The Rosenbaum Law Firm P.C. Blog

My latest JdSupra.com article can be found here.

One of the most positive developments in the retirement plan business is the proliferation of independent ERISA §3(38) fiduciaries. While the §3(38) defined investment manager has been in ERISA since the beginning in 1974, there has been a dramatic increase in the number of registered investment advisors offering this option to their clients.

The uniqueness of the §3(38) proposition is that the §3(38) fiduciary has discretionary authority, assuming the liability of the fiduciary process from the plan sponsor. It’s a nice proposition because many 401(k) plan sponsors don’t do a job of handling it on their own or with the help of a financial advisor. Development of an investment policy statement (IPS), selection and review of investment options based on that IPS, and offering education to participants for participant directed plans isn’t an easy task. Please note that the hiring of an ERISA §3(38) is a fiduciary function, so plan sponsors may be on the hook if they hire a poor §3(38) fiduciary.

While many other professionals think that the ERISA §3(28) boom is just the flavor of the month, I disagree. There are too many financial advisors in this industry that have skirted from taking on any fiduciary role with their clients; I worked for a producing third party administration (TPA) firm who disclaimed any fiduciary role as an RIA. So it’s nice to see someone take on the liability and the risk at a management fee that is as good as those who want no fiduciary role in their role as a financial advisor.

That being said, an ERISA §3(38) fiduciary does not have to be the choice for every plan sponsor. A plan sponsor who is diligent in working with a competent retirement plan advisor can do a good job as well. Then again, every solution in the retirement plan business isn’t the solution for everybody, just like an ERISA attorney who charges a flat fee that is as reasonable of what the legal departments of TPAs charge. Then again, that’s another story for another time.

About a dozen or so year ago, there was a medical report that dental plaque could cause heart disease.  The cynic in me tells me that this was some sort of dental conspiracy to increase revenue as fluoridated water and other dental hygiene has had to have a negative effect on the dentists’ bottom line. Regardless of my cynicism, good oral health is an important goal.

While some people only see a dentist when something in their mouth hurts them, many visit the dentist for annual or semi-annual checkups as preventative care, to avoid dental problems later. Brushing, flossing, and checkups help avoid the root canals, caps, and dentures.

As an ERISA attorney, sometimes I see myself as a retirement plan dentist. While some plan sponsors only seek counsel from an ERISA attorney when something terribly goes wrong with their retirement plan, there are many plan sponsors these days that seek ERISA counsel as a form of preventative care for their retirement plans. Seeking counsel from an ERISA attorney can be like seeking a dentist in avoiding greater harm. Part of the marketing of my practice has been to advise plan sponsors and their financial advisors that their retirement plan should be reviewed on annual basis to determine whether it’s being properly administered and whether the expenses for the plan are reasonable. These are preventative steps to avoid potential liability as a plan fiduciary. My Retirement Plan Tune-Up (which you will be hearing more about in the near future) is a legal review where I look at the plan terms, plan administration, and fiduciary to determine what works and what needs to be corrected.

Plan sponsors should review their plans to determine whether the plan still fits their needs and whether there are potential liability pitfalls in plan administration and the fiduciary process.

In my articles and my blog posts, I highlight the potential liability pitfalls that a plan sponsor needs to avoid. Whether it’s the lack of an investment policy statement or high fees, these are pitfalls that plan sponsors can minimize through best practices.

Some critics of my writings (some of them are ERISA attorneys) claims that small to medium sized employers rarely get sue for breaches of fiduciary duty, so I am in the market of selling useless legal services. I guess that is my version of the plaque causing heart disease theory. While the chances of a small to medium size employer getting sued are slim, the threat is still there. The chance of getting hit by lightning is remote; we still minimize the risk of getting hit by avoiding standing near trees or staying outside. In addition, ERISA litigation progresses and when ERISA attorneys run out of suing the larger plans for fiduciary duty breaches, where will they turn next? Regardless of the small risk or not, plan sponsors should follow good practices because good practices tend to avoid bad results.

Like their teeth, plan sponsors should have their plans checked on an annual basis to avoid a retirement plan root canal later.

When I started my law firm about 17 months ago, I had already had a marketing guru who was handling my public relations side even when I was an associate at a semi prestigious Long Island law firm (sorry, Lois).  Yes, as an associate at a law firm, I had hired my own p.r. guy because our outside p.r. firm was dreadful and our in-house marketing staff was busy with the dozens of other lawyers and the law firm administrator who had to publish articles that never made our firm a dime.

This p.r. guy’s mantra was that Marketing Works. Through some of my referrals, this p.r. guru with the Gold-en touch got two clients based on my recommendations. The first week I started, I  got some nice coverage in the Long Island Business News and that really was it. Other articles I was quoted in were leads that he was sending me and I did all of the work by contacting the reporter and following up. As with any business, it was a struggle and business wasn’t good.

Over time, I started to suspect that p.r. guru was no guru, especially when our local newspaper, Newsday had an article on 401(k) fees and there were no quotes from his clients (myself, a third party administrator (TPA), and pension consultant) in it. From what I gather, he had a good friend in Long Island Business News and that was it. He wanted me to network with people that he recommended and all of them were his clients. 

I lamented to this p.r. guy about my lack of new business and he suggested that I take some time off.  Since I had to pay my mortgage, that wasn’t an option. I also thought that the comment was insensitive and showed a total lack of empathy. So instead of taking his advice, I read a few books on social media and hired a social media guru, Vik Rajan. I realized that for the $30 a day I was paying, this p.r. guy was doing nothing. He was very good at promoting himself, not so well at promoting his clients. He had no knowledge what I did because he started setting me reporter requests for experts on finance topics that had nothing to do with my ERISA expertise. The kicker at the end was when he suggested that I rent an office where the TPA was leasing space, so I can get work from this TPA (who had been referring work to another ERISA attorney). Since I don’t believe in any kind of quid pro quo arrangement, I was offended that he suggested that I rent out space for an office I didn’t need, so he could look good with this TPA client. I quickly fired him and it’s no surprise that my business has lifted off.

The point of this diatribe is about empathy. Empathy is an important, yet neglected trait. Empathy is the capacity to recognize and, to some extent, share feelings (such as sadness or happiness) that are being experienced by another person.  Empathy is a major cornerstone in building human relationships and it is a key to having compassion.

Retirement plan providers whether they are financial advisors, TPAs, ERISA attorneys, and accountants are in the professional services business. These professional services entail working with retirement plan sponsors that are businesses, individual owners, and plan participants. To properly service the clients, you have to know the needs of the client and sometimes those needs are quite large for one reason or another. To properly service the needs of your clients, you need some empathy. That means when times are tough, don’t charge $150 for a boiler plate safe harbor notice when you always gave it away for free. That means not charging a client $30,000 for a plan amendment to correct the errors you put in the plan document. It means returning part of your administration fee when you do so many mistake in the discrimination testing of the plan that caused the plan sponsor penalties.

This is not to suggest that when times are bad economically that a service provider should cut their fees. It means that service providers should show concern when their clients and their employees are going through rough times. They always say you know who your friends are when you see who sticks with you when times are tough. Plan sponsors will always the retirement plan providers who helped them when either the employer or the plan was going through some rough times and those who didn’t.

Providing top notch professional services isn’t enough, plan providers need to deal with their clients because of the human factor. We are not robots, we are human beings and while financial advisors have been fired for poor mutual fund selection, I have seen many financial advisors fired because they didn’t meet the client’s needs when things weren’t going so well.

When I first started in the retirement plan business in 1998, I worked for a law firm that served as the counsel for third party administration (TPA) firm in Syosset, NY.

There was an office worker there named Orville. I remember Orville because I never saw someone who was male who sang “My Heart Will Gone On”, the Titanic theme song sung by Celine Dion.

Orville wasn’t much of a worker, but for some reason my boss had an affinity for him. When the office work wasn’t panning out, they made Orville a computer tech guy. I think Orville knew as much as about computer as my grandmother did. When the tech thing didn’t pan out, they put Orville in an administrative position of dealing with retirement plan distribution to participants. As my boss would probably say: “he’s a good guy, he’s  loyal.”

Well, one day, Orville tried to overpay a participant $18,000 more than what the participant had in their account. The person managing the daily operation of this TPA had enough and Orville had to go. From what I was told, Tom actually had to call my boss to get permission tom fire Orville. Never understood why my boss had this loyalty towards Orville. I thought it was a lot of misplaced loyalty.

Loyalty is an admirable trait, but misplaced loyalty is another thing. I see that with many plan sponsors and their misplaced loyalty with their plan providers, which is not reciprocated, but is actually betrayed. Plan sponsors should pick plan providers based on competence and they should check every so often to make sure these plan providers are doing their jobs. Just sticking by providers because you have retained for so long is one reason to maintain that relationship, but it shouldn’t be the only reason. I have a client being sued by the Department of Labor because the client had used a TPA for 28 years, who apparently wasn’t doing the necessary work in the administration of a defined benefit plan. Saying you used someone for 28 years is nice, you have longevity. It’s not so nice if you discover that they didn’t do the work and as a plan fiduciary, you are the one on the hook for what the plan provider did or didn’t do.

There is nothing wrong with always using the same plan providers, but there is something wrong is that the only reason you keep them because you have been using them for so long. Every plan provider should be evaluated every so often to determine their competence because you may have a shock when your long time provider turns out to have thrown you under the boss with poor work.

My latest JDSupra.com article can be found here.

I have a friend who is an insurance agent and she was looking for a new TPA 9third party administrator) for her clients.

She previously gave work to a TPA that also happens to sell insurance and financial products (which is called a producing TPA). This TPA is known for pushing expensive insurance products and insurance company platforms for their daily valued plans (regardless of size). I know of a financial advisor who has a client who had a plan with this TPA who was led to believe that their plan had a $5 million life insurance policy, when it really has a $3 million life insurance policy in it. Paging New York state Department of Insurance, anyone?

There are those TPA that sell financial products, there are some that sell insurance, and there are those that just administer and record keep.

This story reminds me of another producing TPA that is only a few villages over from where I live. I interviewed for an attorney position there around 6 years ago before my son was born when I was serving as the lead attorney for another New York producing TPA. The owner of this TPA said my TPA was not in the administration business, but in the asset gathering business. Looking back, it was kind of funny because this TPA was consistently butting heads with the IRS over these special trusts with special trustees for these defined benefit plan stuffed with life insurance policies. In addition, I once reviewed a plan of theirs when the plan moved over to my TPA. The defined benefit plan has a normal retirement age of 35! This was not the defined benefit plan for professional athletes, this was a plan for a food wholesaler. This was before the IRS instituted that any normal retirement age before 62 is suspect, so we didn’t take the plan over since I stated that the normal retirement age was not reasonable for that industry and was just used as a gimmick to have inflated tax deductions. In other words, it was a tax evasion scheme.

The lesson to be learned here is that there are some TPAs that are in the insurance selling business, the asset gathering business, and the administration business. Pick a TPA whose main business is plan administration.

As Michael Corleone said in the very underrated “The Godfather Part III”, “Just when I want to get out, they keep bringing me back in.”

Since 401(k) plans are not subject the joint and survivor annuity requirements of the Internal Revenue Code, very few plans offer them. The very few that offer them usually do so because there may be assets in the plan that are subject to the joint and survivor annuity requirements such as assets from a previously merged money purchase plan. When the Internal Revenue Code allowed many of the 401(k) plan that had them (and didn’t have assets from a plan subject to the joint and survivor annuity requirements) to eliminate them without running afoul of the Internal Revenue Code §411(d)(6) anti-cutback rule, many of them did to avoid the added paperwork of purchasing an annuity or having to get a joint and survivor annuity waiver if the participant and spouse wanted another payment option.

There has been a call to add back annuities as an option for 401(k) plans because of the poor returns of the stock market, as well as the fact that most plan participants won’t have enough savings to last through retirement if they get a lump sum.

It should be interesting that with the discussion about fee transparency that plan sponsors and their financial advisors would consider adding back an option to 401(k) plan that are laden with fees.

I am certainly no annuity expert, it has always been an assumption that the more exotics the features that annuities have, the more fees it has. Just like straight term policies have less fees that those term policies with a return of premium. Exotic insurance products come with heavy a premium that is what I always have been taught. So while straight life and joint and survivor annuities should be considered, I am always wary of exotic insurance products such as some of the new retirement plan centered annuities that are currently being developed.

While the Department of Labor has made it easier for defined contribution plan sponsors to use annuities within their plan, there is still concern about cost and a review of annuity fees would be an added burden for plan sponsors to master.

In addition, plan participants always have the right to pick an annuity upon distribution by rolling over the 401(k) assets into an individual retirement annuity. So the option is always there outside of the plan if it’s not offered within the plan.

While I am not going to state whether I am against annuities within 401(k) plans, I am always cautious of offering insurance products within a retirement plan. So plan sponsors and their advisors should be cautious as well if the benefits of adding an annuity are outweighed by some of the risks.

Automatic enrollment, a feature formerly known as “negative election” have been around for about dozen years, but actually codified in the law in 2006.

Under the law, companies are allowed to automatically enroll workers in their 401(k) plans and have them defer a portion of their salary if the workers affirmatively opt out of deferring. The measure was intended to encourage more people to save, but the reason why it was implemented in the first place was to artificially bump up the deferral rate for non-highly compensated employees to help with the deferral discrimination test. Since the law in 2006, allowed fiduciary liability protection for plan sponsors who use a qualified default investment alternative (QDIA) in a participant directed, ERISA §404(c) based retirement plan, I have strongly supported it because I believe that it can be used as a mechanism to recruit employees to defer in the plan and get them so involved that they may affirmatively defer on their own..

Regardless, a recent study that was done for the Wall Street Journal and it showed that 40% of participant automatically enrolled would have deferred more money if they could have voluntarily done it on their own. Surprised? Initially, I was too. Then again, nothing in the retirement plan industry surprises me anymore.

There are a number of reasons for it. First off, as the article states, many plans set the automatic rate at a low percentage, usually 3% because many employers believe that any higher rate will have people opt out. There are a couple of other reasons that the articles fails to state, one is that the fault lies with the plan participants and it’s more sexy in an article to blame employers than participants. The reason why a large fault of it belongs to participants is because plan participants are a very apathetic bunch. So it’s not surprising that participants are too lazy to affirmatively defer more when it’s easier to do nothing and defer at the default auto rate. These are the same group of folks who don’t change their beneficiary forms when they should or never adjust their portfolio allocation or leave money with multiple former employers’ 401(k) plans.

Part of it rests with the employer and how they handle the automatic enrollment feature. Plan sponsors do a very poor job of handling the communications and notices from the third party administration (TPA) firm and the financial advisor. The fact that people can affirmatively defer more money is never highlighted because plan sponsors don’t know how to handle the process or they really don’t want it to be widely acknowledged that plan participants can opt out at all (either to defer more or defer nothing). They see automatic enrollment as that gimmick to artificially boost the discrimination results and want people automatically enrolled.

While automatic enrollment is a great gimmick to boost the savings for non-highly compensated employee, I think it should be seen more as a tool to combat the retirement crisis inn this country where pension benefits have been curtailed and Social Security is starting to resemble a ponzi scheme. If used properly and marketed with the help of a good financial advisor who knows how to captivate the attention of plan participants, automatic enrollment can be used as a tool to engage participants and get them involved on a voluntary basis. If plan sponsors are interested in truly having their employees save, they would increase the 3% rate either through auto escalation (like 1% a year) or at a higher amount like 6%.

Plan participants are an apathetic bunch, so it’s no surprise that automatically enrolling them would have the effect of lowering what people would save if they affirmatively elected to defer in a non-automatic enrollment plan.

My latest newsletter can be found here.