The Rosenbaum Law Firm P.C. Blog

In sports and in business, you are only as good as the team that you are on. I have been on some good teams and not so good teams, so I know that sometimes I was only as good as an ERISA attorney if my fellow employees were good as well.

So I am often surprised how financial advisors are not conscious of the team they need to help their clients or are very ho-hum about the team they select.

While financial advisors don’t need to become experts in retirement plan design and administration,. I believe that the coming changes in fee disclosure and the change of fiduciary will require financial advisors to have more of a background in retirement plan issues. So while financial advisors don’t have the time to learn about plan design or fiduciary liability issues, they need to work with the experts that do such as a third party administration (TPA) firm and an ERISA attorney.

A big part of my practice is working with financial advisors (for free) in developing a team approach in working with their clients and potential clients. That approach always requires the use of a good TPA and the use of a TPA will depend on location, cost, plan type, and plan size.

Plan sponsors and their financial advisors for the most part, don’t know the value of a good TPA until they replace a bad TPA. A good TPA will administer and record keep the plan correctly, which will eliminate potential fiduciary liability and plan sanction/disqualification. In addition, the most important function of a good TPA is plan design. Plan design to me is an art, or a game like Chess. It’s also like logic in 9^th grade math. Too often, a payroll provider or a bundled provider or the not so good unbundled TPAs treat retirement plans as if they came off an assembly line.

In my mind, there is no cookie cutter approach to retirement plans in their design and in their plan documents. Every plan sponsors has different employee populations, needs, and financial resources. An ERISA attorney and/or a good TPA will sit down with the client review their needs for a new plan or to improve an existing plan. Based on the information collected, the ERISA attorney and/ or the TPA will develop a retirement plan design that will fit the needs of that specific client. That design may be a safe harbor plan, new comparability plan design, or the use of another plan like a defined benefit plan or a cash balance plan. Through 13 years in the business, I have seen retirement plans maximize contributions for their employees and/or correct administrative errors by the use of a good TPA.

I have had a client for 8 years now and it was as a result of a meeting that a financial advisor brought me in for, for a potential client he was trying to recruit. The plan was being administered by a payroll company. The plan failed the deferral and matching discrimination tests by a wide margin. The owner of the company was getting a refund of $10,500 of her $12,000 deferral at that time. A review of the test by the payroll TPA was that the plan could have corrected the failed discrimination test by adding a $7,500 qualified non-elective contribution.  Even though it was there on the testing information, no one bothered to highlight to that company. Needless to say, the client paid the $7,500 corrective contribution, avoided all the refunds to the highly compensated employees, and implemented a safe harbor plan design the very next year, This client has been the client of the financial advisor and myself ever since (she thinks we are geniuses) because of this team approach.

I have seen financial advisors grow business with the use of a good TPA and I have seen advisors lose business because of referring clients to a bad one. Like I said, you are only as good as your team, so finding the right ERISA attorney and TPA is beneficial for helping a financial advisor grown and retain their business.

I am still how often I find participant directed 401(k) plans without a financial advisor. While I understand how solo 401(k) plans don’t have an advisor because individuals think they can do it on their own. I have a solo 401(k) and I handle my own investments. I always say that the moment that I add an employee, I am going to hire a financial advisor and there is an easy reason why.

I am often amazed that in the age of the internet that there are still travel agents around in business because the internet has allowed us to book trips and hotel rooms with a simple click button. In the old days, unless you had the travel agent software,  you couldn’t do it on their own. Thanks to the internet, we can invest on our own and buying and selling securities can be done with the click of a mouse as well.  While many people think that the usefulness of a financial advisor has gone the way of a travel agent, I respectfully disagree.

When it comes to participant directed 401(k) plans, the main role of a financial advisor in my opinion isn’t picking mutual funds as a broad range of investments.  While I am working on an article on fiduciary guarantee (that will knock the socks off you) that centers around that whole broad range of investments requirements for ERISA §404(c) participant directed plan protection,  I believe that with all due respect to Commander Montgomery Scott from Star Trek III, that a monkey and two trainees can pick a mutual fund lineup to meet that broad range requirements.

I think the value of a financial advisors is having them a part of the fiduciary process, drafting an investment policy statement, reviewing the current fund lineup and most of all, employee education.

I worked at a semi-prestigious (sorry, Lois) law firm on Long Island and there was no financial advisor on the 401(k) plan for a review of the mutual funds for 10 years. I knew we needed one when someone on the office staff stated that he only invested in the mid-cap mutual funds because “it represented the middle of the market.” That is why you have s financial advisor.

Even 401(k) plans that offer index funds or exchange traded funds need a financial advisor because while index investing beats most of the active funds on a consistent basis, participants still need investment education in order to make an informed decision that will get the plan sponsor ERISA §404(c) protection.  Index funds and ETFs are great, but what about asset allocation and risk tolerance? Index funds and ETFs won’t solve those issues on their own. So even a plan offering only a passive approach needs a financial advisor.

 The moment I hire an employee will force me to hire a financial advisor for my plan because despite my knowledge of 401(k) plans and investments, I don’t have the background or training to review funds and offer education. I stick to what I know, so I stay out of trouble.

For the rest of the JDSupra.com article, click here.

Marvin Gaye and Tammi Terrell were right in their song that “Ain’t Nothing Like the Real Thing”. Anything other than the real thing is a pale imitation.

With an upswing in lawsuits against plan sponsors and fiduciaries for breaches of fiduciary duty, there has certainly been a growth in the use of ERISA §3(21) and ERISA §3(38) fiduciaries who will either share in the fiduciary responsibility (§3(21) or assume it all together (§3(38)). In order to cash in on this growth, a number of bundled plan providers have decided to cash in on this hoopla by offering a “fiduciary guarantee.”

 When you hear the words “fiduciary guarantee”, I assume most plan sponsors think that these plan providers will indemnify the plan sponsor in any lawsuits brought by plan participants for a claim for a breach of fiduciary duty.

A financial advisor forwarded me one of these guarantees for my thoughts. While the language on the guarantee was pretty clear, I am an ERISA attorney for 13 years and I know the tricks of the trade. A plan sponsor who in most of these situations isn’t working with an ERISA attorney assumes that the plan provider will indemnify the plan fiduciaries in any alleged ERISA §404(c) breach in a participant directed retirement plan. The guarantee only states that the investment options that this provider selected was prudent, satisfied the Section 404(c) requirement of offering a “broad range of investment alternatives”, and that the investment strategies provide a suitable basis for plan participants to construct well diversified portfolios. Sounds like a great guarantee? Actually, I don’t think that the guarantee is worth the paper that it’s written on.

That whole broad range requirement is rather broad, I am unaware of any plan fiduciaries ever being sued on that requirement. To comply with the simple broad range requirement, the plan fiduciaries must first decide on the asset classes (e.g., stocks and bonds) and styles (e.g., large cap U.S. equity growth fund, small cap U.S. equity value) for the “core” investments of the plan.

While this bundled provider state that the investments offered are consistent with the fiduciary standard, the plan’s investment fiduciaries still must monitor the investment options to insure that each continues to meet the criteria for the asset class and style and is performing well enough to continue to be offered to the participants.

Guaranteeing that the investments offered in the plan are part of a broad range of investments and are prudent, these are only a couple of ways where a plan fiduciary can be sued for an ERISA Section §404(c) breach. A plan sponsor and fiduciary can still be sued for not formulating an investment policy statement or offering investment education to plan participants. There are thousands of mutual funds out there, it’s not so hard to find five funds that make that broad range requirement or a claim that the investments are prudent.

A fiduciary guarantee is almost absolutely no protection for plan fiduciaries, it’s like buying car insurance that only covers you in a head on collision or a life insurance policy that only pays on accidental death. The fiduciary guarantee is no substitute for an ERISA §3(21) or ERISA §3(38) fiduciary. Unless a bundled provider assumes some sort of fiduciary capacity, the plan sponsor as a plan fiduciary is not being protected.

Don’t be had by a pale imitation, only go for real fiduciaries and real fiduciary protection.

When it comes to health and fitness, you constantly hear studies about what foods fight or cause cancer. Of course, those studies are then debunked. I remember how oat bran was cited to cut down on cholesterol and how margarine was better than butter. Plus I have heard how coffee can prolong life or kill you. I joked that one study will suggest that constantly eating broccoli will cause cancer too.

I blogged recently about how I the paranoia in me figures that a plan provider that quickly cuts down their fee might have been overcharging the client to begin with. People tend to think I have a bias against plan providers such as third party administration (TPA) firms and I certainly don’t because I see the overwhelming value of a good TPA.

With fee disclosure regulations around the corner and constant news articles about 401(k) fees, I think the fascination and concentration on fees could be detrimental if that is the major or sole criteria in selection plan providers.

 401(k) plan sponsors, as plan fiduciaries have important responsibilities. These responsibilities include:

Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them; carrying out their duties prudently; following the plan documents (unless inconsistent with ERISA); diversifying plan investments; and paying only reasonable plan expenses.

While paying unreasonable plan expenses is a breach of fiduciary duty, picking providers solely or mainly because they are low in fees can also breach a fiduciary duty. Retirement plan sponsors also have a duty of prudence as a one of their fiduciary duties. Prudence is about the process for making fiduciary decisions. Prudence requires the plan fiduciaries to document decisions and the basis for those decisions. So in hiring any plan provider, a fiduciary should survey a number of potential providers. By doing so, a fiduciary can document the process and make a meaningful comparison and selection.

Governmental contracts are typically decided by the lowest bidder. Sometimes it works, lots of times it doesn’t. The same thing goes with selecting plan providers. There are many low cost providers out there and some do a very good job and some do not. Some low cost TPAs may be good if there is limited amount of work on a 401(k) plan that has a safe harbor design and terrible if the plan requires a discrimination test.

Paying only reasonable expenses is not the same as paying low expenses. Plan provider expenses are less about cost and more about value. A financial advisor charging 15 basis points providing no help in the fiduciary process such as developing an investment policy statement, reviewing investment options, and educating participants in a participant directed 401(k) plan is less reasonable than paying another advisor 50 basis points to serve as an ERISA §3(38) fiduciary. Why?  The advisor charging 15 basis points is actually increasing the plan sponsor’s liability as a fiduciary because they are doing nothing while the ERISA §3(38) fiduciary is assuming almost all of that liability. Reasonableness is not about cost, it’s about the value of the services provided. A TPA that can help develop a plan design that maximizes contribution for highly compensated employees through a safe harbor/new comparability or a cash balance design is a better value than a TPA who only knows a 401(k) plan with a comp to comp allocation.

Plan sponsors need to focus on the competency of plan providers, the services they offer, and the value they provide. Concentrating just on how much a provider charges may cost more in the long run if that provider provides services that are incompetent. I have seen too many plan sponsors forced into the Internal Revenue Service correction programs to fix the errors of plan providers that were picked solely on cost.

I had a co-worker who got a competing job offer a few years back. He went to our boss and told him that he was leaving for a competitor, returning to a company he had left for this one.  So he told the boss he was leaving and the boss convinced my friend to stay by matching his salary with the job offer. I thought that it was a mistake and if I was in his shoes, I would never do that for two reasons. Number 1 was because it showed disloyalty and reason number 2 was the fact that if this miser boss offered more money, he always had that money to give but wouldn’t unless forced.

The same thing can be said about retirement plan providers who when challenged that their fees are excessive by a competitor, lower their fees for their clients in a panic. I’m surprised when I am told by these competing providers that the client stays with the plan provider that quickly cut their fees. While retirement plan providers can cut their fees from time to time because of new programs or lowered costs, the fact that they do so quickly when a competing provider is snooping always gets me a little suspicious. My suspicion is that the fees were always excessive and that while the fees are now lower, the plan provider still had pocketed those fees for all those previous years.  Would you go back to a provider that you knew charged you more than they should have? I wouldn’t., but some plan sponsors and like to be taken advantage of. Just my two cents.

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

A few months back, I wrote an article about some 401(k) provisions are bad ideas and quite a few of them were about some loan and hardship features that were burdensome to plan sponsors and could cause many errors in plan administration which puts the plan at risk for being out of compliance.

While I understand the needs for loans and hardship distributions (especially in today’s environment), I think having unlimited amount of loans or having loan repayments besides by payroll could lead to plan errors.

There was legislation proposed last month in the United States Senate called The Savings Enhancement by Alleviating Leakage in 401(k) Savings Act of 2011, or SEAL Act. The legislation gives some relief to participants and former plan participants with hardships and outstanding loans, but tries to minimize leakage of assets because of them. Even better, the legislation does not put any additional administrative burden on plan sponsors.

Some of the legislation’s features:

The bill would allow participants more time to repay loans if they lose their job. Currently repayment must occur within 60 or 90 days, or termination of employment, depending on the plan. The new law would extend that repayment period until tax filing deadline — April 15 of the next year. Workers would deposit the money into a qualified individual retirement account, so it would decrease the amount of defaults and not force 401(k) plan sponsors to do anything

The bill would allow a plan participant taking a hardship withdrawal to continue making contributions. Currently, a participant taking a hardship distribution cannot continue to contribute 401(k) deferrals for at least six months.  I understood the reasoning behind the six month kick-out used to be 12 months prior to 2002) because hardship distributions are as a result of a heavy financial need and how is it immediate if you can afford to defer immediately after getting a distribution? However, if the participants can resolve the financial emergency more quickly, this six month suspension only prevents the account from growing as a result of the participant’s contribution and the employer match. With a retirement crisis in this country, we want participants to save more for retirement and this provision will help do that.

The bill restricts the number of loans a participant can have outstanding at one time to three. More outstanding loans will increase leakage and help cause administrative errors. Limiting loans is a great idea and I suggested that in my article.

The bill bans the use of debit cards tied to a 401(k) account. It’s hard to believe, but some 401(k0 plans have allowed participants to tap into funds by using a debit card. 401(k) plans don’t need the financial equivalent of a payday loan.

Most congressional legislation stinks, the SEAL Act does not. It helps participants and former plan participants avoid leakage to their 401(k) plans. Even better, it does so without putting added burden to plan sponsors and their third party administration firms.

When I first started in the business in 1998, I was working for a small law firm that was affiliated with a third party administration (TPA) firm that eventually became CBIZ Retirement Services, Inc. of Syosset, New York. One of the things I remember is that the paralegal I worked and several of the administrators she knew well always took meticulous notes and kept their plan files in order because as they said that everything would be in order if they got hit by a bus. I don’t think anyone thought that they would get hit by a bus, but they wanted everything in order to minimize the disruption if something terrible happened to them, that someone could cover for them quickly.

As far as getting hit by a bus, you can minimize the risk by being careful and looking both ways when you cross the street. You can do your best to minimize the risk of getting hit by a bus, but you can never truly eliminate that risk. The same thing goes for fiduciary liability for plan sponsors and fiduciaries, plan sponsors and fiduciaries can employ best practices to minimize liability, but they never fully eliminate it.

Even those plan fiduciaries who do everything wrong aren’t guaranteed to be sued, just like someone jaywalking isn’t guaranteed to get hit by a bus. Recklessness increase the likelihood of disaster, there is no guarantee. The same thing goes for those who take every precaution; they still may get hit by a bus. When it comes to fiduciary liability, it’s not all ball bearings these days, it’s about minimizing liability.

I have written quite a bit about ERISA §3(38) fiduciaries and multiple employer plans (MEPs) and how these articles can help nearly eliminate fiduciary liability by delegating the fiduciary to a §3(38) or a MEP sponsor.  While I still believe that the appointment of a §3(38) fiduciary or joining a MEP is a fiduciary function (other ERISA attorney disagree and say it’s a settler function), the remaining fiduciary liability is so minimal because the §3(38) fiduciary and the MEP sponsor assume the bulk of fiduciary liability. While some critics of using a §3(38) fiduciary or a MEP point out that the plan sponsor still has some liability, I believe it’s so minimal because the folks that are§3(38) fiduciaries and MEP sponsors tend to be very dedicated to carrying out the fiduciary function in a prudent manner. Plan sponsors could also minimize liability on their own by remaining as full fiduciaries by selecting a plan advisor, a third party administration firm, and an ERISA attorney to mitigate the risk.

A plan sponsor covering all their bases either on their own or the use of someone who assumes the fiduciary role still poses a small risk, same as getting hit by lightning or being hit by a bus.

My latest newsletter can be found here.