The Rosenbaum Law Firm P.C. Blog

We all remember the story of the California Gold Rush when gold was discovered in Sutter’s Mill in 1848. This discovery spurred the Forty Niners (not the Joe Montana-Roger Craig (special thanks to Lawrence Taylor for stripping the ball Craig from in the NFC Championship Game in January 1991) kind), about 300,000 to move to the Gold Coast. We also remember the dot.com/dot.bomb era of the late 1990’s where it seemed everyone had their own online business. The lesson is that whenever a business or venture becomes popular, other people try to enter the market and most of the time, flop. Ask the brains behind Hewlett Packard’s TouchPad and Blackberry’s Play Book.

One of the most positive developments of the retirement plan industry in the last five years has been the proliferation of independent ERISA fiduciaries such as ERISA §3(21) and 3(38) fiduciaries, who have helped plan sponsors minimize their fiduciary liability. These ERISA fiduciaries add some expertise to an industry that truly needed it.

That being said, the popularity of ERISA fiduciaries has spurred many financial advisors to try offering a §3(21) and §3(38) service. The problem is like the previous gold rushes of the past is that you may have the entry of financial advisors into the market that have no idea what an ERISA fiduciary does, as well as how the fiduciary process is being handled by an ERISA §3(21) and §3(38) fiduciary. They will enter the fiduciary gold rush with a tin pan and not much else.

Unlike some of the accredited positions in the retirement plan industry, there is no requirement a financial advisor needs to meet (except making sure those services are covered under their liability insurance) to hold themselves out as an ERISA §3(21) or 3(38) fiduciary. So there will inexperienced ERISA fiduciaries who probably won’t seek out the advice of an ERISA attorney (cough, cough) or an experienced ERISA fiduciary whoand will end up doing an incompetent job. The problem with an incompetent ERISA fiduciary is that the hiring of a fiduciary by a plan sponsor is a fiduciary function and the hiring of a negligent fiduciary is a breach of that plan sponsor’s fiduciary duty.  So hiring an incompetent ERISA fiduciary defeats the purpose of hiring an ERISA fidcuairy.

So the lesson to be learned is that plan sponsors needs a process to evaluate potential ERISA fiduciaries and financial advisors seeking to enter the ERISA fiduciary market should consult with ERISA attorneys and experienced ERISA fiduciaries to understand what being a §3(21) or §3(38) fiduciary is all about.

My latest JDsupra.com article can be found here.

As many of you know, I offer a Retirement Plan Tune-Up, a legal review for $750 that reviews the documentation, administration, costs, and the fiduciary process of a retirement plan.

Regardless of whether you would use my review or hire someone else, it is incumbent on plan sponsors as plan fiduciaries to review their plan on an annual basis to see whether the plan still fits their needs and whether it’s running correctly. Running correctly is about paying reasonable fees, taking care of the fiduciary process, and making sure the plan is operating correctly according to its terms and the law.

So while all plans should be reviewed, there are some plans with more glaring problems than others. These plans may have symptoms that the plan isn’t running correctly and should immediately undergo a plan review.

1. A plan where the third party administrator is not transparent on fees, especially when it comes to indirect payments they receive, such as revenue sharing payments from mutual funds.
2. A company that has a profit sharing and money purchase plan that covers the same group of employees.
3. A plan that has consistently failed their discrimination testing, whether it’s the tests for salary deferrals, top heavy, match or 410(b) participation.
4. A defined benefit plan which is underfunded.
5. A defined benefit plan for a company that has increased their workforce.
6. Any plan with no financial advisor.
7. A money purchase plan that is covering non-collectively bargained employees.
8. Any 401(k) plan that has not reviewed their contract with their insurance company provider in the last 5 years.
9. Any plan without an investment policy statement.
10. Any plan that has not reviewed their choice of investments in the last year.
11. Any plan that has not seen their financial advisor in the last year.
12. Any plan without an ERISA bond and/or fiduciary liability insurance.
13. A 401(k) plan with low participation or low average account balance per participant.
14. Any plan that has not been updated in the last 2-3 years.

These are just some examples of symptoms that indicate you may have a retirement plan in distress. Regardless of whether you have the symptoms or not, you should have your plan reviewed.

As an ERISA attorney, I always have an open phone policy with plan sponsors, financial advisors, accountants, TPAs, and other attorneys from around the country on questions they may have about their plan or a client’s retirement plan. I never wanted to be that law firm attorney who was charging for every simple phone call and I just feel that this policy is a great way to build relationships in this tight knit industry. That being said, some of the questions I get tend to be repetitive. So while I’m not trying to dissuade people from calling me, I just want to educate everyone on some issues that they may not understand. Like I always say, the reason I love the retirement plan industry is that you can learn something new every day. So here we go:

1. In a 401(k) plan, if you are under 59 ½, you can only get a distribution of your salary deferrals for hardship, death, disability, or retirement. There can be no-in-service distribution for salary deferrals in the plan document for less than age 59 ½. If you did, it would be a disqualifying plan provision.  You can have an in-service from the profit sharing source at any stated age though.
2. A transaction between a plan and a disqualified person is a prohibited transaction. So the plan buying a building and leasing it to the plan sponsor is a prohibited transaction. Even a financial advisor serving as a plan fiduciary can’t actively solicit rollovers from former plan participants.
3. Any participant directed investment that requires a minimum investment or account balance is subject to testing under benefits, rights, and features to make sure that these benefits, rights, or features of a plan don’t discriminate against non-highly compensated employees. So investments with minimum investments of $25,000 can be discriminatory if enough non-highly compensated employees don’t have $25,000 in their plan account. One solution to that dilemma is if the investment can be traded in a brokerage account, offer self directed brokerage accounts to all plan participants.
4. There is no statute of limitation for not filing a Form 5500. Using the Department of Labor’s Delinquent Filing Program is a far less expensive than getting socked with a penalty from the Internal Revenue Service for $50,000.
5. Offering a new comparability profit sharing allocation to a 401(k) plan should not be used in tandem with a safe harbor matching contribution formula because you can not use the matching contribution to offset any minimum contributions under a new comparability plan design (which a safe harbor profit sharing 3% contribution can).
6. When terminating 401(k) plans, be wary of the successor plan rule which is only applicable to 401(k) plans. Under the successor 401(k) plan rule, generally an employer may not terminate a 401(k) plan and then start a new one for at least 12 months after the original plan is terminated.
7. Be careful of offering any incentives for people deferring or not deferring into a 401(k) plan. A 401(k) plan is not qualified unless it complies with the Contingent Benefit Rule. The Contingent Benefit Rule provides, in part, that no other benefit may be conditioned, directly or indirectly, on an employee electing to make or not to make elective contributions under the 401(k) plan.
8. Many plan errors can be corrected without seeking submission to the IRS’ voluntary compliance programs. It all depends on the size of the error and the years involved.

Ariel Sharon was one the most polarizing and most loved political and military figures in Israeli history. One of his confidantes, the Israeli journalist Uri Dan summed it up best. Dan said that the Israelis that did not want Sharon as Defense Minister would get him as Foreign Minister. Those that did not want him as Foreign Minister will get him as Prime Minister. So while some were ecstatic over Sharon’s resignation as Defense Minister after the slaughter of Palestinian refugees by Christian Phalangists in Lebanon with Israeli soldiers nearby probably weren’t so happy when Sharon staged one of the greatest political comebacks by being elected Prime Minister in 2001.

So when financial professionals such as brokers and insurers cheer the Department of Labor’s withdrawal of the change in the retirement plan fiduciary definition regulation will probably get a tougher definition in 2012 when it will be re-proposed and will probably extend the rule to individual retirement accounts. As Commander Uhura said in Star Trek III: The Search Spock: “be careful what you wish for, soon you may get it.”

Remember when Congress couldn’t strike a deal on fee disclosure for retirement plans and many in the industry cheered? What happened? A DOL regulation was implemented that ended up doing the same thing.

There are too many conflicts in the retirement plan industry, so a change in the definition of fiduciary that will create a level playing field of responsibility for everyone calling themselves a retirement plan financial advisor is a good thing. I am convinced that a change will occur; it’s only a matter of when.

My latest JDSupra.com article can be found here.

When I write about the needs for plan sponsors to understand their responsibilities as plan fiduciaries and their potential liability if they ignore their duties, I hear the same complaints about my ideas. The complaint which was even leveled by other ERISA attorneys is that small 401(k) plans never get sued over plan costs or a failed ERISA Section 404(c) process for participant directed plans.

While I don’t suspect that best ERISA class action litigators will bother with a $2 million 401(k) plan, one of the major reasons that small plans haven’t been sued is that ERISA litigators haven’t gotten there yet. They are too busy with larger plans and I assume that once the larger plans are taken care of, some ERISA litigators will pursue smaller ones. I have already seen one litigator already placing ads trying to solicit potential clients who are participants in 401(k) plans using insurance company platforms. So while smaller plans haven’t been targeted yet, who is to say that trend will continue?

In addition when it comes to litigation against smaller plans, perhaps people think too big. Perhaps the litigation is more of the nuisance kind, perhaps as a threat of litigation by a former, aggrieved employee with no hopes of taking it to court and just trying to settle it for $25,000 or less.

For example, I worked for a third party administration firm that had a penchant for getting sued by former employees (no, not me). I remember one administrator who was an Orthodox Jew who was a bit incompetent and a lot insubordinate. For one reason, he took some time off and agreed to make up hours by working on Sundays. Problem was that he wasn’t there when he said was there (the front door records don’t lie), so he was terminated. So instead of going away quietly, he hired an attorney and threatened litigation. His claim is that he was fired because he was an Orthodox Jew. Well, the owners of the company were Jewish and while I was never their fans, they actually went out of the way for him because he was Jewish. The case was frivolous, but my bosses paid him $4,000 to go away. They wrote it off as nuisance value, because hiring an attorney to defend a lawsuit would cost more than $4,000. So suppose when times are tough and employees are either laid off or terminated or cost, what would stop a former employee from threatening litigation against the employer because the employer never bothered to implement an investment policy statement for their participant directed 401(k) plan or bothered to review the investment options or offer any participant education. Am I that far off? Aggrieved former employees have sued or threatened to sue for less. So perhaps the potential liability for small plans that plan sponsors need to be concerned with are not class action lawsuits, but nuisance threats.  Plan sponsors don’t have to give a weapon to aggrieved former employees if they don’t load the gun with a poorly managed retirement plan.

An article I wrote for Employee Benefit Adviser last month can be found here.

When I was at law school, I was the Editor in Chief of the law school’s newsmagazine. My rise to the top probably had a lot to with the free time I had by not making law review or any other of the law journals. I failed to get on to any of the four journals through either grades or a write-on competition. While I get lauded for my writing on my blog and through my many articles, my legal treatise writing was probably not very good to get on. Regardless, I took to the pages of the magazine and commented how I had issues with the entire journal selection process.

A year or so later, I was contacted by two members of a law journal who advised me of discrepancies with the time sheets of law journal members. Law journal members had to document 180 hours of work for the year to net 4 academic credits for the year. Well, the time sheets for most members of that journal fell far short of 180 hours, especially those that were elected to the editorial board. Since the editorial board was elected only by the previous editorial board (and not by the current staff), it was alleged that favoritism and not merit got these board members elected. For example, the new Managing Editor only completed about 80.5 hours, almost 100 hours short of his credit requirement. While the time sheets were legitimate and the editorial board had no answer for the time hour discrepancy, they attacked my writing of the article because of my bias against the journals. I knew I would be saddled with that claim, but none of my staff members were willing to write it themselves (as a side note, my co-writer was a member of that journal previously and was later targeted for retribution because of a discrepancy with his time sheet).

As many of you know, I served as an attorney for a couple of third party administration (TPA) firms for about 9 years. So I have seen the good, the bad, and ugly of the retirement plan industry. So I am quite vocal about some of the issues I’ve seen. So while I tell stories about issues of TPA errors and hidden expenses based on my experiences, I get labeled as someone who is anti-TPA or I let my experiences cloud my view of TPAs. On the contrary, having worked for a not so good TPA as their top attorney (Sheldon, you wouldn’t have known how to draft a plan IMHO) has given me an appreciation of the good TPAs that I have worked with since I left. I have a great appreciation for good TPAs because they make my job easier and they save my clients money through very sophisticated plan designs.

On the contrary, too many financial advisors and plan sponsors discount what a TPA does, so they chase after the lowest costs TPA and pay for it later through required plan corrective action. A good TPA will increase contributions to highly compensated employees at a fair fee and doing competent work to preserve tax qualification. TPAs aren’t laundry detergent, there is a difference between the good, the bad, and ugly TPAs.

Gen it comes to service providers, it is a fact that TPAs do the bulk of the work. Plan administration, especially daily 401(k) administration is a highly technical and precise job. At least a need to be precise. However, whatever the reason may be, there are a lot of TPAs that aren’t up to the task of being expert administrators and these plan errors threaten the tax qualification of a retirement plan. While ERISA attorneys, auditors, and financial providers are important cogs of a retirement plan machine, the TPAs do the bulk of the work and if they do the bulk of the work, it is more likely that an incompetent TPA would cause an error that threatens a plan’s qualification. That is not a knock against TPAs, it’s just a fact that they do most of the work.

Many people don’t understand the role of TPAs and how it’s important to choose a good one. Many plan sponsors and their advisors only discover that when it’s too late.

People often think that my background as a TPA attorney was some sort of a traumatic experience. Hardly, it gave me the background to be an ERISA attorney who can be outspoken and can be diligent in working with plan sponsors in trying to avoid excessive plan expenses and trying to minimize their liability at a flat fee.

My latest JDSupra.com article can be found here.