The Rosenbaum Law Firm P.C. Blog

For the longest time, Al Pacino was my favorite actor (I think Clint Eastwood finally surpassed him). Pacino earned an Academy Award nomination for a film that is pretty much forgotten “…And Justice For All”. For the longest time I’ve had a poster from that film and it’s one of my most treasured relics from law school only because the poster says “Once in A While, Someone Fights Back”. It sits in the corner of my office, next to the signed Hank Aaron photo that belonged to my mentor in the 401(k) business, the late, great Richard Laurita.

As you know through my blogs and my writings, I have a very vocal opinion and I’m not afraid to express it. Let’s just say, it goes back to college, through law school, and my career as a TPA attorney and attorney for a semi-reputable Long Island law firm. Speaking up when you see something wrong is something I’ve done on a few occasions and let’s face it, it’s far easier to say nothing and look the other way. There is a high price to pay for saying or doing the right thing. That is price you have to pay and accept for being vocal.

I empathize with people who have the courage to speak up when they see something wrong, whether they suffer for it or not.

Through LinkedIn, I know Mark Mensack, who is a financial advisor in the Philadelphia area. About a year or so ago, he gave me a call and told me of his problems working at Morgan Stanley (MS). He had told me that after accepting a generous bonus to join MS, he discovered that MS was taking hidden fees on the 401(k) plans they managed, at the expense of plan participants. He left MS, he claims he was forced out for his outspokenness.

Mensack lost an arbitration with the Financial Industry Regulatory Authority (FINRA) and was forced to repay MS more than $1 million (the bonus plus interest and legal fees). Mensack is now in personal bankruptcy and will likely lose his home.

The issue for me here is not whether Mensack or MS is in the right, I think that issue is for appeal. And that’s the problem.

The problem is that FINRA is required to make a recording of all their hearings including this arbitration. Yet when Mensack’s attorney asked for the recordings for his appeal, FINRA refused. Apparently, FINRA is missing 8 hours of the 18 hours of recorded testimony. So about 45% of the required recorded testimony is missing. It was nice for FINRA to send Mensack an apology where the FINRA regional director stated: “I apologize for this and any perceived miscommunications from the FINRA staff about the status of the recordings. …I understand Mr. Mensack’s disappointment with the arbitrator’s decision. However, FINRA has no authority to reverse the award.” At least he has that.

When FINRA is supposed to record all of their hearings and the fact that portions of the recording are missing is highly suspicious. Loads of conspiracy theories can start from there and FINRA doesn’t have the sterling reputation as an investigative body.

Again, whether the allegations against MS are true or not are irrelevant. The fact that Mr. Mensack is entitled to a fair arbitration and an arbitration that is fully recorded and memorialized (as required by FINRA’s rules) to preserve his right to an appeal.

We are a country of laws and not of men or women. We are a country that believes in a fair system of due process and any misdeeds or mistakes that negatively affect due process needs to be expunged.  The FINRA arbitration decision must be vacated because FINRA’s “error” will certainly doom Mensack’s appeal.

For a full article on this case, click below:

http://www.efxnews.com/story/11131/broker-bankrupted-kangaroo-court#.T19qaQ_2Xzw.mailto

I did an interview with FiduciaryNews.com, probably the best interview I’ve done with many thanks owed to the writer Chris Carosa. For the interview, please click here.

About a year or so ago, there was much hub bub about multiple employer plans (MEPs). Sort of like the game of telephone, the story gets muddled and I am not interested in rehashing it. In short, an official at the Department of Labor (DOL) answered an off the cuff question about MEPs and expressed concerned how open MEPs (as opposed to closed MEPs, i.e., an association of employers of common interest, etc.) operated. The concern was not about the legality of open MEPs (they are allowed by the Internal Revenue Code), but about plan sponsorship and whether they were actual plan sponsors and not just a gimmick to avoid Form 5500 for the participating employers of the MEP. Of course, news of this off the cuff comment spread like wildfire and it got so crazy you had financial advisors out there saying they wouldn’t recommend their clients to consider MEPs. So you had quite a few reputable MEP providers who probably suffered a pecuniary loss as a result of rumor and hyperbole, not actual fact.

I didn’t buy into the panic because common sense dictated that if the DOL wanted to end open MEPs, they probably would have to rewrite the Internal Revenue Code and/or the regulations thereunder, which is a problem since they don’t have the power and the IRS is a division within the Department of Treasury.  I calmed financial advisors, MEP providers, and clients interested in the MEP business. My belief is that the concerns in the MEP business are like every other facet of the retirement plan business or any other business out there, people hawking services that were a bit unscrupulous and/or expensive.  A MEP is like any other feature or service within retirement plans, plan sponsors considering them have to conduct a due diligence review and make sure the MEP providers are up to snuff.

Well, don’t take my word for it, take Phyllis Borzi’s.

This was from her March 7^th testimony to Congress:

“While it is clear from my testimony that the Department supports efforts to expand small business coverage, it is just as important that ERISA’s protections for workers’ pensions be maintained. In that regard, the Department has more recently become aware of promoters marketing multiple employer plans, or “MEPs,” that do not involve collective bargaining with an employee representative. These arrangements, often called “open MEPs,” purport to allow totally unrelated businesses to join together to offer a collective pension plan. Promoters claim that these arrangements relieve businesses of their ERISA reporting and fiduciary obligations in connection with administering the plan or monitoring the plan investments and service providers. Proponents say such arrangements can provide the participating employers with a way to pool resources and reduce administrative costs. There are several bills pending in Congress which call for the Department, in coordination with the Treasury Department, to provide fiduciary relief and simplified administrative, reporting and disclosure obligations for multiple employer plans. We are currently analyzing these proposals.

Under ERISA, employee benefit plans must be sponsored by an employer, by an employee organization, or by both. ERISA expressly recognizes the idea of a “multiple employer plan” by including in the definition of “employer” any “person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan; and includes a group or association of employers acting for an employer in such capacity.”

For example, a MEP operated by a bona fide employer association or group of related employers is a well-established concept in ERISA. Such plans in fact can provide the participating employers with a way to pool resources and reduce administrative costs. The idea of “open MEPs,” however, is not an established concept in ERISA. Indeed, EBSA has had difficult experiences with similar “open” employee benefit structures in the group health area. These arrangements, called “MEWAs,” or multiple employer welfare arrangements, can be provided through legitimate organizations, but they sometimes are marketed using attractive, but unsound, organizational structures and generate large, often hidden, administrative fees for the promoters. In addition, certain promoters try to use ERISA’s general preemption of state laws as a way to avoid state insurance or other regulation. That fact, together with the claimed separation of the employer from accountability for the plan’s administration, too often put workers at risk of not getting the benefits they were promised. Bringing this type of product to the pension marketplace presents a number of complicated and significant legal and policy issues. We understand that the Government Accountability Office is actively studying this development in the pension marketplace.

We have also heard about this “open MEP” development from regulated financial institutions, including insurance companies and other financial service providers, who currently are allowed under Internal Revenue Code rules to offer “prototype” plan products to employers. These prototype plans are another way to reduce legal and administrative costs of offering employees a tax qualified pension plan. Some financial institutions have expressed reservations about developing competing “open MEP” products. Their lawyers, based on a review of the many Department of Labor opinions and other guidance on “open MEWAs,” have expressed concerns about whether these “open” benefit arrangements can fairly be classified as a “single” plan as opposed to a collection of separate plans being collectively administered much like the prototype plans they already offer. We have been informally asked to provide guidance in this area by some of those groups, and we have two formal requests for guidance, one directly presenting the open MEP issue and the other indirectly. We are actively working on answering these requests.”

I read between the lines and while there is concern about promotion about open MEPs, I think the concept that MEPs can help reduce a plan sponsor’s liability and costs is too irresistible for the DOL to refuse since plan costs have been at the top of the DOL’s hit list.

My latest JDSupra.com article can be found here

As we know with the Danny Ocean trilogy of films is that every confidence game needs a mark. The mark is chosen to be a victim either through the con artist’s targeting of the mark or because of the mark’s greed.

There has been a burgeoning of business in the ERISA §3(38) space where ERISA defined investment managers assume the bulk of a plan sponsor’s liability in the fiduciary process. It has been a booming business that many of the bundled providers and/or insurance company providers have been touting that they will offer a §3(38) solution through the offering of such fiduciary services by a third party and it’s usually the same third party. To me the issue is that there needs to be independence for the §3(38) fiduciary and it’s often hard if you are partnering up with an insurance company or mutual fund company and “independently” chose their funds. While there is nothing wrong with this situation from a legal standpoint until things can go horrible wrong and if things go horrible wrong, the §3(38) fiduciary may have made themselves to be a mark.

Suppose for some strange curse, the worst mutual fund company know to man, the Steadman funds were resurrected and they offered a bundled 401(k) product and platform. Suppose they partner up with ABC Trust to serve as the §3(38) fiduciary for the plans on the platform and the §3(38) fiduciary picks some Steadman funds. If the participant sues because the Steadman funds were dogs (Old Yeller type of dogs), who is going to get hit with a big lawsuit? While the plan sponsor will get loads of shrapnel (hiring a 3(38) is a fiduciary function),  the investment manager as the 3(38) will get loads of liability.

While this is all hypothetical, this will happen one day. It has to because a 3(38) fiduciary is going to make a mistake either through blind faith or greed.

For some reason, when it comes to some charges within 401(k) plans, I always remember Don Fanucci from The Godfather Part II, who was killed by Vito Corleone because Vito no longer wanted Fanucci to wet his beak from Corleone’s criminal activity with Clemenza and Tessio.

I remember an advisor who told me of an ERISA attorney that we all knew who gave a referral to this advisor and then wanted something for that successful referral and it wasn’t just a thank you. I can tell you from the time that I started my practice that I have been approached on a number of times by both brokers and advisors who would give me something for the effort. While I won’t achieve total consciousness on my deathbed, I also won’t wet my beak because there is something to be said about independence and the belief that the only person entitled to an advisory fee is a financial advisor.

In addition, when it comes to a single employer plan or a multiple employer plan, some providers have so many charges that you think you’re paying off the entire Town of Brookhaven or some other branh of government. I know one multiple employer plan where it seems everyone is on the take because they have created so many levels of bureaucracy that the costs of joining this plan outweigh going it alone for many plan sponsors.

As we inch closer to disclosure, it should be interesting how people start labeling the fees that were so hidden for so long.

As retirement plan sponsors, you have a fiduciary responsibility to act prudentlty. If you sponsor a pension plan, hiking your financial advisor’s fees while your returns suffered would certainly raise a few eyebrows with your participants and the Department of Labor.

So it turns out, that the New York State Comptroller (who didn’t know what the yield curve when he was elected to the job by the State Legislature after the previous was convicted of using a state paid chauffeur to drive his wife around) has reportedly paid the state’s pension fund’s financial advisors (he runs the state pension) an increase of 163% in fees over the last 5 years while the state pension fund’s returns lagged. I’m sure most of the financial advisors in this audience have probably has to lower their fees over the last five years than raise them.

Don’t expect any participant lawsuits or DOL oversight since the plan isn’t subject to ERISA because of that government exclusion from coverage rule.

They always say that the concern over small retirement plans is overblown, that they never get sued. While much litigation from plan participants have avoided smaller plans (ERISA litigators like big asset plans), small plans are still at risk from Department of Labor (DOL) sanction.

In 2010, the DOL audited more than 3,100 plans and found that:

• More than 73% of the plans were required to restore losses to the plan or take another type of corrective action to correct plan deficiencies.
• 96 individuals (e.g., plan officials, corporate officers and service providers) were indicted for offenses related to their plans.
• From the audits, the majority of violations generally come from oversight, errors and omissions by plan sponsors and not through actual theft.

One would think that the role of a retirement plan financial advisor is to pick plan investments. Most plan sponsors think that way and some financial advisors think as well. Some financial advisors promote their brilliant picking of actively managed investments and I really think those that do really miss the boat of what the role of a financial advisor is.

Sometimes, I see the role of a financial advisor as the concierge at a hotel. The concierge is supposed to fix any issues and score you the sold out tickets to the show you want to go. While the role of a financial advisor isn’t the same as the concierge, it is similar because it’s a position of service. If you have a problem with your third party administrator or ERISA attorney, it’s usually the financial advisor that is called in to help.

Again, picking funds for a participant or trustee directed plan is only part of their job. A good financial advisor will help the plan sponsor pick investment options, but create a process that justifies the selection of those investments. It’s the development of an investment policy statement (IPS), review of investments against the IPS, and offering participant education and/or advice. Too many advisor pick a fund lineup and never see the client again, but they collect their quarterly fee. Those are the financial advisors that are going to get swamped because you see more financial advisors who get their role, limiting the plan sponsor’s liability in the fiduciary process. No ifs, ands, or buts.

My latest newsletter can be found here.