The Rosenbaum Law Firm P.C. Blog

My latest JDSupra.com article can be found here.

People can promise you the moon, but they may deliver far less. That is why despite the promises made by your plan providers; you should always read their contract to determine whether they are actually delivering you what they promised.

A few weeks back, an advisor looking at a prospective client showed me their agreement with their current ERISA §3(38) fiduciary. The only problem is that there was nothing in the contract that suggested that the fiduciary was an ERISA §3(38) fiduciary or was exercising discretionary authority over the fiduciary process. So for all intensive purposes, the provider may be providing the service, but the contract says differently.  So imagine if the plan sponsor has to sue the fiduciary for a breach of fiduciary duty and realize that the contract doesn’t protect them because the contract never claimed they were getting that 3(38) service.

So rather than taking the plan provider’s word, I recommend all plan sponsors to read those contracts to make sure they got what they bargained for. Otherwise, it’s another breach of fiduciary duty.

Thanks to the fee disclosure regulations of Section 408(b)(2) and 404(a)(5), all of us in the retirement plan industry are a little fee-centric or fee-aphobic (depending on your role in the business).

The question I get a lot from a lot of financial advisors and third party administrators (TPAs) (I have an open phone policy for financial advisors and TPAs with questions) is what fees are reasonable. Reasonableness is quite vague, but is less vague than Potter Stewart’s definition of obscenity because you don’t have to see it to determine whether it’s reasonable or not.

As we know, plan sponsors as fiduciaries have a duty of prudence to pay reasonable fees. The law doesn’t say what reasonable is, but it’s really a sliding scale. It’s about the whether the fees are reasonable for the services provided. In addition it has to be reasonable as compared to what other providers charge for similar services.

So it is quite possible for a financial advisor to get an advisory fee of 75 basis points for a $1 million plan if the advisor is offering a full blown concierge service where the advisor is offering a ERISA 3(38) service, investment advice to participants, and monthly meetings with plan sponsors (hand holding is also a good idea). On the flip side, my legal review, the Retirement Plan Tune-Up got a broker fired from a $14 million plan because the broker was netting a fee of 60 basis points while not developing an investment policy statement (IPS) for the plan sponsor, not performing an annual review of investment options against the IPS, and not offering education to plan participants. Paying 75 basis points can be reasonable if you are getting prime service and 60 basis points is too much if you are getting nothing for it.

As part of the plan sponsor fee disclosure regulations under Section 408(b)(2), plan sponsors have to determine whether the fees they are paying are reasonable is to benchmark their fees using a service or shopping the plan to competing plan providers. Shopping the plan around isn’t just about price because you can always find a cheaper provider, you need to determine whether the fees being paid are reasonable for the services provided so picking a cheaper provider who isn’t providing 1/10^th of the service the current provider is providing isn’t a good idea.

So what is reasonable? It’s all facts, circumstances, and ball bearings these days. It’s a lot of ingredients for that recipe, but a plan review will go a long way in determining whether it’s reasonable or not.

The third party administration (TPA) business is the Rodney Dangerfield of the retirement plan industry, they don’t get any respect. TPAs do the bulk of the work and get all of the blame if things go bad and none of the credit when things go well.  What is added to this burden is the onset of fee disclosure regulations that will add more pressure to their narrow profit margins.

While I can’t fully predict what will happen to the retirement plan industry after fee disclosure on July 1, I am sure that there will be providers exiting the business.  Some TPAs will benefit from fee disclosure and others who hid fees or lived off not disclosing revenue sharing will suffer in a transparent industry. In addition, TPAs who fully disclosed revenue sharing before it was fashionable may be under stress because it is likely that revenue sharing payments may be cut by mutual fund companies as they may be under pressure from market share growth from exchange traded funds and index mutual funds.

So even before fee disclosure is implemented, we already have the first casualty of the large plan providers. Hartford Insurance announced that will seek a buyer for their retirement plan business. While the decision to sell the business can be traced to their heavy losses in equity-linked variable annuities led to a taxpayer bailout in 2009. While shareholder John Paulson of Paulson & Co. is demanding that Hartford shrink its size to maximize shareholder value, the decision to sell the retirement plan business is pretty clear. The retirement plan business is not considered by Hartford to be a huge growth business. If it was, they would keep it.  Let’s face it; fee disclosure isn’t going to help the retirement plan operation’s growth.

Hartford said it will stop selling individual annuities and will seek buyers for its individual-life, Woodbury Financial Services and retirement-plan operations. Hartford will maintain property and casualty, group benefits and mutual funds as well as liabilities tied to annuities.

So even before July 1, one major provider sees the signs. Who will see it next?

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

When it comes to my law practice, I have an open phone call policy. I entertain phone calls from financial advisors and TPAs around the country and try to help them by answering questions regarding their current clients or potential clients. I don’t charge them for the phone calls because the retirement industry is a close knit community and it’s all about building relationships.

A few weeks back, I got a phone call from an advisor I know and haven’t heard from for a long time. His client is a professional service practice and their bundled service provider told them they were Top Heavy for 2011 and they will likely be Top Heavy for 2012. Since safe harbor 401(k) is not an option (December 1, 2011 came and went), it will be 2013 before the plan could be placed on a better compliance setting.

The client is adamant about not paying the top heavy minimum contribution and the advisor asked what the consequences would be. While not paying the required top heavy minimum contribution could result in a plan disqualification, the Internal Revenue Service is not going to take that action if they catch it on audit. They will require the plan sponsor to make the top heavy contribution with some interest and likely pay a penalty. In addition, the bundled provider will fire this client as a client because no competent third party administrator will work on a plan where the sponsor refused to abide by the rules of qualified plans. Top heavy contributions, minimum funding contributions, and any other mandatory contribution are like taxes, you don’t want to pay it, but you have to.

So next time your client tells you they don’t want to make a minimum contribution or make a withdrawal that is not allowed or make any action that contravenes the rules regarding retirement plans, tell them they have to play by the rules.

For some reason whenever I hear there is an appearance by a Department of Labor official at an American Society of Pension Professionals and Actuaries (ASPPA), I think of Charlton Heston coming down as Moses with the Ten Commandments. I don’t know why, but I always anticipate some pearls of wisdom or some clues as to what the DOL will do next.

DOL Deputy Secretary Michael Davis spoke at ASPPA’s 401(k) Summit in New Orleans this week and said some things that we already knew and said some things that we didn’t. He said a lot of things, but he said nothing. That view is usually from the belief that I only care what a governmental agency will do until they actually do it.

Davis indicated that the DOL will eventually revisit the change in the fiduciary rule at some point. There may be a delay in implementing it because the DOL wants to get it right (that’s a relief, as opposed to them wanting to get it wrong). At the same time they will unveil the new regulation, they will unveil some prohibited transaction exemptions to complement this rule, namely dealing with 12(b)(1) fees and revenue sharing.

Again, I say the fiduciary rule was inevitable with the delay in the implementation of the fee disclosure regulations, as well as the investment advice rule to plan participants that was implemented in December. Transparency and accountability is the way the DOL has been heading in the retirement plan business for quite some time.

Davis also indicated the DOL’s concern with open multiple employer plans (MEPs). The DOL is concerned with open MEPs that can be abusive arrangements and they should be because their role is to protect plan participants. From my experience with open MEPs, if you pick the wrong providers, they can be disasters and believe me, I have seen one of these disasters up close. The guidance set forth by the Internal Revenue Code and the Treasury Regulations is pretty thin. Yet the DOL by itself has no power to change the rules concerning MEPs and who can serve as a plan sponsor.

Open MEPs can be an attractive and affordable way for small employer to offer a 401(k) plan to their employees. MEPs can increase retirement plan coverage and there has been a push on Capitol Hill to support it. So while some open MEP chicken littles think the sky is falling, it would be unpopular for the DOL to torpedo open MEPs.

So I await the DOL’s action in these areas because everything else is just conjecture.

When it comes to the fee disclosure regulations, I was always troubled by the frequent delays by the Department of Labor in implementing the Section 408(b)(2) fee disclosure regulations. Many plan providers and retirement industry trade groups wanted the delay because they said that many plan providers weren’t ready for the change and because the final rule wasn’t published. Well I understand about the desire to push back the effective date because the final rule wasn’t published but the excuse that plan providers aren’t ready was hogwash.

Hogwash? Well, you heard me (except this is written). The reason I find that excuse is hogwash because I am convinced that if you push back Section 408(b)(2) implementation until June 2017, you still will have providers not ready. How do I know? I have received calls from several plan providers within the last few days asking me about Section 408(b)(2) and whether it applies to them. Yes, I did. This is after a couple of years of delays in its implementation and you have providers who still didn’t know until now that they have to disclose their fees to plan sponsors in 10 weeks.

So no matter when you will have the implementation of fee disclosure, you will still have plan providers that will still be unaware that it applies to them.

My latest JDSupra.com article can be found here.

Apparently, a multiple employer plan sponsored by the Commonwealth of Massachusetts just awaits Gov. Patrick’s signature into law in order to be implemented.

While any retirement plan that promises to cover more employees and act as a cost effective plan for unaffiliated, small employers, there are two issues for me.

While I am a big fan of multiple employer plans (MEPs) where it makes sense for employers, does the Commonwealth of Massachusetts have any idea on how to run a plan that is governed by ERISA (governmental plans don’t have that coverage)? Last but not least, should employers adopt a retirement plan sponsored by the same folks who run the DMV office or oversaw the Big Dig? Just asking.