The Rosenbaum Law Firm P.C. Blog

My latest JDSupra.com article can be found here.

With apologies to Tod Higgins (played by Keanu Reeves) in “Parenthood”, you need a license to practice law to be an ERISA attorney, you need to be a CPA to be a retirement plan auditor, you need a securities license to be a financial advisor, but any shmuck can put out a shingle and call themselves a third party administrator (TPA).

There is no required training or licensing for someone to operate a TPA business and I find that scary for a position that requires such knowledge and expertise to do the job of plan administration and recordkeeping properly.

So when looking for a TPA, look for any ASPPA designations or other accreditations such as an enrolled actuary among the professionals you hire as your TPA.

An advisor friend of mine advised me of a potential client that was considering making the move to an insurance company based provider. Nothing too strange about that, except for the fact that the 401(k) salesman for the insurance company provider indicated that the insurance company would serve the plan in a fiduciary role, which is news to me and news to the financial advisor. While insurance companies have been tinkering with fiduciary guarantees and some are working with ERISA §3(38) fiduciaries, but at this level this service provider could not be serving as a fiduciary and has had a history of court cases where they fought the responsibility of being a fiduciary.

So plan sponsors should be wary of some 401(k) salespeople who overpromise and undeliver. The plan sponsor in question should review their contract with the insurance company provider to determine whether the insurance company provider is serving in a fiduciary capacity or not.

401(k) sales people can be an interesting lot. Some of them like my friends Carlos Tariche of Kravitz and John Grace of  Chernoff Diamond had extensive careers as plan administrators before becoming salespeople. Some don’t have the retirement plan background and were probably coming from a mutual fund company wholesaling background or working for a broker dealer or registered investment advisory firm. Salespeople don’t have to be retirement plan experts at all, but they need to surround themselves with those that are to avoid the overpromising of services and not to get the third party administration firm in trouble. My good friend Rich Laurita who was the greatest 401(k) salesperson I ever worked with knew very little about retirement plans, but he was a master of human relations. Rich knew his limitations, so he would bring me in from time to time to help with the sales pitch and to ensure that the client got what was promised for.

The other salespeople who were working with Rich at the time he got ill were not as smart to bring me in and help out. I used to joke that they couldn’t spell 401(k). There was one salesman who signed up a client with problems passing the discrimination tests because of its transient workforce. This salesperson asked me if it was OK if the illegal aliens working for this new client defer under the 401(k) plan using phony social security numbers. Yes, you read that right. Then there was the other salesperson who I understand years after I left told a major Long Island accounting firm that our company had its own audit practice to audit our audit eligible plans. Of course, years later, that tiny tidbit of information sunk that TPA. Don’t fret about that salesperson, they promoted him.

There are many fantastic 401(k) salespeople out there and some not some very good ones. Regardless of their professionalism, it would be wise for plan sponsors to review the contract with their TPA to determine that they are actually getting what they were promised for. Plan sponsors should consult with a retirement plan consultant or an attorney to determine whether their service contracts meet their expectations.

When I joined a semi-prestigious Long Island law firm (sorry, Lois) after spending over 9 years as an attorney for third party administration (TPA) firms, I thought I could develop a solid book of business in the single employer retirement plan area. When I left the TPA in question about a year earlier, I learned that they raised the amendment fee from $475 to $600 because I was replaced by two attorneys and a paralegal. So when all plans had to be amended to conform to the new Internal Revenue Code Section 415 regulations, I saw an opening.

I proposed to send letters to all of my previous clients at that TPA and offer to do the 415 amendment at 50% off, $300 than what the TPA was charging. I thought by getting these clients for a $300 amendment, I could eventually parlay that to the plan restatement work that were going to have to be done by 2010.

When the managing attorney and her law firm administrator/lackey reviewed my proposed letter, they took the Advertising Committee’s suggestion that they take out my reference to a $300 amendment fee and just state that I would do the amendment in a cost effective manner. They claimed that I could not guarantee the fee (even though the amendment could be done by mail merge) and they felt that form of advertising cheapened the firm’s image.

Of course the letters went out, omitting the $300 reference, and stating I would do the 415 amendment in a cost effective manner. So when a plan sponsor gets a letter from their TPA that they will do the amendment for $600 and a law firm stating they would do the very same amendment in a cost effective manner, who do you think plan sponsors thought was less expensive? Needless to say, 700 letter, 0 clients.

That is the stigma of an ERISA attorney. People think we cost too much, so small to medium sized employers stay away from ERISA attorneys in drove. Same with financial advisors, they try to steer their clients away from what they think is an unnecessary expense, especially when TPAs can offer plan documents at a cost far less than what most law firms should charge. The stigma is justified because I believe that the billable hour can be a dangerous weapon used to overcharge plan sponsors for ERISA work. One of the main criteria to judge the effectiveness of partners and associates in a law firms are billable hours. Networking, writing articles, developing relationships with TPAs, and RIAs were hours that I can never bill, so billable hours can be an incentive to overbill.

So when I started my own law firm, I wanted to take what was the best from law firms and TPAs, and eliminate what I didn’t like. What I took from TPAs that I liked was the flat fee approach to plan documents. So I charge $2,000 for a plan and I charge $750 for a plan tune-up. I don’t charge for mail expenses or a photocopy or for phone calls, a flat fee is cost certainty and clients see a value to it. I charge $1,000 to rewrite a TPA or RIA’s service agreement to comply with Section 408(b)(2). What I took from the law firms that I liked was the professional service affording a client-attorney relationship that the TPA legal department can never have. What I didn’t like about both the TPA and the law firms was the transparency of fees. Some TPAs don’t practice that and most law firms don’t, they quote the billable hour and that’s it.

I had the pleasure of referring a TPA client to Marcia Wagner’s office for an outside opinion on multiple employer plans. Marcia’s office quoted a flat fee and delighted the client because of the work product and the certainty of the fee. There was no sticker shock; the client knew what they were getting and the fee that they were paying. I am glad I’m not the only ERISA attorney doing that.

ERISA attorneys talk about so much about fee transparency for retirement plan providers, yet so many don’t practice what they preach. Plan sponsors and their advisors are hesitant in using them and there is a good reason for it. I remember an RIA who told me of the ERISA attorney who blew through a $100,000 retainer in reviewing the plan and the service providers. The client wasn’t Exxon-Mobil or Apple. Legal representation from an ERISA attorney shouldn’t be so cost prohibitive for small to medium size employers and I’m trying to prove that every day. I try to cultivate relationships with advisors to help them pursue business or offer to speak at their events for free. Why? The retirement plan business is a relationship driven industry and because I believe that since financial advisors are the gatekeepers to plan sponsors, smarter retirement plan advisors will lead to better retirement plans.

People who live in glass houses should never throw stones, so ERISA attorneys should be transparent in the fees that they charge and what the suggested cost of their work should be.

For the last year or so that the Department of Labor has been trying to implement the 408(b)(2) fee disclosures, we hear about a lot of retirement plan providers (including yours truly) about the coming storm and how fee disclosure will create opportunity for some providers and some anguish for a few. We have talked how this will certainly be an eye opening event for plan sponsors who have sworn for years that they pay nothing for administration.

But one of the problems that I see with fee disclosure is that I don’t believe that plan sponsors are ready for it or are ever going to be ready for it. There are too many plan providers who don’t do a lot of hand holding for their clients and kind of just drop things on clients without mentioning their importance. So I am wary that there will be some plan providers who will just send their fee disclosure mailing to their clients without really explaining what these disclosures are and what plan sponsors will do with them.

Plan sponsors have important jobs to do with fee disclosure and many are unaware of it. It’s not as simple as getting a fee disclosure form and putting it in the back of the drawer. Plan sponsors have some serious tasks such as making a listing of all service providers and identify which ones qualify as a provider required to provide disclosures. Plan sponsors will need to confirm all disclosures are received and presented to plan fiduciaries. They will also need to confirm that all covered service providers have furnished reports and that the reports contain sufficient detail to enable them to assess the reasonableness of their fees.  If a covered service provider fails to provide the disclosure, or sufficient detail in the disclosure, the plan sponsor must notify the provider and consider terminating the arrangement or even notifying the Department of Labor. Plan sponsors will actually have to determine whether the fees are reasonable by shopping it around, perhaps as formal as sending out a request for proposal.

These are important tasks, are the service providers letting plan sponsors know what their role is? I’m sure quite a few are and quite a few aren’t. I just worry because plan sponsors have a fiduciary responsibility to comply with the 408(b)(2) regulations and they could be breaching their duty by sitting back, doing nothing, and leaning on their plan providers just to disclose their fees. The onus will be on the plan sponsors to determine whether the fees are reasonable and you can’t do that by sitting back and doing nothing.

If you are a service provider and need help in formulating agreements or disclosure forms to sponsors for 408(b)(2) or education for plan sponsors, you know where to find me.

My latest JDSupra.com article can be found here.

My comments regarding wills and retirement plans for this Fortune Magazine article can be found here.

You hear all the debates in the retirement plan industry, active vs. passive; bundled vs. unbundled, ERISA §3(38) vs. co-fiduciary vs. ERISA §3(21) vs. non fiduciary, brokers vs. RIAs, among others.

Regardless of the debate, there are enough plans in the industry to handle all of them and not one theory of doing business is perfect for every retirement plan out there. For example, I have never been the biggest fan of bundled, insurance company based platform plans. However, they can be a terrific for small plans and some of them have programs that fit the needs and costs for larger plans.

Same with ERISA §3(38) fiduciaries. It is a great fit for the plans where plan sponsors and fiduciaries have no idea how to handle a retirement plans. However, there are a few plan sponsors and fiduciaries diligent in acting as fiduciaries, so there might not be a need for an ERISA §3(38) fiduciary.

The morale of the story is that no matter what product you push, there is probably enough room  in the marketplace. In addition, no matter what products or services you offer, it may not be the best fit  for everyone. There are no absolutes in the retirement plan industry. As Obi Wan Kenobi said in Revenge of the Sith, that “only a Sith deals in absolutes.”

When I was a student at Stony Brook, I was heavily involved in student government. The student government was as chaotic as regular government except for the fact that student officials were brazenly stealing elections and student money without the administration blushing an eye and putting Tammany Hall to shame. The tactics of the student government was to pit student groups against each other and spreading false innuendo that if certain people would take power, than funding for these student groups (mainly populated with cultural groups) would be eliminated. It was a great tactic and this is where I learned about tribalism.

Tribalism is a strong feeling of identity with and loyalty to one’s tribe or group. I always look at tribalism as a belief that the members of the tribe will support other members of the tribe against all charges (despite all the evidence) made against these members, only because they are the member of that tribe. We see this belief system when it comes to ethnic groups, religious groups, employee unions, and political parties. I always see it as a kind of look the other way approach, where guilty people are defended because they happen to be a member of that group. Perhaps that explains why I’m not involved in politics or any type of trade organizations.

 I understand that the Executive Director of ASPPA has spoken out against the consolidation of 403(b) plan vendors in Los Angeles’ Unified School District and how this does not benefit 403(b) participants at all. There was a bit of an outrage over this, but what did you expect? As Heath Ledger said in the Dark Knight, “why so serious?” What side did you expect him to be on the side of? 403(b) participants or those that are in the industry? Who pays ASPPA’s bills? 403(b) plan participants or providers in the industry? So I ask you, why so serious? It is a practice of a trade organization or lobbying group to defend the practices of the industry, despite how abhorrent. Remember The Tobacco Institute? They were funded by the tobacco companies as a trade group to debunk the health concerns of smoking. So why should it be shocking that a lobbying organization is lobbying for 403(b) vendors since many of them are paying the bills? Again, why so serious?

As far as eliminating 403(b) vendors and its impact on 403(b) participants. Choice in life is good, except for multiple 403(b) vendors in a school district. I once worked on a state teachers union and its desire to get back into the endorsed 403(b) market after an absence. As part of the agreement with the state, they had to offer two 403(b) plans (one low cost and one not so low-cost). When the request for proposal went out, I told the partner in charge that this was going to be won by an insurance company. I was right. After the RFP went out, all of the low cost providers withdrew interest. Why? These providers didn’t want to compete against another teacher union endorsed product and didn’t want to compete against 3-4 different vendors in each district and then with the added burden of having to send representatives of 950+ school districts. With anyone with a rudimentary understand of the daily valued retirement plan business, assets dictate everything and larger plans have better pricing because of the industry’s economies of scale. So it would be common sense that multiple plan vendors drive up cost. What would happen if a $10 million 401(k) plan was then divided up among 4-5 401(k) plan vendors for that one plan? It would drive up cost, wouldn’t it? So it stands to reason that eliminating 403(b) plan vendors will drive down cost? I think so. Then again, no industry groups are paying my salary.

I once worked for a third party administration (TPA) firm that I have been critical of and which no longer exists. When I was there, I wasn’t so public with my remarks because those folks were paying my salary. Independent thought requires independence and it’s hard for someone to be critical of the industry if they are the ones supporting you and your way of life. So don’t expect trade and lobbying groups to represent plan participants. As honest plan providers, that’s our job and not looking the other way.

My latest newsletetr geared towards financial advisors can be found here.