The Rosenbaum Law Firm P.C. Blog

I remember when I first saw the political sign as a freshman at Stony Brook over 20 years ago where the student government Acting Treasurer Naala Royale was running for her own full term. Her motto for the race was that “If it Ain’t Broken, Don’t Fix It.”  If you knew anything about Polity, the student government at Stony Brook, you knew it was broken and it needed to be fixed. Actually about 15 years later, the administration Stony Brook got so fed up with Polity, they destroyed it completely and started a whole new student government.

I liked Naala, but I hated the slogan. I think that phrase is a cop out, it’s a sign of complacency. It’s a sign to me that we need to maintain the status quo because it’s the status quo and because it’s always been that way. People become complacent because they are afraid of change, they have the fear of the unknown.  Heck, if Steve Jobs would have remained complacent when he took over the role as interim C.E.O. of Apple in 1997, they probably would have been out of business by now. Complacency is for the lazy, innovation is for the ambitious.

When the Pension Protection Act of 2006 was implemented, I told my bosses at that producing third party administration (TPA) firm I often write about that we should really push our clients to implement automatic enrollment. It would increase our assets under management, increase the deferral rates for non-highly compensated employees, and prevent a net outflow of assets when the baby boomer generation retired. I never got a response back from my bosses. In 2007, I left that firm because I thought fee disclosure was the future and since we had bosses running the place like it still was 1995 (at least when it came to administration fees), we were going to die. I told my former co-workers that the TPA was going to be finished and I was laughed at. They had the mentality that the TPA wasn’t broken because they had operated for almost 20 years with impunity. Unfortunately their run ended this past December as they were forced to merge with a sister TPA.

I remember my old law firm. I wanted to use Twitter, LinkedIn, and blogging to build a name for myself and my practice of trying to save clients on administration costs and minimize liability at a flat fee. I was told by the head of the advertising committee (which was actually one person and he didn’t bring in any business) that social media was barred by the New York Attorney Advertising Rules. If anyone knows anything about social media, to be effective at it, it can’t be advertising. I tried to bring in business and I was a failure because there was no financial incentive for me to draw in business and no financial incentive for the partners to work with me. For some reason, the Managing Partner either didn’t like me or felt threatened by my non-lawyerly ways of networking and working with potential clients and with financial advisors. It was a law firm that employed few associates and mostly partners, they didn’t see the associates for what they should be, the future of the firm. The new ways that lawyers market themselves with social media scared the heck out of them, maybe that’s why they are hurting as they had to cut three associates loose.

Too many plan providers also have that complacency bug. It could be the financial advisor making 75 basis points for working with a plan sponsor and not working with them on an investment policy statement or providing participant education. It could be the TPA insisting that the insurance based platform with wrap fees was the best value for a $14 million plan or the ERISA attorney charging $7,000 for an individually designed plan document when a  volume submitter or prototype was available. In these situations, it was more profitable to be complacent and these providers were hoping that the plan sponsors wouldn’t be wise to what they were doing.  Complacent providers get replaced because they are broken and they needed to be replaced. I never heard of a financial advisor being replaced because they were too responsive to the client when it came to the IPS and fund selection. I never heard of a TPA being replaced because they fully disclosed fees to the client years before they were legally required to do so. I never heard about an ERISA attorney being replaced because they use flat fee billing instead of the chiseling hourly fee.

How many plan sponsors still have the same providers because that’s the way they always have had them? How many plan sponsors have that “if it ain’t broken, don’t fix it” mentality?  I have a client being sued by the Department of Labor because she used a TPA for 28 years without realizing they didn’t do valuations or distribution forms for owner-employees.  Plan sponsors have too much fiduciary liability to be complacent. Instead of being convinced that things aren’t broken, plan sponsors need to make sure that their plans have advisors that are at the top of their game and willing to be ahead of the curve because those that don’t change with the times will have the times change them.

If it ain’t broken, don’t fix it is a cop out. It means we are too lazy to be better.  For those who are plan sponsors and plan providers, complacency can be a killer.

When you speak up and make your opinions known, it should be no surprise when someone disagrees. As a former student journalist, my views have been criticized one way or the other.

However, in all my years, I don’t think anyone has disagreed with me in such a classy manner than Jerry Stinson from K Plan Retirement Advisors. It’s worth a read.

About 10 years ago, I started The Rosenbaum Law Firm P.C. and its original niche is different from the retirement plan focus of today.  My original ideas was that my law firm would be the Walmart of legal services. I would charge $100 for a plain vanilla will or preparation of income taxes (whatever the size) for $150. The idea was a tremendous flop because legal services are not something that people want to buy on discount like a pair of underwear or groceries.  So people won’t flock to get a will done for the cheapest price.

With retirement plan fee disclosure, many critics insist that plan sponsors will simply choose the cheapest provider because fee disclosure will focus on a retirement plan sponsor’s bottom line in the cost of plan administration.

A growing part of my practice is now representing registered investment advisory firms that want to enter into the retirement plan business or want to grow their practice. For a monthly retainer for as little as $500 (shameless, cheap plug), I work with my clients on their client agreements, compliance assistance, and marketing. One of the best questions out there that these clients or potential clients have asked me on what a reasonable advisory fee that they should charge their clients. That question is almost as painful as when one of my potential employers asked me how much money I wanted. For my end, I always shot myself in the foot. For the plan advisor, how much they should charge is a difficult thing to gauge.

Investment advisors should charge a reasonable fee. What is reasonable? That’s debatable, but I think reasonableness is based on what services they provide. As I had discussed previously, a recent client had a broker who was charging them 60 basis points for a $14 million plan. For a plan that size, that fee was high. When I did my Plan Tune-Up legal review for the client, I learned from them that there was no investment policy statement or education given to plan participants. So since the broker wasn’t doing his job, 60 basis points was obscene.

ERISA doesn’t require plan sponsors to pick the cheapest providers, they need to pick providers that charge a reasonable fee. So plan sponsors can hire a financial advisor who charges 75 to 100 basis points for plan advisory services as long as the services they provide make that rather large fee reasonable. All things being equal a financial advisor who is an ERISA 3(38) fiduciary should charge more than one who is a co-fiduciary or a broker who has no fiduciary role. Of course, my good friends James Holland and Tim Wood corrected me that in most situations, an ERISA 3(38) fiduciary is less expensive than the advisor they replace.

The same things go with third party administration (TPA) firms. Picking the cheapest TPA is usually a huge mistake because they tend to have the most errors and the worst service.  I have a client today that has only $1.5 million in assets, but opted for a TPA with a $7,500 minimum because they want that white glove service in administration and compliance that the TPA offers. I have had clients who later regretted using their payroll provider as a TPA.

So plan sponsors should focus less on low fees and more on value. They need to ensure that the fees they pay are reasonable for the services they get. Plan providers who go the extra mile should get paid for that, but plan providers that don’t provide enough value for the fees they charge should be replaced.

In Canarsie, Brooklyn, where I grew up, the best place for baked ziti was a place called Anna Napoli.  Baked ziti was one of the very foods I ate that weren’t named pizza or hamburger. Baked ziti was a Saturday staple until they closed down a few years before we moved.  The placed I would get baked ziti after Ana Napoli was a few steps down as they were lazy by plopping down ricotta cheese in the middle of the dish, instead of mixing it with the sauce. Was the best baked ziti at Ana Napoli or was it the best because that is the first place I ate it? Whatever the reason, Ana Napoli isn’t coming back so I have to eat elsewhere for some baked ziti.

There was an article about 30 years with 401(k) on Businessweek.com and there is the usual lament on how the advent of 401(k) plans coupled with the employers’ decision to cut back on defined benefit plans.

I always love the love of defined benefit plans and how some commentators want the defined benefit plans to be brought back.  My response reminds me of what Rick Pitino said when he was the coach of the Boston Celtics on the expectations of Celtics fans:  “Larry Bird is not walking through that door, fans. Kevin McHale is not walking through that door, and Robert Parish is not walking through that door. And if you expect them to walk through that door, they’re going to be gray and old.” So no matter what we want or how much people decry the 401(k) plan, defined benefit plans are not coming back. If municipalities and state governments are having a tough time funding them, the private sector isn’t about to bring them back.

Unless someone comes up with a better system for retirement savings, we are left with the 401(k) plan and instead of complaining about them, I think we should do all we can to improve them. While fee disclosure is certainly a good step, I think one of the biggest problems is participation. The article in Businessweek noted that 401(k) plan assets only comprise 16% of all retirement assets.

More companies should have 401(k) plans and employees should have an easier time to participate. Perhaps the Federal government should offer tax credits for the implementation of new 401(k) plans for small businesses and that would create greater incentive for the plan sponsor to borne the costs of administration, rather than the participants. Provisions that spur participants to defer should be championed. That should include automatic enrollment and automatic eligibility for salary deferrals. While the article stressed the need to pare down investment options and noted the use of target date funds as an example, I encourage that investment options be pared down to a manageable level, but I don’t believe that target date funds are the solution that the mutual fund industry think they are.

Needless to say, 401(k) plans are here and they aren’t going away. To steal a quote from Ric Flair, 401(k) Plans: learn to love them because they are the best thing going.

As an ERISA attorney, I do get to talk to a lot of financial advisors and ERISA independent fiduciaries around the country and the lament is that many plan sponsors don’t understand or care about such important fiduciary problems like excessive administrative fees, the lack of an investment policy statement, and the lack of education given to plan participants.

However, sometimes a 401(k) plan sponsor will understand and care without any help. A few months back, I got a phone call from a doctor from a medical practice. He indicated to me that he thought that there was something wrong with the plan. The plan was being handled by a broker who owed his position in his familial relationship with one of the doctor’s partners. This doctor questioned the third party administration (TPA) firm (owned by a law firm) and his broker about the plan’s insurance based platform. Since the plan had 200 participants and $14 million in assets, this doctor thought he could do better with an unbundled provider. The TPA and broker said it was impossible. The doctor was also concerned about fiduciary guarantees offered by the plan’s custodian. The doctor decided that his medical practice should retain my services for a Plan Tune-Up (yes, cheap plug, the $750 plan review that I shill).

Since the Plan was safe harbor, discrimination testing wasn’t an issue. A review of the census and valuation reports didn’t show major issues. When it came to plan expenses and a review of investment options, there were plenty of issues. First off, the Plan had 63 different investment options, 63, no joke. I am under the belief that 12-15 investment options are more than enough because studies have shown that more investment options depress employee participation because more choices adds to more confusion. A review of plan expenses showed that the fees all in (including the advisor) was more than 200 basis points, which was extremely high for a plan that size. The broker, who has no fiduciary role, netted 60 basis points. I questioned the plan sponsor and there was no investment policy statement and no education was given to plan participants. The plan sponsor also didn’t have fiduciary liability insurance. Needless to say, the plan sponsor was paying a boatload in fees and getting little minimization of their liability.

The Tune-Up noted the concern over the investment options, plan fees, and lack of work performed by the broker. I recommended that an ERISA §3(38) advisor (which the doctor asked about)  could offer full protection from liability on the investment process and do it for less than what the broker is collecting for doing nothing.

After reviewing the Tune-Up and having me on the call for a partners meeting, the doctor advised me that the plan sponsor quickly decided to replace the broker and the TPA and hired a new ERISA §3(38) fiduciary who will help them select a new custodian and a new TPA. This was done without my input, this was done because the plan sponsor only took my review as a confirmation of what they already knew.

So when people will tell me that plan sponsors don’t get it or understand their role as plan fiduciaries and the liabilities attached with it, I am reminded how plan sponsor can understand their role without any help from a financial advisor or an ERISA attorney.

My latest JDSupra article can be found here.

Adam Pozek in his blog had a great discussion about ERISA §404(c), which is the code section that may limit a plan sponsor’s liability in retirement plans where participant directs their investments. Adam mentions how people in the marketplace have guaranteed that plan sponsors won’t get sued with 404(c) compliance and others have guaranteed that plan sponsors will get sued if they are not fully compliant.

I got a chuckle this week when a retirement plan “expert” who is not a financial advisor, actuary, third party administrator or ERISA attorney, claimed that people like me create a fear factor within the retirement plan industry to generate business with no evidence to support it.  It was a good laugh because as an ERISA attorney who charges a flat fee for most of my services, I get paid whether the plan has fiduciary liability issues or not.  My Retirement Plan Tune-Up plan review only discovers errors that are there. As far as evidence goes, like Justice Potter Stewart, I know plan problems when I see it. How many retirement plans out there have compliance issues? I don’t know and since most compliance issues only become compliance issues when they are actually discovered, your guess is good as mine.  I guess the same person who thinks retirement plans have no problems probably thinks that all husbands are faithful because I have no evidence to determine how many wives are being cheated on when they don’t know it.

Getting back to Adam’s view on Section 404(c), he is right. Section 404(c) compliance or ignorance is not a guarantee on liability issues. There are no absolutes in the retirement plan business and even if a plan sponsor fully complies with Section 404(c), there is still always a chance than an irate employee may sue the plan fiduciaries even if they have absolutely no case. Whether a plan sponsor is vigilant in their duties or not, fiduciary liability and responsibility can really never be fully eliminated. It’s a threat that is always there.  All a plan sponsor can do is implement good practices like annual reviews, semi-annual or an annual fiduciary review, and regular plan enrollment/education meetings to minimize as much potential liability as they can. That is why plan sponsors should always purchase some fiduciary liability insurance because there are no guarantees in life and in plan compliance.

As Adam points out, plan sponsors need to follow a prudent process. As I say, a prudent process is not a full proof process.  I don’t need any evidence to back that out.

A month or so ago, I wrote an article regarding what 401(k) Plan Provisions are Bad Ideas. The provisions I listed were listed because I thought that they were plan features that could easily cause operational errors that could threaten the tax qualification of the Plan and its trust. In this post, I will take the positive side and mention plan provisions that 401(k) plans should have. The reason why I like these plan features is because they will enhance the savings of plan participants and enhance the benefit that the 401(k) plan could offer.

When it comes to 401(k) plans, so much is said about plan expenses, review of funds, investment policy statements, and fiduciary liability. What is forgotten about 401(k) plans is that in addition to being a retirement plan, it is also an employee benefit.  So a 401(k) plan with features that encourage participation and accessibility to account balances is an employee benefit that could attract potential employees and retain current employees.  The features that I think should be added to 401(k) plans if they currently aren’t current provisions would cost plan sponsors very little in administration fees and nothing in added contributions. Here are my suggestions, so take it or leave it:

Eligibility to Defer with Little or No Service Requirement: We have a retirement crisis in this country where most employees haven’t saved enough for retirement.  While I understand why employers require a Year of Service to give participants a profit sharing or matching contribution, there is very little reason why plan sponsors should require a Year of Service for participants to be able to make salary deferral contributions. The reason is because even if a plan sponsor would require no service or six months of service as an eligibility requirement for deferrals, the otherwise excludible rule would allow salary deferral testing (the ADP test) to be conducted as if the salary deferral eligibility was age 21 and a Year of Service.  The only downsides are that administrative costs would be increased because third party administration firms typically have a per participant charge and there is a concern with employee turnover that there will be many small account balances of former participants in the plan. The reasons those downsides can be dismissed is because most 401(k) plans have their administration fees paid by the participants’ account balances and there are mechanisms to rid 401(k) plans of small account balances of $5,000 or less belonging to plan participants. The ability to allow participants to defer quickly is a statement that the employer is encouraging retirement savings and it becomes a rather attractive benefit to entice potential employees.

Roth 401(k) Feature: Since 2006, 401(k) plans can add a Roth feature that allow participants to defer some or all of their salary deferrals for the year on an after tax basis. By doing so, a participant could get those deferrals back and the earnings from those deferrals on a tax free basis upon retirement. The Roth feature has no effect on 401(k) limits or 401(k) testing, so other than notifying the payroll company that deferrals are going to be made on an after tax basis, it is almost the same as the regular pre-tax deferral. Yet a majority of plan don’t have that feature. Why? Participants should have the option on whether they want their deferrals on a pre or post tax basis. Options that have no negligible effect on a retirement plan are good.

In-Service Distributions: Other than hardship, it is a disqualifying plan provision to allow active participants to receive a distribution of their salary deferrals prior to the attainment at age 59 ½. In addition, distributions after the attainment of age 59 ½ will not incur the early distribution penalty. There should be no reason why plan participants should not be able to take out a portion or all of their account balance upon turning age 59 ½ or attaining the retirement age under the Plan, It is their money and since they are near the age of retiring from employment, they should have the opportunity to take that money in cash or transfer it to their own individual retirement account.

Loans and Hardship Distributions: In an ideal world, 401(k) plans would be for retirement savings only. However, we live in the real world and there are reasons why participants may need to tap their 401(k) account funds. A plan loan is an attractive way to borrow money at a reasonable rate that also acts as a participant directed investment. Hardship distributions are for important reasons like burial expenses, medical expenses, to prevent a foreclosure, or other life important events. While many believe that participants shouldn’t tap their accounts in these instances, we should allow participants to have the free will to make those choices when they really need to.

Automatic Enrollment: When I first heard of automatic enrollment in 1999, it was called negative election and I thought it was something out of the Soviet Union. The reason for my red baiting was clear. Negative elections were merely designed as a cheap gimmick to artificially improve the ADP/salary deferral discrimination test by forcing participants to defer who didn’t affirmatively opt out of deferring. The reason that it was a gimmick because there was no liability protection for plan sponsors to invest that money if the plan was a participant directed plan and these participants didn’t affirmatively elect to participate. Legislative changes have made automatic enrollment more than a gimmick with the advent of the qualified default investment alternative (QDIA) which allows the plan sponsor to have liability protection if they place these deferrals into a qualified, default investment. In addition to helping the ADP results, automatic enrollment increases the retirement savings of participants and it has increased participation. Combined with great investment education to participants provided by the financial advisor, I believe automatic enrollment can turn people who automatically defer to people that will voluntarily defer. Increasing retirement savings for all plan participants is a good thing. While many companies fear the backlash from automatically enrolled participants, having these participants to opt out is fairly simple.

These are just a few provisions that I think all 401(k) plans should have. Plan sponsors should never forget that 401(k) plans are employee benefits and I believe that these provisions can only enhance this benefit to current and future employees.

One of my favorite movies is Casino. I admit it, I am a huge sucker for great mob movies and while it’s not the Godfather Trilogy or GoodFellas, it’s on the next level. One of the most interesting scenes is when it is acknowledged that the mafia owners of the Tangiers casino were not allowed in the count room, where the money from gambling is counted. It was a strange rule that as the owner of a commercial enterprise, you were not allowed in the room where your revenue is counted. Strange, but true.

Retirement plans until January 2012 have a similar rule. While retirement plan sponsors and fiduciaries have the fiduciary responsibility to know the true cost of the administration of their plan, plan providers are not legally responsible to tell plan sponsors that information. So what the plan sponsors and fiduciaries may not know, can hurt them. Plan fiduciaries such as plan sponsors and trustees also must determine whether the fees being paid are reasonable and that is impossible if they don’t know the actual fees.

I have been a big proponent of fee disclosure because I believe in the free flow of information and plan sponsors not only should know how much the administration of their plan costs, but they have that fiduciary obligation.  While I have been critical of excessive fees in the past (especially those charged by a former third party administration (TPA) firm employer of mine), I understand that the far majority of plan providers don’t gouge fees and a majority of these providers already disclose these fees before any regulation required them to so do. So if there is no illegality or fee gouging going on, why were so many people and companies resistant to fee disclosure? I am a big fan of a level playing field and I think all providers should play on one and all plan providers should be required to disclose fees, so plan fiduciaries can exercise their fiduciary responsibility in a prudent fashion.

Some critics of fee disclosure claim that all fee disclosure will do will drive plan sponsors to only seek the cheapest TPA firms and the cheapest financial advisors. That might be the case if all plan sponsors would actually read the financial disclosure and then actually shop the plan around to determine whether the fees are reasonable. In addition, will plan sponsors still always choose the cheapest plan providers? If people only sought the cheapest provider, we’d all be shopping at Walmart. In addition, TPA and financial services aren’t like a pair of Wrangler Jeans because many cheap providers in the retirement plan business make up the lack of cost with a lack of services.

As I have stated before, fee disclosure may bring or may not bring a multitude of changes. I can’t wait to see what will happen.

The whole purpose of having a participant directed 401(k) plan has been to take advantage of ERISA §404(c), which limits the plan sponsor from liability from losses incurred by participants through their directed investment.

Plan sponsors were under a misconception is that simply offer the safe harbor mix of 5 mutual funds would simply be enough to afford this protection from liability. Of course, that is not the case.

Plan sponsors need to manage the fiduciary process with a financial advisor to develop an investment policy statement (IPS), select and review plan investments against said IPS, as well as providing education to plan participants. Only after doing that, can a plan sponsor afford that protection.

While it seems a lot of work, selecting the right financial advisor, third party administrator, and ERISA attorney will do the trick.

By not taking these steps, especially not developing an IPS, puts the plan in far worse shape from a liability standpoint than if the trustees directed plan investments. Why? Well, most trustee directed plans have a financial advisor helping with the investments and these plans have an IPS.  The IPS is one of the most important tools that the plan sponsors and trustees have. It has become so important that the Department of Labor routinely asks for a copy of the IPS upon an audit.

The purpose of participant directed investments is to minimize liability. Not taking the steps under ERISA §404(c) defeats that purpose.

In addition regardless the form of investment, it is always recommended that plan sponsors get fiduciary liability insurance to protect all plan fiduciaries.