The Rosenbaum Law Firm P.C. Blog

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

My comments in Financial Advisor Magazine can be found here.

When I first started as an ERISA attorney in 1998, I was privileged to have worked for an ERISA attorney by the name of Harvey Berman. While Harvey was the easiest going boss I ever worked for (I wish I knew it then and appreciate him more), the biggest influence on my career in my work product was a paralegal named Marge.

Marge went farther back in the retirement plan business than ERISA and her caustic style rubbed me the wrong way initially and I only appreciated her years after she retired.

One f the things that I remember Marge telling me was that you have to especially be careful when drafting summary plan descriptions (SPDs) because if there is a discrepancy between the SPD and the plan document, courts will hold that the SPD controls because that is what the plan participants received. It’s a rule that I always followed.

Just in the past few weeks, the Supreme Court in Cigna Corp. v. Amara ruled that SPDs are not as legall binding as a plan document. “To make the language of a plan summary legally binding could well lead plan administrators to sacrifice simplicity and comprehensibility in order to describe plan terms in the language of lawyers,” Justice Stephen Breyer writes in the opinion for the court. “Consider the difference between a will and the summary of a will or between a property deed and its summary. … None of this is to say that plan administrators can avoid providing complete and accurate summaries of plan terms in the manner required by ERISA and its implementing regulations.” In English, plan sponsors aren’t off the hook from providing accurate SPDs, but the plan document is the legally binding document.

The beauty of this retirement plan business for me is that I learn something new everyday, just like I did when I worked with Marge.

My latest JDSupra article can be found here.

Here are just some random thoughts (making slightly more sense than Larry King’s old column in USA Today) I have come across in the retirement plan industry.

1. Cost is an overused consideration for picking plan providers, value and quality are underused.
2. Target benefit plans are the Boo Berry Cereal of retirement plans. You know they exist, but you rarely see them.
3. Target date funds, what’s the target? In 2008-2010, the target was the participant’s retirement savings that used them. The target was eliminated with extreme prejudice, as they would say in Apocalypse Now.
4. People can’t understand that profit sharing plan don’t require profits, but what does a Money Purchase Plan’s name mean? How do you purchase money?
5. The weirdest plan investment I ever came across was an antique toilet.
6. The only thing that Democrat and Republican congressman can agree, is to fight the Department of Labor’s impending change on the definition of fiduciary. Of course, Wall Street money to support congressional campaigns help.
7. The quality of a third party administrator (TPA) can be determined on just one thing, the quality in support and education they give to their administrators. Good TPAs educate their workers, bad TPAs don’t.
8. The funniest beneficiary form I ever saw is when a participant selected someone as a beneficiary. For the relationship to the beneficiary, the Participant put “Good Time Joe.”
9. Plan sponsors will show more concern about plan costs when they realize that if the owners are participants in the plan, they are also paying way too much in fees themselves.
10. The most difficult client I ever had was a company whose H.R. director had me re-write the plan document 7 different times and at one point wanted me to draft it with elapsed time that required 1,000 hours (which is impossible because they are conflicting concepts).
11. Love how people talk about ERISA §3(38) fiduciaries being a new concept, I think they were originally part of ERISA when it was signed into law in 1974. Same with multiple employer plans, they have been around since
12. A fiduciary guaranteed offered by a plan custodian is the retirement plan industry’s version of the $3 bill.
13. Never hire an auditor for your 401(k) plan if they don’t know what revenue sharing is.
14. Will never forget the gall of a mutual fund company acting as TPA who thought nothing wrong of running a 401(k) plan as a safe harbor plan even thought it didn’t have the provision because theyt never charged for compliance testing.
15. Plan design is an art, a fancy participant website is not.

There was a recent court case about some beneficiary designation that had some people give some “shattering” article titles on how 401(k) plan designations were trumped by ERISA. A friend of mine sent me the article about how 401(k) rights were trumped by ERISA. I had heard about this case called Cajun Industries LLC v. Robert Kidder, et al., that the article was referring to. The case was really a slam dunk by the court and was very similar to a case I had as an attorney for a TPA firm and I actually came up with the same ruling as what the Court found in this Cajun case. At least I have that going for me.

 In this Cajun Industries case, Leonard Kidder had his first wife as his beneficiary. She predeceased him and then he named his three children as his new beneficiaries. He got remarried to someone else and died six weeks later (like some bad soap opera). Since the new Mrs. Kidder never bothered to give a spousal consent to waive her benefit, the new Mrs. Kidder was entitled to the benefit The three children argued that she was not entitled to get the benefit because their father and the new wife were married less than a year because there is a rule that a plan may have a provision that states that spousal consent is only required if the spouses were married more than a year. Since the plan didn’t have that provision, it was clear that Mrs. Kidder was due that benefit, fair or not.

I had a similar case, but even more challenging. In my case, a law firm partner had his children as his beneficiaries. He got married to the new wife and as part of the pre-nuptial agreement; she waived her benefit to the 401(k) plan in question. He died and his two children felt that they were entitled to the benefit. They were right, you thnk? You’d be wrong.

While a spouse has every right to waive her benefit, a pre-nup by itself is not an actual waiver according to the rules governing retirement plans. So in addition, the spouse had a pre-nup that she signed and then needed to sign a separate waiver form to waive the benefit to make that pre-nup effective. She didn’t, her good fortune.  The children were horrified and their counsel asked about that one year provision in the Code that they thought was a smoking gun. Again, retirement plans can require a year of marriage for spousal waiver, they don’t need to and most plans I have come across don’t have that one year provision.

End of the soap opera story, in my case, this second wife actually waived her right to benefit and the children got the benefit because this second wife wanted to keep her end of the bargain in the pre-nup, valid waiver or not.

 So my opinion, this Cajun case isn’t earth shattering. It was just common sense.

It can’t be stressed enough that plan participants need to review their beneficiaries annually and if the participants gets re-married or widowed, they need to sit down with either ERISA or estate planning counsel to determine what they do with their retirement benefits since these are non-probate assets governed by ERISA and the Internal Revenue Code.

I always believe that when it comes to plan documents, amendments, and contracts that less is more. Some attorney always feel that they have to justify their fees as if they are billing by the word they are drafting legal documents. I guess when I bill at a flat fee, I guess I don’t have that problem.

I have been doing a lot of work with RIA firms and third party administration (TPA) firms on revising their agreements for fee disclosure at a flat fee of $1,000 (cheap plug). When it comes to fee disclosure and reviewing agreements for TPAs, I actually believe that more is more.

One of the fears (which I believe will be unfounded) is that fee disclosure will only benefit the low cost providers because disclosure of fees will lead plan sponsors to choose the cheapest provider.  I disagree with that notion because I don’t believe that cost will be the sole or major reason why plan sponsors change their plan providers. When it comes to changing providers, I think value is more important than cost. There are too many TPAs who are low cost and offer either low service or negligent service.

The fee disclosure notice that plan sponsors will receive will effectively serve as an invoice for a TPA where for the plan sponsors that do their job, will be the piece of paper they will use to gauge whether the costs they are paying for this TPA is reasonable.  The problem is that I believe that plan sponsors don’t know the value of a good TPA, they don’t understand that a TPA does a little more than recordkeeping and issuing a Form 5500.

To thwart off the lesser expensive TPAs that don’t the heavy lifting that many good TPAs do, I think TPAs need to list all of the services they do for their client. I swear there are some TPAs that do so much hand holding for their clients that they pick up and drop off their dry cleaning.  At least it seems that way.

So if a TPA does a whole lot of work for their clients that are outside the scope of what other providers are willing to do (usually payroll provider TPAs), then the TPA should list that service on their fee disclosure (whether they charge for it or not). Suppose a plan sponsor just gets a fee disclosure that is skimpy on details (even though the TPA does so much work for them) and picks a provider that is less expensive. Unfortunately, the plan sponsor may learn a little goo late that the less expensive TPA won’t do all the work that the prior and actual full service TPA did.

That is why TPAs shouldn’t be shy when it comes to disclosing their fee and the breadth of the services they offer their client. At least that’s my 2 cents on disclosure, marketing, and retention tools for a TPA.

My latest JDSupra.com article can be found here.

When I read the papers and I find a financial advisor running a ponzi scheme or a Third Party Administrator (TPA) stealing from a client’s custodial account or an attorney like Marc Dreier trying to rip off investment firms for hundreds of millions of dollars in selling fake promissory notes.

It also reminds me of the administrator working at my old TPA firm who tried to convert plan assets into his own IRA account, only to be caught by the plan custodian because he got his IRA account number wrong.

The question I always have thought is what were they thinking? Did they honestly believe that they will get away with it? I understand more a person who robs a bank with a ski mask, then a plan fiduciary or advisor stealing money from a registered custodial account. Discover is inevitable.

I remember having a tax return client who told me that he didn’t want me to go bad. It was never in my nature to do the wrong thing (I did leave that TPA because of my aversion to their ethics) and I believe that eventually, criminals get caught.

When it comes to charging fees to plan sponsor, excessive fees are not a crime, not yet at least. Obviously, fiduciaries have a duty to not charge the clients excessive fees and plan sponsors/fiduciaries have the duty of prudence, not to be charged excessive fees by plan providers.

Clients whether they are plan sponsors or TPAs sometimes say my fees are too low, I have an RIA client who thinks my $500 a month retainer is too low for the amount of hours of work I give. My explanation is based on a fear of mine, that in the end, the clients will know. So if you a charge a reasonable fee for a client for your services, you will never hear them complain on how much you overcharged them because I am convinced that in the end, the clients will know. If you cheat them and charge them an excessive fee, they will find out and they will let other people know that you really got one over on them.

There is a well renowned ERISA attorney who used to refer work to the producing TPA that I worked for. A competing TPA later showed one of that attorney’s client that not only were they charge $7,000 for a custom made document when a $2,000 volume submitter document would have sufficed, but the ERISA attorney also got a split of the RIA fee as part of a “paid solicitor agreement”. So the clients in the end found out that this ERISA attorney was putting their needs ahead of the client.

How many plan sponsors of defined benefit plans discovered that their plan was not a retirement savings plan, but rather a gimmick for their insurance salespeople to sell excessive policies with excessive premiums that the plan sponsor could no longer afford?

I did a Retirement Plan Tune-Up for a client recently and the broker on the plan was charging 60 basis points for a $14 million 401(k) plan without providing investment education or developing an investment policy statement. So the clients found out from me that they were paying an overinflated fee and not getting compensated for it.

 Plan providers can make untold fortunes of charging excessive fees, but the clients will eventually find out and there are just so many clients you can find to take advantage of and churn out.

 At the end of the day, you charge people a fair fee for a fair amount of work, you’ll be OK. If you don’t, you may discover that the clients will find out and help ruin your reputation in an industry that is close knit and where word travels fast.

I got a call not too long ago from a financial advisor about my practice and how I price my work on a flat fee basis. I told the advisor that I charge $2,000 for a volume submitter retirement plan and the advisor asked me if the price differentiated if the plan had thousands of participants. I understood his question and I kind of thought it was funny because for me, drafting a plan for one person or drafting one for thousands of employees is about the same amount of work. I told him that the number of participants have no bearing on my plan document work and participant account is more interest for a third party administration (TPA) firm who has more expense in administering a retirement plan because of the amount of sub-accounts they have to set up (if the plan is a defined contribution plan) or benefit statements they have to provide (for a defined benefit plan).

For the longest time, I wanted to write an article on the asset based fee for TPAs. Happily, Sanders Booze in their blog reference an article by Nevin Adams about the asset based fee, which brings up a pet peeve of some TPAs pricing.

I’m no expert on TPAs, but I assume the only fee that may go up with an increasing plan asset size is the custody fee because regardless of the size of the plan, a plan is paying 6 to 10 basis points in a custody fee for a daily valued no transaction fee 401(k) platform (despite the up to 25 basis points my old TPA charged for the daily platform custodial maintenance fee). Otherwise, there is no extra cost for a TPA to run a 100 participant, $100 million 401(k) plan than it is for a 100 participant, $10 million plan.

So I am flabbergasted by some very well known and well regarded TPA firms that charge their administration based on assets. Having them charge on assets is not much more different that me charging plan documents, based on participant headcount. I know if it’s OK if it’s disclosed, but it still doesn’t make sense to me. Call me old fashioned, but I think a fee should be relevant to the work involved and assets bear little relation to the work of a TPA.