isn’t a true value proposition for the plan provider and the sponsor.

Change is coming to the retirement plan industry and fee disclosure was just the first shot in a bid to improve transparency and improve the retirement savings of all plan participants.