The Rosenbaum Law Firm P.C. Blog

Sometimes you can spot a poorly run retirement plan from a distance, sometimes it’s just as easy as reading their Form 5500. Whether you are a plan sponsor, a financial advisors, and/or third party administrator looking for new clients, you can gauge whether a plan is going through problems just by reading their Form 5500.

Here are some things to spot:

1. The Form 5500 admits it has a serious error (prohibited transaction, no ERISA bond, later 401(k) deferral deposits.
2. If the plan is a defined benefit plan, the plan is severely underfunded.
3. The plan sponsor has both a money purchase and profit sharing plan. Unless they benefit different groups of employees, plans should have been merged in 2002.
4. If the plan is a 401(k) plan, it’s on an insurance company provider platform and plan assets are more than $2 million.
5. The broker of record is getting a hefty commission that is not reasonable by what the market dictates (i.e, % compared to plan assets).
6. The information on Schedule C looks less than complete (especially compensated received directly or indirectly amounts).
7. The plan is paying too much in administrative fees and auditing (if the plan requires one).

My latest JDSupra.com article can be found here.

If I want to get a new doctor or an attorney, I certainly want to know their background. Same with a financial advisor, I don’t want the next Bernie Madoff. When you hire a professional, you want to know their credentials.

So it’s often surprising that when a plan sponsor hires a third party administration (TPA), they rarely check the credentials of the plan administrator in charge of their plan. Sure, many plan sponsors learn about the TPA through a referral or research, but they never check the credentials of the individual administrator.

Why bother? Simple, since the bulk of the work is usually done by this administrator; you want to make sure you are being handled by someone with the credentials and experience to do the job right.

I often find that the difference between a good TPA and a bad one is the experience of the administrators they have as well as training. Good TPAs tend to have the most experienced administrators with credentials from ASPAA with training for them to achieve that level. Bad TPAs have administrators with little or no experience, as well as limited training and oversight.

I remember moving a law firm from one TPA to another. The administrator at what we call the bad TPA had the administrator butcher a top heavy test, namely the administrator failed to label partners of the firm and their spouses as key employees. This administrator had 15 years of experience, but clearly with no oversight to check her testing. The good TPA (which was less expensive by 30% because they actually used revenue sharing to reduce administrative expenses) had an administrator who discovered this error upon conversion. This administrator had all the credentials from ASPAA as well as 28 years experience and she once owned her TPA. This TPA had compliance specialists to assist this administrator with the testing, so there clearly was a check and balance to ensure correct results.

The difference between a good and bad administrator isn’t years of experience, its training and oversight. Just one thing most plan sponsors don’t ask of the TPA and I think they should.

I met a group of advisors this morning trying to get into the 401(k) business and I was really impressed with the philosophy, their practice, and how they want to be surrounded by top retirement plan providers.  They are an advisory team that is ahead of the curve and will certainly make waves and be successful. Financial advisory firms that understand their role in the plan sponsor’s fiduciary are the future of the industry.

They presented me with a new client that they have and the issue of that client’s 412(i) defined benefit plan. For those who don’t know, Section 412(i) defined benefit plans are funded by life insurance. There were some abuses within these types of plans and the Internal Revenue Service did some cleaning up that area. They are still a viable plan if the intent is to provide retirement benefits. The plan in question was not to provide retirement benefits, but something quite else.

The plan was being administered by a producing TPA. This wasn’t a TPA with a registered investment advisory firm. This was a TPA that sells insurance or more like an insurance salesperson who also happens to administer retirement plans. The client was paying over $110,000 for a $5 million whole life insurance policy. The problem?  Life insurance (unless with some estate planning of setting up a life insurance trust) is part of a person’s taxable estate and guess what is the exclusion amount for estate taxes in 2011? $5 million. So if the client died today, the insurance policy in the plan would certainly push the client’s estate into the estate tax. Proper estate planning is to minimize estate taxes, not create them. Clearly this plan did not take estate planning into consideration and was just basically a great commission for this insurance agent masquerading as a TPA.

That TPA is very soon going to be the past of the industry if the Department of Labor changes the definition of a fiduciary because this insurance salesperson will certainly become a fiduciary and you owe a fiduciary duty to a plan sponsor, you are going to have up with a good enough excuse to explain why the purchase of a $5 million life insurance policy was prudent and saying it was a great commission for the salesperson isn’t going to cut it.’

The future of the industry meeting the soon to be past of the retirement plan industry.  It’s the irresistible force meeting the immovable conflict of interest. The irresistible force will eventually win in the end.

The namesake of this New York based producing third party administration (TPA) firm was always impeccably dressed and he brought a law firm presentation to many of the services that his firm provided. Plan documents were bound like classic novels with all the government filings attached. The materials presented by his registered investment advisory firm were also professionally collated.

He belonged to the New York Athletic club and had Yankees season tickets to entertain investment advisors or potential clients. New clients and investment advisors who were new in bringing business to this TPA were overwhelmed by the whole client recruitment which resembled a courtship. The conversion specialist was almost able to always make the transition from the old TPA to the new TPA rather seamless. Like Commander Montgomery Scott from “Star Trek”, he was a miracle worker.

While the client recruitment and conversion process for this TPA was so professionally done, it was apparent that after the client wooing was over, the wheels came off.  At that point, the Emperor had no clothes. The work product was poor; there was no oversight of what poorly trained administrators did or didn’t do in the handling of hundreds of daily valued 401(k) plan. In addition, plans were being gouged in fees as plans were pushed to select mutual funds that paid revenue sharing that this TPA simply pocketed it without offsetting administration fees that the revenue sharing was intended to be used for. It was also discovered that this TPA had an improper relationship with an auditing firm that they referred business to, in effect they were self auditing their client’s plan when these clients needed an independent audit. So despite the polish that this namesake of this TPA has, he was simply a liar, a cheat, and a thief.

When it comes to picking plan providers, there is nothing wrong with picking a retirement plan provider that has polish, but you have to make sure they are competent. Don’t be wowed by a plan provider’s polish, be wowed by their value and their attention to detail.

It’s great to pick a TPA that has a great participant website, but it means nothing if they don’t run the compliance tests correctly or don’t get your Form 5500 on time.

It’s great to pick a financial advisor who could produce flashy charts and graphs, but it doesn’t mean anything if they don’t work with the plan fiduciaries to develop an investment policy statement or provide investment education to participants.

It’s great to pick an ERISA attorney with fancy offices and beautiful presentation folders, but it doesn’t mean anything if plan documents are incorrect and the billing is excessive.

Plan sponsors should make sure all plan providers are doing their jobs diligently because plan fiduciaries are liable for the choice of providers they make. There is nothing wrong with bells and whistles, just make sure that there is a competent service behind it.

My latest newsletter can be found here.

My latest article on JDSupra can be found here.

When you work as an attorney for a third party administration firm, you see some zany things. When you have so many clients to deal with, every once in a while you run into some zany clients and situations that they never covered in the textbook  for my qualified retirement plan course at Boston University’s LLM program in taxation. Here are just some of the zany clients and situations:

 There was a radiologist who had a defined benefit plan and was constantly at our offices to meet one of our Managing Partners. He was always trying to cut corners on his defined benefit plan, especially when providing benefits to his employees. He also apparently cut corners on his medical practice as he was permanently enjoined by New York from conducting mammograms because he made too many errors.

 I had one client where because of the human resources director; I drafted the plan documents seven times. At one point, she wanted plan eligibility and vesting to be based on elapsed times (which is a period of service with no hours) with 1,000 Hours of Service required. You can’t have elapsed time and require hours, it’s pretty clear in the law. This zany h.r. director was fired pretty soon afterwards.

 We had a company in Brooklyn that fired their broker and then not too long after, fired their h.r. director. The h.r. director then dropped the dime on the new chief financial officer who was sharing the commissions with the broker he just hired. The old broker was rehired while the CFO and new broker were terminated.

I will never forget a beneficiary form that a participant filled out. For the relationship that the beneficiary had to this participant, he filled out “Good Time Joe”.

 I had a plan participant try to alienate his benefit for his sister’s benefit because he was in jail. He wrote the request on prison stationary.

 I had two participants murdered by their beneficiaries.

 I had a 401(k) plan sponsor that had an antique toilet as a participant directed investment.

 I handled the defined benefit plan of a famous politician that we had set up right before New Year’s. On New Year’s eve, his then girlfriend wanted her own defined benefit plan so that is what I was doing one December 31^st.

Once had a client who was in the Greek food business who constantly gave us samples when the financial advisor visited them.  We never had such luck with the beer distributor or the liquor distributor.

When it comes to plan sponsors in choosing providers for their retirement plan, I think one rule of thumb is to choose plan providers that are ahead of the curve. What do I mean by ahead of the curve? Retirement plan providers that are consistently innovators in the industry that started to change before change was required.

As often stated, I left the third party administration (TPA)  firm where I was Director of ERISA Legal Services in early 2007 because I saw that fee disclosure was going to be the future for 401(k) plans and we were going to die. We were going to die because the people that were running the company had started this TPA 23 years earlier and were running it as if it was still 1984. Fee disclosure wasn’t something they ever intended to practice as they had an addiction to revenue sharing. I remember when automatic enrollment was finally made a part of the Internal Revenue Code in 2006 and I told the folks in charge at this producing TPA that pushing automatic enrollment was something we should push for our clients for a number of reasons (including the fact that it would increase assets under management).  I’m still waiting to hear back from them.

What is a TPA that is ahead of the curve? A TPA who practices full fee disclosure before it was ever required.

What is a financial advisor that is ahead of the curve? A financial advisor who understand their role in assisting in the fiduciary process for the plan sponsor by developing an investment policy statement, constant review of plan investments, and offering investment education to plan participants. It’s also an advisor who is sensitive to the cost of plan administration and plan investments.

What is an ERISA attorney that is ahead of the curve? An ERISA attorney who is interested more in lowering the administrative costs and potential liability of a plan sponsor instead of how many hours they billed them.

Whether it’s exchange traded funds in 401(k) plans or ERISA §3(38) fiduciaries that will be the next big thing, always check the providers that are willing to try new things than those who stand pat and refused to change with the times. You either change with the times or the times will change you. Ask my two old bosses who can’t operate in the TPA space for the next couple of years and with their reputation in the business, may never work in this industry again.

My comments in a terrific Fiduciary News article can be found here.