The Rosenbaum Law Firm P.C. Blog

One of the more interesting points of the movie Casino was that Nevada Gaming Control rules forbade casino owners from being in their own count room, where all the money from gaming was collected.  It was an absurd point, but those were the rules.

With fee disclosure regulations being implemented in April 2012, plan sponsors will fully understand how much direct and indirect compensation that their plan providers received.  The indirect compensation includes revenue sharing and other sub-TA fees, as well as 12b1 fees.

What I find similar to the Casino count room situation in the retirement plan industry is the indication by many retirement plan custodians that they will not account for any of the indirect payments that a third party administrator (TPA) or financial advisor will receive.

Years ago, I had a client who swore that their TPA was pocketing revenue sharing while the TPA had promised that the revenue sharing payments were being used to offset the hard dollar administrative plan costs.  I contacted the plan custodian on the client’s behalf and the plan custodian claimed that they had no accounting for revenue sharing payments that the TPA was receiving because these payments were part of an agreement between the TPA and the various mutual funds under the plan. My training is an ERISA attorney, but common sense tells me that a plan custodian should be able to determine what a TPA receives in revenue sharing payments because the money has to come from somewhere and it has to get to the TPA some way. I assume that because there are 401(k) custodians that do account for the indirect payments that a TPA receives. Maybe I’m wrong but plan custodians who claim they do not account for revenue sharing payments are using the same Sgt. Schultz act from Hogan’s Heroes where they: “hear nothing, see nothing,  know nothing.”

Hidden fees of the 401(k0 plan business is a function of the industry that led it happen. Many plan providers went the full fee disclosure route before the Department of Labor demanded it, but the industry could only have cloaked fees if you had plan providers like custodians look the other way.

A “perfect storm” is an expression that describes an event where a rare combination of circumstances will aggravate a situation drastically. The term is also used to describe an actual phenomenon that results in an event of unusual magnitude.

With fee disclosure to plan sponsors by their plan providers and fee disclosure to plan participants in 2012 bringing much change to the retirement plan industry, there are other changes as well. In addition, by New Years, you will have 401(k) Advice regulations and the Department of Labor is still insistent on changing the definition of retirement plan fiduciary. So with all these changes, you have a Perfect Storm for retirement plan sponsors.

Unfortunately like Captain Billy Tyne and the crew of the Andrea Gail, retirement plan sponsors aren’t prepared for the Perfect Storm. Unlike a nor’easter, these changes will bring a lot of good to the retirement plan industry. However, if plan sponsors don’t understand the changes and get prepared for it, they can certainly capsize and risk their plan to unwanted liability.

It is incumbent on the plan sponsors to find quality plan providers like an ERISA attorney, third party administrator, and financial advisor to help guide them through a turbulent period that will require them to be more vigilant in their duties and more diligent in reviewing their plan providers.

My latest newsletter for retirement plan advisors can be found here.

For my latest JDSupra.com article, please click here.

My latest newsletter can be found here.

There was a great article written by Fred Reish and his staff regarding Department of Labor (DOL)investigations into broker dealers and registered investment advisors and their relationships with their retirement plan clients. I recommend everyone in the industry to read it.

As far as the investigations as to what the DOL called the Consultant/advisor project (CAP), it comes as no surprise. The DOL over the last few years has made it their goal to improve the role of retirement plan advisors whether its requiring them to disclose fees, abide to a fiduciary standard (to be decided), and to finally offer investment advice.  

Having been in the business for over 13 years, you see a lot of things that are quite good in the industry and some things that are not so good.  Whether it’s the plan provider who receives extra compensation that is not disclosed by having their client switch 401(k) platforms or those who can get an extra trail for pushing a specific share class of a mutual fund or stable value fund, there are enough abuses with the financial community to warrant these investigations.

As I have always stated, the good old days where a financial advisor could make a few bucks by not servicing a client and by making sure the client added a specific fund to their lineup or to use a specific 401(k) platform are over. A retirement plan advisory business where fund and platform selection is fee neutral and where advice can be given to participants will be a good thing.

Fee disclosure regulations will be implemented for the first time for retirement plans on April 1, 2012. There are many people in the industry who have asked for my opinion and my guess on what will happen when they are finally implemented, but my guess is as good as guessing the winning ticket of next week’s Lottery drawing.

What I do know is that there are two main groups in the retirement that have very little or no knowledge as to what fee disclosure means. First are the plan sponsors, second are the plan providers. While many plan providers are ready for fee disclosure since they have been practicing full fee disclosure for years, others have been waiting until the very last minute.

As for plan sponsors, I believe that outside of the largest companies, very few small and medium sized plans understand what fee disclosure means and how their role as a plan fiduciary has expanded because they will have to be more vigilant in determining whether the fees they are paying are reasonable or not.

As for those who are against the whole notion of fee disclosure, get over it. I remember when all these fast food chains protested in New York City when there were plans to require these restaurants to put their calorie count on their menus. I do not believe that any calorie information has hurt any of these businesses because information and knowledge are business neutral, it is what the person who now possesses that information will do with it that is not. So a plan sponsor who puts the fee disclosure forms or new provider contracts in the drawer isn’t going to bother with whether their plan expenses are reasonable or not.  A plan sponsor who fulfills their role as a plan fiduciary by shopping around to determine whether their fees pay are reasonable, are a threat to only those providers that may unreasonable fees.

While there is this mentality that fee disclosure will simply create a race to the bottom to find the lowest fees, I still don’t buy that. The reason I don’t buy that is that many low cost providers aren’t very good whether it comes to day to day  plan administration.  The other reason is that again I don’t see most plan sponsors doing the due diligence in finding what the cost of plan services are in the marketplace.  The third reason is I don’t see plan services as being a service where price is the most important consideration. While I often fault plan providers in not stressing their value as plan providers, I don’t believe that someone who wants to be the Wal-Mart of plan services will do very well because I don’t see it as a business where price has been the overall consideration. It never has been and I don’t think it ever will. Like other professional service like law, medicine, and accounting, advertising that you have the lowest fees isn’t going to be the best selling point. At least that is my opinion.

So what do I see in the marketplace as a result of fee disclosure? I think there is a need for plan providers to stress their services and the reasonableness of fees. If you provide a quality service, it is less likely plan sponsor will leave you for $5 less. I also sense that there will be an upswing in lawsuits against plan sponsors for unreasonable fees since fee disclosure will reveal a plan’s true costs structure and end the myth of free 401(k) administration. Again if plan sponsors simply take the fee disclosure form and put in the drawer, that will increase their potential liability as a plan sponsors because what plan sponsors don’t know will hurt them.

My latest JDSupra.com article can be found here.

A couple of years before and a couple of years after I left that third party administration (TPA) firm  the Director of ERISA Legal Services, I predicted their demise. Whether it was co-workers or competitors or financial advisors I had worked with in the past, people thought I was crazy to make such a prediction. When that TPA imploded as a result of issues over how they used revenue sharing and how the auditing firm they referred a lot of work to them wasn’t independent, I was vindicated. The same happened when that TPA was forced to merge into a sister TPA, I predicted that lots of jobs in our old New York office would be lost. Again, I was ridiculed. After more than a third of the office was laid off in a bloodbath, I was vindicated again for my bold claims. In both situations, I didn’t have a crystal ball. I simply took simple business concepts and let that be the basis of my predictions.  For my old TPA, we had management operating the business as if it was still 1993 and I knew fee disclosure was inevitable. As for gutting the TPA’s staff when it merged into its Massachusetts based, sister TPA, anyone with a basic knowledge understands when there is a merger, there is always a cost savings by reducing employee headcount when there is a duplication of services. Why still have a conversion and processing staff in New York when you already have one in Massachusetts? So no crystal ball, just common sense. My bold predictions don’t extend past the retirement plan business as I got President McCain and death of e-book readers wrong.

So for the past year or so, I have predicted that the retirement plan business will once  again be changed because there will be a new fiduciary standard that will create a leveled playing field where anyone who call themselves a retirement plan financial advisor will have to be a fiduciary. So brokers who push their own product and own 401(k) platforms would have to change the way they do business to meet this new standard.

Of course, when the Department of Labor (DOL) withdrew their proposed fiduciary definition change after much pressure by Congress and broker-dealers, some broker had a sigh of relief. I still maintain that the fiduciary standard is inevitable. The rule withdrawal was just a way for the DOL to tinker with the definition and eventually add IRA accounts as also requiring a fiduciary standard for financial advisors working in that space.

The new DOL rule on 401(k) advice, which will be implemented in about 60 days (I bet it gets pushed back, the DOL loves) in my view is just another step for the DOL to push the new fiduciary standard forward.  The DOL’s new advice rule allows the plan provider to offer advice themselves, as long as they meet one of two requirements that are designed to minimize their conflicts of interest. Either the fees they receive must not vary based upon their recommendations; or the advice must be generated by a computer model that’s been verified as unbiased.

I see this change as a boon to 401(k) participants and bigger boon to people who will now be the auditors verifying that the advice is unbiased. I see this rule change as just another exit on the highway to a new fiduciary standard. Why? It’s all about the lack of bias, whether it’s the use of a computer model or the use of a flat fee type of billing arrangement. This lack of bias is in conflict with the way brokers currently operate in the retirement plan space (under the current fiduciary rules, where they are not plan fiduciaries) who are in the business of selling securities and perhaps getting better commissions for certain investment products or 401(k) platforms they have to push. The fiduciary standard is about putting the retirement plan ahead of any monetary gain; it’s about not making transactions or investments that benefit the financial advisor of the plan at the expense of the plan’s assets  

Change in the fiduciary rule is inevitable. The trip to that new rule on that highway may be delayed, but it’s inevitable. The new fiduciary standard is inevitable, just like fee disclosure and 401(k) advice.  While brokers may have been given a temporary reprieve, I believe that the DOL will make another attempt at changing the definition.

When you start fixing up the house (for me, a never ending battle) and replacing appliances or items like the front door or the roof (that was me last week), you realize that the replacements are more energy efficient. Replacing that old refrigerator or that washing machine can lead to some savings in your energy bills.

When it comes to retirement plans, there are so many of them that are inefficient in either their cost structure or plan design. While cost structure will be all disclosed to plan sponsors (who have the duty as fiduciaries to determine their reasonableness), plan design inefficiency is something that won’t be discovered until the plan goes through an independent review (like my Retirement Plan Tune-Up) or takes the plan to another third party administrator (TPA). Inefficient plan designs come in all sorts, but it wastes money like that 40 year old furnace I replaced 5 years ago.

Inefficient plan design wastes money because it either makes less cost effective contributions or it doesn’t maximize tax deductible contributions to highly compensated employees. So it either wastes money in unnecessary contributions or is inefficient for tax savings.

In terms of wasting money, it could be a defined benefit plan that has outlived its usefulness or it could be a 401(k) plan with a new comparability plan design and a safe harbor matching contribution (because unlike a safe harbor 3% profit sharing contribution, you cannot use the safe harbor matching to offset any new comparability contributions to non-highly compensated employees like you could with the safe harbor 3% profit sharing contribution). A plan that doesn’t maximize contributions could be a 401(k) plan that consistently fails discrimination testing and doesn’t implement a safe harbor plan design or a plan that doesn’t offer a new comparability profit sharing allocation to highly compensated employees when the plan sponsor can afford it.

Retirement plans are a great employee benefit for retirement savings, but you should never forget the tax savings component it has.

So when I consistently state the claim that plan sponsors need to find a quality TPA that is not predicated on price, but predicated on its competency and knowledge of cost effective, retirement plan design.

When you look for new appliances, you always look for those with an Energy Star sticker. When shopping for TPAs, look for those who would deserve a Tax Star sticker (if one existed, don’t steal my idea!).