The Rosenbaum Law Firm P.C. Blog

I always believe that regardless of whether it’s business or in regular day to day life, that you can’t be everything for everybody. Being honest with that is only half the battle.

A few weeks back, I met someone who was interested in starting a registered investment advisory (RIA) firm.  He called me for my insight on the retirement plan business, as well as my work in drafting advisory agreements for RIA firms and their retirement plan clients to comply with the fee disclosure regulations (which I do for $1,000 on a flat fee basis, cheap plug).  The next week or so, he called me and asked whether I could work on his RIA registration or whether he should use one of those businesses that only deal with RIA set ups and registration. Looking at my experience in doing that and comparing myself to these businesses, I politely told him that these firms would be a better fit for his RIA registration. It’s not that I couldn’t do the work; it’s just that the fees and length of time in doing the work is probably better by using a business that does nothing but RIA registrations. Perhaps this new RIA will be a client of mine, perhaps not, but he appreciated my honesty.  Again, you can’t be everything for everybody.

I have a friend of mine who works for a great third party administration (TPA) firm in the Northeast. Only problem is that when it comes to smaller plans, the fees are high. Nothing wrong with that, except if you are a smaller plan and were dead set on getting this TPA to handle your plan. Anyway, this salesperson met one of the accountants he was familiar with. The accountant had a lot of opportunity in single employee, defined benefit plans. With a $4,000 minimum for the actuarial work, the salesperson told the accountant that they were better off finding another firm for these plans at less than half what his minimum fee was. Again, you can’t be everything for everybody.

Contrast this with a case at my old TPA. We had a 401(k) plan where the human resources director hated us from day one because we wouldn’t do the work she received from the previous TPA she liked. She was a problem from Day 1, but we took the case because we had a great relationship with a southern RIA firm. So this client was a problem from Day 1, but they seemed to be interested in changing the plan by making it a K-SOP, basically adding an employer stock ownership feature (ESOP) to it.  The client’s advisors asked me about our experience with it and I was honest, I said we had a couple of those cases. My boss who was an ERISA attorney, but didn’t practice since the Ronald Reagan administration, knew better. He flew out to meet the client and since he always knew better (since he thought I couldn’t speak or sell), he was going to educate the client on K-SOP even though he knew nothing on the topic. Story cut short, my boss’ lack of knowledge was exposed and not only did we lose the client, the RIA who referred us the client lost the client as well.

Regardless of whether it’s a TPA, RIA, and an ERISA attorney, you know you found an honest provider when they basically tell you that they can’t handle your plan because the plan is not a right fit for their book of business. These are providers who are telling you that one of their competitors is a bigger fit because they would rather you go somewhere else and be happy because it would be good for you and good for them.

My latest JDSupra.com article can be found here.

The Internal Revenue Service (IRS) announced cost of living adjustments (COLA) affecting dollar limitations for pension plans and other retirement-related items for Tax Year 2012. In general, many of the pension plan limitations will change for 2012 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged.

Here are highlights from the IRS press release:

• The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $16,500 to $17,000.
• The catch-up contribution limit for those aged 50 and over remains unchanged at $5,500.
• The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $58,000 and $68,000, up from $56,000 and $66,000 in 2011. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $92,000 to $112,000, up from $90,000 to $110,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $173,000 and $183,000, up from $169,000 and $179,000.
• The AGI phase-out range for taxpayers making contributions to a Roth IRA is $173,000 to $183,000 for married couples filing jointly, up from $169,000 to $179,000 in 2011. For singles and heads of household, the income phase-out range is $110,000 to $125,000, up from $107,000 to $122,000. For a married individual filing a separate return who is covered by a retirement plan at work, the phase-out range remains $0 to $10,000.
• The AGI limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $57,500 for married couples filing jointly, up from $56,500 in 2011; $43,125 for heads of household, up from $42,375; and $28,750 for married individuals filing separately and for singles, up from $28,250.

December 1 is pretty quickly going to be upon us, which reminds me that I have some notices to send out shortly. For those in the retirement plan business, we know December 1 marks the date that safe harbor notices have to be distributed to participants for a plan to be eligible as a safe harbor 401(k) plan for the 2012 calendar plan year. Since December 1 is before December 31, 2012, plan sponsors have to have a premonition that they might fail their 2012 discrimination tests in order to be a safe harbor plan.

Safe harbor plan design is one of the best developments in qualified plans in the last 15 years. It’s win win because the 100% vested contributions to plan participants allows the plan to get a free pass on ADP (deferral discrimination tests), ACP (matching contribution tests, if contribution made), and the Top Heavy test (making sure plan doesn’t substantially benefit Key Employees). In addition, if the plan sponsor elects the 3% non-elective safe harbor (3% of compensation contribution to participants, regardless of whether they defer or not), that 3% can also be used to satisfy the minimum gateway contribution to non-highly compensated employees in a cross-tested allocation  (which means that highly compensated employees can get up to 9% of compensation in this type of profit sharing contribution).

That being said, a plan sponsor has to be advised by their third party administration firm (TPA) and/or ERISA attorney why a safe harbor plan design might be a good idea. Here are some clues as to when plans need to go this route:

1. Plan has failed the ADP, or ACP, or Top Heavy Test (or all of them) in the past 1-2 years.
2. Plan has come close to failing the above tests in the plan year.
3. Demographically, plan has non-highly compensated employees that defer at a very low percentage.
4. Demographically, plan has a large group of highly compensated employees such as a professional practice (law firm, accounting, and medical practice).
5. Plan already uses a cross-tested, new comparability allocation for their profit sharing contribution.

If you are an advisor on a plan or a plan sponsor and you need to know whether a safe harbor design is a good idea for a specific plan, contact your TPA or yours truly.

I call this time of the year as Retirement Plan Crazy Season where plan sponsors decided to change plan providers in order to get things changing smoothly at January 1. I call it Crazy Season based on NASCAR’s Crazy Season when drivers and car sponsors switch teams by making new deals for the following Sprint Cup season.

In addition, it is this time of the year that many employers decide to implement a plan for the current year as the deadline for putting a plan in place for a calendar year plan is December 31.  Of course, I have spent some years drafting plans until the very last day.  So much fun.

One of the difficult choices for an employer in deciding to sponsor a plan is which type of qualified plan to sponsor. Here is just a small list:

1. Number of employees to participate: The more, maybe not the merrier. But the more, is less likely you will be pursuing a defined benefit plan and more likely pursuing a 401(k) plan.
2. Age and compensation of the owner(s)/highly compensated employees. Despite what the folks protesting at Wall Street believe, one of the goals of setting up a retirement plan is saving the maximum for the owners and highly compensated employees of the business.  One way to achieve the maximum savings is the use of a defined benefit plan or a cross tested allocation that will award higher contributions to these high paid employees and some of the key factors are age and compensation.
3. How much can the Employer afford to contribute? When it comes to defined benefit plans and safe harbor 401(k) allocations, as well as the near obsolete money purchase plans, the employer must dedicate a fixed contribution each year (which is decided after the end of the Plan Year). Does the Employer see that it has the cash flow over the next couple of years to make such a financial commitment? I can’t tell you how many times that I have had sole proprietors say they want to save the maximum under a defined benefit plan. All of a sudden, they needed to pare back after the sticker shock of the maximum contribution that the actuary determined.
4. Ask the Employees. A small business is usually not a democracy, but is may be wise to ask employees on the input of setting up a retirement plan. Namely the questionnaire really should be tailored towards trying to indentify whether they see this plan as an important employee benefit  and if the employer decides the 401(k) route, whether the employees would defer. Now employees shouldn’t have a say in designing the plan since they aren’t going to be the ones funding the contribution.
5. Find a financial advisor. If a small business has a non-owner employee, a financial advisor should be hired. No ifs, ands, or buts.
6. Find a good TPA/ERISA attorney. Obviously, to have a good retirement plan, you need a good team. I cannot stress the need for businesses to find a solid third party administration firm (TPA) and a good ERISA attorney (preferably an independent ERISA attorney who will draft a plan documents at costs comparable to what a TPA would charge).

While this list is not completely full, I think it’s pretty straightforward and in English.

Years ago, David Letterman mocked the graphs that a national newspaper had on its sections by joking that: “USA Today has come out with a new survey: Apparently three out of four people make up 75 percent of the population.” This is my moment.

I recently came across an article that said that government employees prefer defined benefit pension plans over 401(k) plans.  The article was based on a study from the Washington-based National Institute on Retirement Security (NIRS). The study showed that public sector employees prefer defined benefit (DB) pensions over other forms of retirement plans, such as 401(k)/defined contribution (DC) plans. The study analyzed seven state retirement systems that offer a choice between DB and DC plans, and found that 75 to 98 percent of new employees in those systems preferred DB plans, while 2 to 25 percent choose DC plans.

“The research is clear that public employees highly value their pension benefits and will choose this retirement plan over an individual DC account,” said Ilana Boivie, who was a co-author of that NIRS report. In other news, the sun will rise and set today.

Let me get this straight, public sector employees would rather have a retirement plan where the employer funds almost all of the contributions than a plan where the employees fund the bulk of it? Really? Imagine that. I’m sure you might get the same result by asking private sector employees, except a good chunk of the employees wouldn’t know what a defined benefit plan is. But that’s another story.

I remember when I first started in this business in 1998, as a young, naïve ERISA attorney. I had a paralegal named Marge who taught me a lot more about retirement plans that what I learned in my Tax L.LM program. I told Marge how great I thought 401(k) plans were and how they were the best plan going. Marge told me straight that I was clearly wrong because other plans like DB plans, money purchase plans, and straight profit sharing plans were actually better. The reason those plans were better was because the employer was doing the bulk of the funding for retirement. Under a 401(k) plan, it’s the employee that does the bulk of the funding. 401(k) plans, when they were first designed were implemented as an additional savings plan for employees to supplement a pension plan. As 401(k) plans grew in popularity, thanks to daily valued, participant directed plans (which supposedly eliminated an employer’s liability), employers realized they can save money by phasing these type of employer funded plans out.

The debate over pension plans for governmental employees is always an interesting one. To me, it’s not about politics. I worked for three years at a couple of union side law firms where they confused their work with politics and they let politics kind of cloud their views and their work. As an ERISA attorney, politics never affect my work because I feel there is no Democrat or Republican way to represent my clients.

The debate over public pensions to me isn’t about politics; it’s just the simple nature of the employer-employee relationship. The employee wants to make as much money as they can and the employer wants to pay as little as possible. Doesn’t matter when it’s the sanitation department, the NBA, or a third party administration firm (bringing back such great memories). So when the employee has a great benefit like a pension plan or great health care benefits, they don’t want to give it up. On the flip side, government wants to phase these plans out to save money and close large budget deficits. I see it pretty clearly because I don’t let politics cloud my views on retirement plans.

People complaining about public sector unions state that pension plans should be replaced by 401(k) plans. Like that has served private sector employees so well over the last 30 years. Of course, those people are correct in noting how expensive defined benefit plans are and how tenuous local, state, and federal budgets are these days in this terrible economy.

Empathy is the capacity to recognize and, to some extent, share feelings that are being experienced by another person. Let’s face it when it comes to political debate or collective bargaining between employees and employers, there is more yelling and less empathy. But that’s another story too.

I probably have drafted and amended thousand of plan over the years and every plan has its own little quirks. When it comes to plan design, I have always believed that some of the bundled providers have it wrong. There is no cookie cutter approach to retirement plan design; so many plans being handled by bundled providers are underserved because the plan document doesn’t fit what the plan sponsors needs or wants to do. You’ll have prototype, fill-in the blank documents that doesn’t have all the choices that a plan sponsor may want or need. For years, I actually was recommended by one of the largest providers to draft amendments to their prototype documents because up until the EGTRRA restatement documents, they had no provisions for new comparability profit sharing allocation.

That being said, even with prototype and non-prototype, I am often amazed on what provisions that plan sponsors don’t have. I am not talking about required contributions like safe harbor, I’m talking about provisions that are common sense and help facilitate administration. I’m talking about 401(k) plan provisions that plan sponsors eventually end up needing one day that they end up spending money to amend the plan to add these provisions. Here are some plan provisions; I like to see in every plan document:

1. Allowing plan participants to rollover money into the plan and allow them to withdraw it at any time.
2. In-service distribution, allowing plan participants to access their money at age 59 1/2 , even if they are still working.
3. Loans, not a big fan of them, but participants may need it for one reason or another.
4. Hardship provision, same view as #3.
5. Discretionary profit sharing and matching contribution provisions. Even if a plan sponsor never wants to make one, I feel having those provisions in there are better than not and having a plan sponsor wanting to add them because with the language needed for an amendment, you’ll actually need a new document.
6. Roth 40(k) provision. I see no reason in not offering it.

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

One of the most unfortunate working relationships I had was when working for a client who had another ERISA attorney on retainer. This ERISA attorney was conducting a review of the plan including its administrative procedure. My Retirement Plan Tune-Up can do that for $750, his review cost about $100,000+. Mind you, this was not Microsoft’s 401(k) plan, but the plan of a medium sized business. That being said, I was asked by the plan’s financial advisor to draft a notice to interested parties regarding a plan amendment that was made that the client wanted an approval letter on. I drafted the notice, based on the one provided to me by my plan document provider. The ERISA attorney reviewed it and claimed that it did not have all the language and therefore would disqualify the Plan if used.  The notice had all the required information and even if it didn’t, it was hardly something that would disqualify the plan. The ERISA attorney was trying to justify his extravagant fee and knock my low, flat fee. Of course, the ERISA attorney’s hyperbole was a bit dramatic because it really lacked common sense, the Internal Revenue Service (IRS) would never disqualify a plan because of a missing notice. Plan disqualifications are the ultimate sanction for qualified retirement plans and are used only in the rarest of circumstances.  A notice with two lines missing isn’t going to do it.

Whether it’s an ERISA attorney or a competent third party administrator, we certainly know what the rules are when it comes to having the plan comply with the Internal Revenue Code and ERISA. Rules govern notices, discrimination tests, salary deferrals, and participation, and a retirement plan needs to comply with. I have always said that if I ever wanted to find an error in a retirement plan, I can certainly find one. The error in administration or plan document design might be so minimal, but I am sure I can find one in every plan I will review. The reason is that you have so many important qualification rules such as making sure the plan doesn’t discriminate in favor of highly compensated employee, that some of the smaller ones are forgotten about. So while we strive for perfection in plan administration, most of us know we won’t get there. However, there are errors that even the IRS will forgive on audit because even they don’t want to deal with such minutiae.

One detail of minutiae deals with safe harbor 401(k) plans. The safe harbor plans have been around since 1999 and are an effective plan design tool because a plan could avoid a discrimination test it knew it would fail by making a fully vested contribution to non-highly compensated employees either in a profit sharing or matching contribution. One of the most important requirements for an existing plan is the hand out of a safe harbor notice annually to all participants between 30 to 90 days prior to the start of the Plan Year. So you know what I am doing around November 15^th. While the safe harbor notice is required for the safe harbor contribution to be made, it has been my argument for the last 12 years is that if the safe harbor contribution is not handed out in time, the Internal Revenue Service is not going to raise a stink over it. Why? Common sense would tell you that the Internal Revenue Service isn’t going to stop plan participants from receiving a fully vested contribution from their employer, especially when they are non-highly compensated employees.

I know what you are saying, I am speaking blasphemy. I am saying that even if you don’t follow the rules, you still may get away with having a safe harbor plan. Well, my 12 year assumption was correct when I had a safe harbor plan audited. A notice was provided to the Plan and by all counts, it was provided on time. The auditor reviewing the plan noted that some of his superiors have indicated that an agent on plan audit can not dwell on when a safe harbor notice was posted or handed out or when because there is no way to determine whether the plan sponsor complied with the safe harbor notices or not. In addition, he confirmed my hunch. The IRS is not likely to stop an employer from giving fully vested contributions to employees. All the IRS wants to hear that the employer gave the notice at least 30-90 days prior to the plan year, whether they did or not.

So like Animal Farm, we do have rules on retirement plans that are more equal than others. Limitations on deductible contributions, plan discrimination in favor of highly compensated employees, prohibited transactions, and improper plan distributions are more important to the IRS than whether a safe harbor notice is distributed on time. As an ERISA attorney, I am cognizant of what the rules, but I have enough common sense to determine what issues may raise IRS sanction and what will be ignored.  I’m not Chicken Little and the sky isn’t falling.

This reminds me of the line Ronald Reagen used in the 1980 Presidential debates in response to what he thought was Jimmy Carter misinterpreting one his positions. Reagen said : “there he goes again.”

One of the most unfortunate developments in the retirement plan business in the last six months has been the misrepresentation of the validity of multiple employer plans (MEPs).

As the story goes, an attendee at a mid-west benefits conference asked some folks at the Department of Labor (who have still remained nameless) about the use of open MEPs, which are MEPs open to all employers (regardless of industry or association membership). A question was presented to those representatives of the DOL about open MEPs where the plan sponsor was a third party administration (TPA) firm. Quoting directly from someone who was actually there, an ERISA attorney (no less) said: “[the]  DOL representatives told GAC on June 13^th that it is their opinion that the structure being considered by some TPA firms is not a multiple employer plan, but a series of individual single-employer plans covered under a common document.  Why?  Because there is not a sufficient connection between the plan sponsor (the TPA firm) and the participating employers and their employees to enable the TPA firm to act as the plan sponsor.  If the DOL position holds, many of the advantages to the TPA-provided multiple employer plans evaporate.  The DOL’s position has never been formalized with respect to retirement plans, but has been longstanding with regard to health and welfare plans.  The DOL representatives indicated to us that they believe that the same analysis they used for the multiple employer welfare plan should be used for retirement plans.”

Before you knew it, within days of this conference, the MEP Chicken Little was insisting that the sky was falling.  This started what I called the Open MEP Urban Legend and how all open MEPs were under risk. Many financial advisors and service providers were starting to shy away from all open MEPs, regardless of whether the plan sponsor was a TPA or not. While I am not crazy about a TPA being a MEP sponsor for a wide variety of reasons, there is nothing wrong with it even despite what these unnamed DOL representatives say. Why? Because qualified retirement plans are governed by rules and regulations and some comment at a benefit conference is not binding. While I would caution participating employers interested in a TPA sponsored MEP, my caution is that the DOL might one day hold that a TPA can’t be a MEP sponsor.

So while the analysis about what happened at the benefits conference was clear, the game of “retirement plan telephone” was not. So people with limited background in retirement plan knowledge were making false allegations against the validity of MEPs. Being the chief fiduciary of one MEP and representing a TPA who is currently entering the MEP administration business, I find that problematic. I recently received an e-mail sent by a representative of an insurance company provider to a financial advisor regarding the validity of MEPs and totally misrepresenting the view of that ERISA attorney who was at that conference. In addition, this representative made some allegations against one of the more well known MEP providers, suggesting that their 2010 incorporation was an issue (it was not) and that the person acting at the financial advisor was a one man shop (that is not an issue here). The funny part of the e-mail is that this representative is from a well known insurance company who has been in the middle stages of finding a MEP solution for themselves. So I guess what may be good for them, isn’t good for other providers interested in the MEP space.

That being said, this is probably the 3^rd or 4^th time I have blogged on this very same issue, and I will not stop blogging about it until the urban legend of the DOL investigating open MEPs is put to rest.