The Rosenbaum Law Firm P.C. Blog

My latest JD Supra.com can be found here.

Henry T. Ford is considered the father or the pioneer of the modern day assembly line of manufacturing.  His development of the Model T and its way of manufacturing is considered one of the great developments in 20^th century capitalism. His assembly combined the idea of interchangeable parts  and was a model of efficiency. His efficiency did have its limitations. In his autobiography, Ford wrote: “Any customer can have a car painted any color that he wants so long as it is black”.

There are many retirement plan providers that have an assembly line approach when it comes to retirement plans. These providers use their own standardized prototype documents and have a consistent plan design structure. Like the color of a Model T, plan sponsors usually using these providers have no choice in plan design and these limitations may cost the plan sponsor money because they are not able to maximize employer contributions through plan designs that may increase contributions to highly compensated employees, which many times are the owners of the plan sponsor.

There cannot be a cookie cutter approach to retirement plans. Every plan is different. Even plans sponsored by the same employer are different. Every plan has its own set of circumstances as to why they were set up, what the goals were when set up, as well as the demographics of the plan sponsor supporting it. Their vesting schedule, eligibility requirements, and employer contribution should be drafted to the specific needs and demographics of the plan sponsor. Plan documents are legal documents and legal documents have legal consequences. They should not be churned out by someone who is not an ERISA attorney or a paralegal with extensive retirement plan drafting background.  Prototype plan documents that have that fill in the blank document look can be a very cost efficient, but they have their limits and there are very often situations where the plan sponsor’s needs cannot fit within the confines of the plan document’s limited choices.

Retirement plans are not widgets or tubes of toothpaste. Like a suit, they have to be custom made or tailored to meet the specific needs of the plan sponsor. Failure to have the plan fits the needs of a plan sponsor is the same as my 6 year old son wearing his 4T clothes or my clothes.  Plan design and drafting is an essential part of retirement plan administration and should not be discounted.

These plan providers that use that assembly line approach that doesn’t offer new comparability plan design or a variety of choice among plan provisions does a disservice to the plan sponsor. Cost for a plan sponsor in retirement plan administration is a concern, but not the overriding concern. Plan sponsors need providers that can draft and administer the plan so it fits their needs.

1n 1946, a bunch of grocers in New Jersey started a cooperative called Wakerfern Corporation so they could get reasonable prices on wholesale goods. In 1951, these grocers decide to market their independently owned groceries under one name and that name was Shoprite.  By uniting as a cooperative, these grocers (which have grown in number) are able to buy products in bulk and at a lower cost so that they can compete against other supermarkets.

I always see multiple employer plans (MEPS) as the ability of small plans to group together and buy in “bulk”. By buying in “bulk” and grouping together with other employers, plan sponsors can get a better product at a better price. At least that’s the way it should be.  For me MEPS is the ability of smaller plans to have a greater choice in the choice of plan providers, allowing them to get services from unbundled providers that they probably could not afford as a standalone plan.

MEPS have become very popular of late and have certainly become a burgeoning business for me. That being said, any burgeoning business will bring in the entry of many new players in the market. The problem for the MEP area, it may bring in a lot of providers that have no background in MEPS or understand how they actually operate.

There has been discussion of late of the Department of Labor (DOL) looking at MEPs of late because someone asked someone from the DOL at some benefits conference. The person for the DOL said that they would be taking a closer look at MEPs that are “open”, meaning that the plans are not affiliated through an association like a bar association or some type of civic group. Low and behold, a lot of people started to act as if the MEP sky was falling. You had advisors questioning of having their clients in MEPs and plan providers consider curtailing their interest in them.  Calm yourselves, will you? The sky isn’t about to fall just yet and there is no reason to panic. Having someone from the DOL say something at some Midwest benefits conference is hardly regulation. However, if you read between the lines, I think MEPs that really look like individual plans bundled together for the sole purpose of avoiding separate 5500s. What types of MEPs are these? I think MEPs where you have the third party administrator (TPA) or a registered investment advisor as the plan sponsor.  If the plan sponsor is an association or a company that is unrelated to the TPA, I don’t think you have anything to worry about. If I’m wrong and the DOL is going to act on open MEPs, they would offer some relief to wind them down and allow the participating employers to spin them off.

As with anything new and popular, you hear a lot of false marketing and innuendo. One piece of false marketing is that joining a MEP totally eliminates a participating employer’s fiduciary responsibility. Not true. Joining a MEP is a fiduciary function, so the participating employer still has potential liability. Another false rumor out there is that if one participating employer is not in compliance, then the entire plan is out of compliance and susceptible to plan disqualification. While the malfeasance of a participating employer puts the entire MEP at risk, the issue is really a red herring. First off, the Internal Revenue Service allows MEP to self correct or voluntarily correct any plan errors. In addition, plan disqualification is an extreme penalty and is very doubtful that the Internal Revenue Service would disqualify all participating employers for the malfeasance of one. In addition, a good MEP helped by a good ERISA attorney (cough, cough) would draft language in the participating employer/joinder agreements that would force the spinoff of participating employers who refused to abide with the compliance of the plan such as paying top heavy minimum contributions.

In addition, there are a lot of insurance company based MEPs. While I have not really look into the issue on a fund expense level, I always believe that the beauty of a MEP was low costs, so I would urge employers and their advisor to look into cost.

A MEP isn’t for anyone, but it s a great opportunity for some employers to get a better plan at a better price.

My latest newsletter can be found here.

Many thanks to my readers, making another of my articles the most read article on JDSupra.com. Click here for the list.

My latest JDSupra.com article can be founds here.

When I was at law school at American University Washington College of Law, I was the Executive Editor of The American Jurist, which was the student newsmagazine for my final year of law school. I wasn’t a particularly fond fan of my law school, I think they made promises to students that they couldn’t deliver on and some of the great opportunities like their law clinics were only available to a small group of students. For example, while I was lead to believe my interest and coursework in tax law would merit me for consideration in the tax clinic, I did not get a slot for the tax clinic because my name was literally not pulled out of a hat.  So my year as the top editor was dedicating my columns to lambast what was wrong with the school and suggestions on how to improve certain aspects of it like the career services office, the journal and law clinic selection process, and orientation.

Certain students and faculty were very critical of my views because they said my columns would have a negative impact on the school because potential students would read the columns and then not got to our school because of what I wrote.  It was pure nonsense because my columns criticized the school and then offered suggestions on how to fix the problems I pointed out. After I graduated, many of my suggestions were acted upon by the administration and I am proud of my role in helping the school out.

People don’t like criticism, they can’t handle it. If you criticize, you get labeled as a hater.  It’s a label to discredit you and your opinion.

A few weeks back, an advisor I know sent an e-mail to one of the big movers and shakers in the 401(k) industry. The e-mail had a quote from an outspoken columnist who has been critical of the abuses with the 401(k) industry. The 401(k) big shot was very offended by the quote and took much exception to it.

My point is that there are enough problems within the retirement plan industry to criticize and simply attacking those that do is certainly not going to help the industry out. Those that try to shout down those 401(k) critics do a disservice to the industry because it is those critics on fees and investments that have helped spur change within the 401(k) industry. That being said, there are those who consistently attack 401(k) plans without a suggestion to improve them or a realistic way to help the retirement savings crisis in the country. When managed correctly, a 401(k) plan is one of the best employee benefits out there that has helped plan participants save for retirement and lower their current taxable income. People within this industry don’t have to be like Anthony’s neighbors in the Twilight Zone episode “It’s A Good Life” and think “nice, happy thoughts.” If you see something wrong within the industry, say something and offer a way to make things better.

Those that believe that the retirement plan industry is perfect and call those that criticize it are haters are members of a flat earth society who don’t have tolerance for the free flow and exchange of ideas. There is a lot of right and wrong with the retirement plan business, don’t be afraid to speak up in trying to improve it.

JDSupra.com was the best thing that happened to my practice, so when they asked me to help with marketing their terrific service, I said “anytime”. My YouTube video can be found here.

My Retirement Plan Tune-Up, the legal review of a retirement plan for $750 now includes Brightscope analytic ratings at no additional cost. Click here for details. Click Brightscope Press Release as well.

In the good old days of participant directed 401(k) plans, a good chunk of financial advisors did very little work for the plans that they advised. Many of them sat back, collected their trail or asset based fee, and maybe saw the client once a year. Thanks to changes in regulations and court decisions, the day of wine and roses are over.

Recent court cases especially the DeWolf case, make it far easier for 401(k) participants to sue plan sponsors. In addition, the poor market returns have created incentive on plan participants to sue plan sponsor for breach of fiduciary duty. These cases have shown that many plan sponsors don’t do a very good job in managing the fiduciary process in developing an investment policy statement (IPS), reviewing plan investments against the IPS, and providing participant education.

The new fiduciary regulations, if implemented, will create a level playing field for all financial advisors who will then bear the risk of providing advice to plan sponsors.

While so many other plan providers tell me that they are jealous on how much advisors charge and how little they do, a financial advisor is an integral part of limiting a plan sponsor’s fiduciary liability and so many are underpaid for what they do. Sure I have found those advisors making 60 basis points on a $14 million plan and do nothing, there are so many advisors that understand their role and do a great job in limiting a plan sponsor’s liability, The fiduciary process of being a plan sponsor is an arduous task, so plan sponsors need to rely on someone and that someone is a financial advisor, Whether they serve as a broker, co-fiduciary, or an ERISA fiduciary, a financial advisor has a job to do. The days of showing once in a while offering no IPS help or participant education is slowly becoming part of the retirement plan past.

The day where an advisor can simply put a plan on a bundled platform and forget about the plan until the quarterly fee is paid is over. Financial advisors will have to help the plan sponsors out to manage the fiduciary process. If financial advisors are not up to the task, then they should surround themselves with those that can like an independent ERISA attorney or a top notch third party administrator. Some advisors have sought out the advice of a Loring Ward or Advisors Access to offer a turnkey 401(k) platform and support.

Financial advisors can sit back and pretend the good old days are her, but they stand at the risk of losing business to those breed of financial advisors that know their role and will strive to fulfill it.