The Rosenbaum Law Firm P.C. Blog

My latest JDSupra.com article can be found here.

Not too long ago, I had the worst call with a prospective client in the 14 years I have been an ERISA attorney.

Without divulging any information about this prospective client, this 401(k) plan sponsor was like many prospective clients, poor participation and paying too much in fees. The plan sponsor was using a reputable provider, but a provider that would be a better fit for plans 10 times their size. Client was paying $100 or so a head plus what looked like an additional 3% in an asset based fee. Clearly, this is a plan that is paying way too much.

Why the call was such a disaster was because the person on the call was the one who designed the program with this expensive provider and he basically stated that he had absolutely no interest in changing providers, Funny, the call with the interested advisor was not concerned with changing the third party administrator at the time because you can always have the discussion with the current provider bout reducing. I am provider neutral, heck if the current third party administrator is charging a decent fee and doing a good job, I have no issue with that. You’ll be surprised to know that I still had a couple of clients being serviced by that former employer that I had always railed against.

So why was this underling in the human resources office so serious? Well, if he designed the program and we have issues with its cost or poor fund lineup or poor participation, he is obviously going to take any criticism as an attack. While plan fiduciaries don’t necessarily have to change their providers, they certainly have s fiduciary duty to check whether fees being charged are reasonable or not.

I know what I know in life, but if I made a technology decision or a financial decision that an expert may question or offer suggestions for it, I’m not going to take offense. But then again, I’m on my own boss. So if we are a plan provider or a plan sponsor’s decision maker, we should understand that sometimes people are so resistant to change or just considering so constructive criticism, because they get defensive as if there job depends on it and maybe it does. That is why we should always consider who we contact about looking at their plan and doing a review.

They are making a big stink in my hometown of New York City as Mayor Bloomberg is trying to phase out large containers (more than 16 ounces) for sugar sodas that are being sold at restaurants, movie theaters, mobile food carts, and delis. I haven’t seen folks from New York City this much up in arms (even through 8 years of the Giuliani administration). While people think this is a draconian method or theft of liberty (you still can buy 2 liter bottle of sodas from the supermarket), this ban is supposed to curb a behavior because 58 percent of New York City adults and nearly 40 percent of city public school students are obese or overweight. While I drink soda like it’s going out of style, it’s diet soda and let’s face it, who really needs a 64-ounce container of Coke?

In another upsetting move with similar protest, the Department of Labor (DOL) pulled a last minute rabbit of its hat, by issuing a bulletin last month alerting the industry that self directed brokerage accounts that are offered by retirement plans should be treated the same way as other plan investments. Financial advisors are up in arms because they may have to help plan sponsors monitor the investments where a participant could do anything with the brokerage window that the plan sponsor gave them.

The DOL is worried that by not treating assets in brokerage accounts the same way as other plan assets, then that would give plan sponsors enough ammunition to simply turn their plan into all directed brokerage accounts, so they could eliminate their responsibility in monitoring,

I have never been a big fan of self directed brokerage accounts because they raise a whole host of issues dealing with plan discrimination issues as well as the simple fact that most participants who use this option probably do worse than participants who stick to investing in the plan’s funding lineup.

My feeling on the DOL’s crackdown is akin to what Son of Sam (David Berkowitz) said when he was finally arrested in 1977: “What took you guys so long?” I have always stressed that self directed brokerage accounts are a hidden danger for plan sponsors because plan sponsors are fiduciaries of all plan investments, including those sitting within self directed brokerage accounts and if a participant is investing all their assets in a double inverted Chinese exchange traded fund, that’s an issue that shouldn’t be ignored.

So while people are up in arms over this, my point is that brokerage accounts should have always had the same oversight and concern as other plan assets because the rules under ERISA require fiduciaries to serve a s a fiduciary of all plan assets.

So what’s the DOL’s game? Again, I think is just the DOL’s way of trying to mold behavior (just like Mayor Bloomberg) by trying to phase out something that they aren’t fond of, self directed brokerage accounts. Have they publicly come out against brokerage accounts? No, but they have been concerned with the retirement savings of plan participants and may see brokerage accounts as something that negatively affects the retirement savings of participants. Am I right or am I wrong? Time will tell.

My latest JDSupra.com article can be found here.

When automatic enrollment first started, it was called a negative election and it was propped up by a revenue ruling where an employer proposed adding it for the very first time.  When I first heard of it in 1999, I thought it was something out of the Soviet Union (yes, I was one of the last of the red baiters). The reason that I didn’t like it because I thought negative election was a gimmick to boost the deferral participation rate for non-highly compensated employees, so the employer could get better testing results.

It didn’t help those who didn’t negatively elect not to participate in the plan (there is a reason they use automatically enroll because negative election means that if you didn’t elect not to defer, you were deferring) is because there was no relief for the employer under ERISA 404(c), so pretty much money belonging to those affected were placed in money market accounts typically.

Fast forward 7 years and the government finally enacted what is now known as automatic enrollment into the Code with protection under ERISA 404(c). Thank you, qualified deferred investment alternative (QDIA), as well as automatic enrollment qualifying as a safe harbor 401(k) as a Qualified Automatic Contribution Arrangement (QACA).

So my view towards automatic enrollment changed because it gave a benefit to those who were automatically enrolled since their assets would be invested in something that over the long term would return better than money market.

Working for a producing third party administrator (TPA), I thought this was a great idea to push because we had assets under management and we administered plans where pricing was based on assets. Plans that added automatic enrollment would likely have more assets and since many of the folks who had the assets in the plan now would likely retire over the next 20 years (bye, bye, baby boomers), we may have a negative outflow of 401(k) assets because the younger workers don’t save. I see  automatic enrollment as one small step to helping a retirement crisis this country will face over the next 20-40 years.

The folks at the TPA thought otherwise, they saw automatic enrollment as a human resources disaster, mainly employees complaining after they were automatically enrolled and losing 3%+ of their paycheck to the 401(k) plan.  I think it’s a bigger h.r. disaster for employers to do nothing to help their employees save for retirement. Is automatic enrollment perfect for everyone? Absolutely not. Should every plan sponsor consider it? Yes.

If you are a plan sponsor, consider it as a way to do better for your employees to save for retirement. For a financial advisor and/or TPA, automatic enrollment may help your bottom line.

My latest JDSupra.com article can be found here.

A JDSupra.com article I wrote concerning the business of law firms and that certain law firm I will not name can be found here.

My comments in a great Fiduciary News article by Chris Carosa can be found here.

My latest JDSupra.com article can be found here.

I need to step away from the multiple employer plan situation for a moment, so my head doesn’t explode.

With July 1 around the corner, there has been so much discussion and consideration concerning plan fees. Again, a plan fiduciary such as a plan sponsor or trustee breaches have a fiduciary responsibility to pay reasonable fees.

Excessive fees have certainly gotten their play over the last few years and will certainly be on our most important concerns up until and after July 1^st.

While excessive plan fees are evidence that there is a breach of fiduciary duty and part of the problem affecting 401(k) plans, to me, it’s not the most important issue that negatively effects retirement plans today.

To me, the greatest issue is the fiduciary process or lack thereof.  The issue is about placing the control of investments in the group with the least education to make informed decisions, the participants. This isn’t a criticism of the participant directed model under ERISA 404(c) that is supposed to limit a plan sponsor’s liability for losses sustained by participants in their investment direction. The problem is that most plan sponsors aren’t aware that they are losing the protection of ERISA 404(c) by neglecting their fiduciary duty. Picking a financial advisor who doesn’t help the plan sponsor in the fiduciary process, namely developing an investment policy statement and educating plan participants does a lot more harm than good.

An advisor friend of mine is prospecting a case recently where the plan has an ERISA 3(21) fiduciary as the advisor, who hasn’t changed the fund lineup in 5 years, has investment options that are duplicitous, and is missing certain area of the market for investment. Yet the current advisor is an ERISA 3(21) fiduciary. Let’s face it, the number sound nice, but an ERISA 3(21) fiduciary not doing their job is as Dean Wormer would say: an ERISA “0.0” fiduciary.

Plan sponsor as a whole don’t do a very good job with providing participants with enough education, so that the participants can make informed decision. While the Department of Labor allowed advisors to provide investment advice, very few have offered it because of the expense and very few know of other provider like RJ20.com that can offer the investment advice for a very reasonable per head charge.

So while so many advisors see fee disclosure as a win-win opportunity to gain clients, one should also look at potential clients with ineffective or missing in action advisors. However, plan paying excessive fees are probably more likely to have other fiduciary issues than companies that are paying reasonable fees. At least, that’s what I think.

So excessive fees are part of the problem, but I think the lack of participant education and lack of fiduciary oversight are bigger problems that won’t go away July 1.