The Rosenbaum Law Firm P.C. Blog

My interview with BLR.com can be found here.

With changes in fee disclosure and the change in the definition of fiduciary, many advisors have been asking me for my opinion on what effect these changes will have. While I don’t have a crystal ball, I can certainly answer that question rather simply. The companies that have already adapted to a full fee disclosure model will thrive and those who hid fees all along will have a tough time. The same can be said for some brokers who are affiliated with broker-dealers who don’t believe that being a fiduciary was part of the bargain. Some retirement plan third party administration (TPA) firms and advisors will thrive, while others will die. Of course, there may be some unintended consequences.

Since I am a big fan of business history, this reminds me of the Airline Deregulation Act of 1978, which deregulated the U.S. airline industry. Until 1978, the Civil Aeronautics Board (CAB), regulated many areas of commercial aviation such as routes, fares and schedules. The CAB had three main functions: to award routes to airlines, to limit the entry of air carriers into new markets, and to regulate fares for passengers. The CAB essentially handed the international flight market to Pan Am and Pan Am heavily rewarded their employees for their good fortune. Other airlines that were protected by governmental regulation like Eastern also had some sweetheart deals for their labor unions.  In 1974 the cheapest round-trip New York-Los Angeles flight (in inflation-adjusted dollars) was $1,442. With that kind of fare, these legacy airlines could be generous with their staff.

There were some against deregulation. Some complained that smaller markets would lose airline service and that the airline industry didn’t need to change the status quo (sound familiar).

The changes after airline deregulation were breathtaking. Fares decreased and carriers that could not adapt to deregulation and had huge labor costs because of their “monopoly” like Pan Am, TWA, and Eastern died. The unintended consequence was probably the fact that airline travel has increased so dramatically, that we have constant delays because of huge capacities of flights.

With the advent of change, everyone take a guess on what may happen and everyone could be wrong. Change will certainly occur, some companies will thrive and some will die. Those who have adapted to the changes before they took place will be at an advantage.

My latest article on JDSupra can be found here.

A friend of mine who is a retirement plan consultant was advising a $14 million plan on which custodian and third party administration (TPA) firm to use. She picked a local unbundled TPA, using the Schwab platform.

The broker of the record is somehow related to somebody on the plan sponsor’s through marriage. Perhaps there were cousins removed as well, but you get the drift. The broker, affiliated with one of the large broker dealers suggested using a high cost, insurance based platform.

The reasons for using the insurance company based platform were obvious. The broker had little or no knowledge as it pertains to plan cost and it seemed that the only thing he really cared about that he could easily be paid by this insurance platform and Schwab would have been harder to get paid.

Swell. The client and plan participants would have paid more in fees, so the broker can get paid easier. Wonderful. The fact that the broker didn’t bother to find out which other unbundled platforms could have paid him easily as well (Matrix, anyone?) makes this story a little more outrageous.

Requiring brokers to abide by the Department of Labor’s definition of fiduciary is much needed, as seen by this example. So this broker, under the new rules, would be more tied to the client’s needs as a plan sponsor and less to the almighty dollar. Fiduciary standards will require brokers to live up to a higher duty of care, where the client comes first and the 12b1 trails come later. So brokers under the rules if implemented, will either change their habits, get out of the business, or partner up with ERISA fiduciaries. Either way, plan sponsors win out when advice is given with no strings attached and the client’s needs come first.

The first time I heard the word Schnorrer, I was 7 years old and my parents took me to a trip to Mystic, Connecticut. During those days, the Connecticut Turnpike had eight toll booths from Greenwich to Mystic. It felt that every 10 miles, some toll collector was looking for a quarter. So my mother said, Connecticut is a bunch of schnorrers.

Schnorrer is a Yiddish term meaning “beggar” or “sponger”. The English usage of the word denotes a sly chiseler who will get money out of another any way he can, often through an air of entitlement. For me, a Schnorrer is essentially a cheapskate.

When it comes to retirement plans, a retirement plan sponsor or a retirement plan providers shouldn’t be a schnorrer.

A retirement plan sponsor who is a schnorrer is one who selects the lowest cost third party administration (TPA) like a payroll provider and doesn’t care that the administration of their plan is done properly or not. Plan costs should always be a consideration, but so should proper administration is a greater consideration.

For retirement plan providers who are schnorrers, I can remember my old TPA. As a producing TPA with its own RIA practice, we had clients around the country. We did charge a hefty RIA fee and then the managing director of the Firm who ran the day to day operation (the biggest schnorrer I ever met) started charging for travel expenses for our client relationship managers to visit clients in assisting them with the fiduciary process. That went over like a led zeppelin. I worked for a law firm partner who had clients around the country and he was insistent that he would never charge his clients for his travel time because he felt that the client would simply want to hire counsel than was more local than to pay him for traveling.

When I left the TPA in 2007, I was replaced by 2 attorneys and a paralegal. Like Lou in Caddyshack who had to raise the price of Coke because he was losing at the track, my old TPA had to raise plan document fees because they were losing money by hiring this larger staff to replace me. Plan document fees went up by 25% and they started charging $150 for annual safe harbor notices. $150 to simply search and replace the year in a Word document for $150, this chiseling offended many clients.

Clients don’t want to be chiseled. They would rather play a higher flat fee that getting inundated by petty charges.

One of the things I hated most about law firms was their chiseling of clients. It was enough that clients were charged by the hour, which only led to possible abuses of overbilling because law firms stress billable hours more than quality of service. So it’s not enough to overcharge clients for legal services, but the law firms that I was associated with also charged clients for typical office charges like FedEx or copies. When I buy a bagel with olive cream cheese at my favorite bagel store, do they charge me for napkins or a plastic knife? There is a cost for any business to do business, but does a law firm have to pass every nickel in costs to their client.

That is why my practice uses a flat fee; clients should have a fee that they have cost certainty over and with the knowledge that I am not chiseling them. When I drafted a plan document for a client yesterday for $2,000, I didn’t charge them the $8 to mail the plans or the $18 to bind the plans at Staples (my clients would tell me not to be schnorrer and buy a binding machine).

Every retirement plan provider needs to be fully compensated for the work they do. There are costs involved in doing business, but clients don’t need to see every charge added and itemized because you don’t want to be labeled a schnorrer.

My guest gig on Voice America can be found here.

If you read my writings, you know that fiduciary liability is one of the plan sponsor’s more important concerns as a plan fiduciary.  Since participant directed plans under ERISA §404(c) are supposed to limit a plan sponsor’s liability, I have consistently reiterated the need for plan sponsors to develop an investment policy statement (IPS) with their financial advisors, consistently review the funds against said IPS, and provide participant education. Otherwise, plan sponsors can be subject to liability from participant lawsuits.

A plan sponsor’s adherence or disregard for ERISA §404(c) is no guarantee that the plan sponsor will not get sued or will get sued.  While fiduciary liability is a great topic these days because plan sponsors have been named defendants in lawsuits by participants more frequently today than in the past, fiduciary liability isn’t usually what gets plan sponsors into trouble.

Retirement plans are highly technical, tax deferred and qualified entities. Retirement plans has so many different moving parts with so many discrimination tests, buffeted by a plan document that can be difficult to understand by most people. So my rule of thumb is that if an Internal Revenue Service agent or Department of Labor agent wants to look for something wrong, they will find it. It may not be a huge plan error like a plan document that hasn’t been updated in 10 years, it can be as simple as not allowing participants to change their 401(k) salary deferrals according to the terms of the plan.

Plan errors can come in all different shapes and sizes and if a plan sponsor can detect these errors through the use of an ERISA attorney or their third party administration firm. By finding these errors on their own, a plan sponsor could self correct if the error doesn’t require an IRS submission. Larger errors or errors discovered on a plan audit by the IRS and/or DOL, may require a submission to their respective voluntary compliance programs.

Unfortunately, plan errors are a common fact of day to day administration of a retirement plan error. With the right team surrounding them, plan sponsors can mitigate potential plan defects.  Yet if they have plan errors, there is enough room for the plan sponsor to correct it without large penalties or the risk of plan disqualification.

My latest article on JDSupra can be found here.

As a child growing up in Brooklyn, I had terrible allergies. I had an asthma attack when I was 5, so I took allergy shots almost every week until I was about 18. It’s debatable whether it actually improve my allergies or I just grew out of its severity.

So almost every Wednesday, I went to Dr. Apfel’s office for my weekly shot. It seemed quite often, there was a pharmaceutical salesman sitting in Dr. Apfel’s office bearing free samples and who knows what else.

Fast forward a few years later and I was working for a third party administration firm (TPA) that had its own advisory practice.  Instead of pharmaceutical salesman bearing free sample, we had mutual fund sales people meeting the client relationship managers who helped develop the fund lineups for our clients. The fund salespeople took our client relationship managers out to lunch and they were always bearing gifts including Yankees tickets. I remember being told that one fund salesperson came to our office and inquired what kind of gifts that our client relationship managers would want and I will never forget how one of them actually asked for a set of Callaway golf clubs. While I don’t think he got the clubs, I could have only imagined if he did.

Graft and bribery is a way of life and I’m sure sometimes that happens when selecting a fund lineup.