The Rosenbaum Law Firm P.C. Blog

My latest article on JDSupra can be found here.

Did you ever hear of a dentist that didn’t bother to check a patient’s teeth or the bartender that didn’t serve any drinks to thirsty patrons? Me neither.

However, I still see retirement plan financial advisors who don’t do the basics of their job. While people think that the role of a financial advisor for a participant directed 401(k) plan is about picking top performing funds, that is not the case.

The most important role for a financial advisor in a participant directed 401(k) plan is working with the plan sponsor on the development of an investment policy statement (IPS), selection and review of plan investments based on the IPS, and providing investment education to plan participants because the use of a financial advisors is to minimize any liability under ERISA §404(c). If the financial advisor can’t complete those tasks, they serve no purpose than to just get their undeserved fee.

 I reviewed a Plan a few weeks back for a Retirement Plan Tune-Up (cheap plug, my plan review for $750) and the Plan had a broker of record. Problem was that the broker was getting 60 basis points in fees, which was high on a $15 million plan. In addition, the Plan had no IPS or giving education to plan participants. So while the Plan sponsor would get no protection from liability under 404(c), the broker was getting 60 basis points for doing nothing.  A broker not doing the most important jobs for a retirement plan advisor is almost the same as one of the political lackeys having a no show job.

 Whether you are an advisor or you have on, know the roles and make sure they are being completed.

Years ago, I had this silly notion that I would not only start my own law firm, but that I would also go for a certified financial planner designation. It was silly because I don’t see why someone would seek out their attorney for financial advice.

Having worked for a third party administration firm (TPA) that had its own registered investment advisory (RIA) firm that led to conflicts of interests and hidden fees, I have the belief that plan providers should stick to their own element of expertise.

I have also seen accounting firms with its own RIA practice including one firm that audited the retirement plan of a client that they were providing investment services through that RIA affiliate.

One vehicle that I have taken notice of late are law firms with their own TPA practices. I am rather perplexed because I think there is certainly an inherent conflict of interest and a client of mine showed that to me recently.

I did a Retirement Plan Tine-Up (the legal review of plans I do for $750, cheap plug) for a client that was a client of another law firm and their TPA affiliate. The Plan has over $14 million in assets, yet was still with an insurance company based platform that was laden in frees. The conflict of interest is that an ERISA attorney is supposed to put the clients’ needs first and a concern for a client are plan fees and that fees should be reasonable. Plan sponsor paying unreasonable fees for plan services Using an insurance company platform when an unbundled platform could be had for probably a lot less creates a conflict since the law firm owns the TPA that is involved in having the client use a far more expensive 401(k) product.

People have asked me in the past whether I do financial advisory or TPA work and I always tell that I won’t because the clients’ needs come first and providing any other plan services than providing legal representation can create a conflict, which can certainly cause disciplinary problems down the road.

Plan providers should concentrate providing the best services to plan sponsors using their expertise and should be less concentrated in being the Wal-Mart of retirement plan services.

My comments in a Bankrate.com story, featured on FoxBusiness.com on the freezing of pension plans can be found here.

The latest issue for plan advisors can be found here.

My latest article on JDSupra can be found here.

When you get pulled over by the police while driving, the best way to handle is to be pleasant and not be argumentative. You listen to the officer as to why he pulled over. Being belligerent and non-cooperative will only lead you to a ticket,

When a plan sponsor is contacted by the Internal Revenue Service (IRS) or the Department of Labor for a questionnaire or a request for information, it’s best to be cooperative. Being unresponsive or curt with them may lead them to sniff further and look closer at the plan for potential ERISA or Internal Revenue Code violations.

I had a client that had committed a serious breach of fiduciary duty and their cooperation of the Department of Labor (DOL) agent investigating the matter went a long way into correcting the error and avoiding some serious penalties.

A few years back, I was contacted by a potential client who advised me that the DOL was seeking information as to why the defined benefit plan that his bankrupt company had sponsored failed to prepare audits and 5500 filings for the past several years. This potential client refused to answer the DOL’s request and informed me that he had bankrupted the plan to benefit his personal expenses. I had advised him that he should immediately cooperate and the criminal attorney at my firm recommended to same to avoid certain jail time for embezzlement. This potential client ignored our advice and declined our representation. He was arrested a year or so later and faces 4-6 years in prison.

Cooperation with the IRS and DOL can go along with defusing problems that threaten the qualification of the plan and increase the liability for the fiduciaries. So if a plan sponsor is targeted for an audit or a request for information, the best bet is to contact an ERISA attorney. I hate to say it, but IRS and DOL agents act differently when working with an ERISA attorney than a client with no retirement plan background. Regardless of the problem, it’s always best to cooperate.

I always say that good third party administration (TPA) firms don’t get the respect that they deserve. The reason that they don’t get the respect that they deserve because many plan sponsors and financial advisors don’t know the value that they bring. I tried to note that value. One of the greatest values is plan design which can maximize the retirement savings of a plan sponsor’s highly compensated employees, as well as the use of plan sponsor contributions.

One of my favorite plan designs for 401(k) plans is the combination of a new comparability/cross tested plan design and the 3% safe harbor non-elective contribution. New comparability allows for greater percentage profit sharing contributions to highly compensated employees, as long as a minimum gateway contribution is made to non-highly compensated employees.

Trying not to throw some actuarial mumbo jumbo out there, we look at what the top group of employees gets (percentage wise of compensation). The non-highly compensated employees need to get the lesser of ½ of the percentage that the top rate group gets or 5% of compensation. The beauty of using the safe harbor 3% non-elective is that it can also be used to satisfy the minimum gateway requirements.

So in English, by using the safe harbor 3% non-elective contribution, the top paid group can get 9% of compensation as their profit sharing contribution (barring any unforeseen actuarial issues). With safe harbor, the ADP test, ACP test, and Top Heavy Tests won’t be necessary so highly compensated employees can maximize their 401(k) deferrals without worrying about refunds.

Safe harbor 3% non-elective and new comparability is a design that brings the best of both worlds, maximizing deferrals and profit sharing contributions.

On the flip side, I have seen many plans out there that offer the new comparability and the safe harbor matching contribution. The problem? Since matching contributions are only made to those that defer, it can’t be used to satisfy minimum gateway. So if a plan wants to use both designs, they have to give the safe harbor match and then give an additional profit sharing contribution to satisfy the minimum gateway,  While I understand that the safe harbor match is cheaper than the non-elective because you don’t have to give it to people who don’t defer, I think it’s a poor plan design because you are cutting your nose to spite your face because this design won’t maximize retirement savings and may have the plan sponsor make a greater contribution to non-highly compensated employees than they had to. It’s a plan design that reminds me of one of my old TPA bosses, Manny. I used to say about him was that he was the type of guy who would lose five dollars to save a dollar and be happy about it.  A safe harbor match and new comparability combo saves a couple of bucks at first, but costs the plan sponsor more if they wants to fully use both designs. Manny might approve.

Great plan designs in a TPA’s repertoire are a thing of beauty, as long as it maximizes the plan sponsor’s contributions. Inefficient plan designs costs the plan sponsors more money in contributions.

“401(k) Plan Provisions That Are Bad Ideas”, #1 most read article on JDSupra.com for the month of February 2011. For the list, click here.

I am wedded to my wife and that’s it. I am a huge fan of Aerosmith, the New York Mets, Howard Stern, Manchester United, Seinfeld, Dallas, and Survivor. I am willing to give everything up except for Howard Stern and my wife (not necessarily in that order).

There are too many plan providers, whether they are third party administration (TPA) firms, financial advisors or ERISA attorneys that are too wedded to a specific platform or provider. I am a big fan of choice and I would recommend avoiding plan providers that limit choice because they are wedded to a specific platform, Fund Company, or other retirement plan provider.

For TPA firms, I would avoid firms that seem to be dedicated to one platform, whether that platform is unbundled or a TPA alliance. There is a TPA I love, but when it comes to daily valued 401(k) platform, they live and die by one daily provider. The provider is a great if you are an advisor, but if you are a broker, this TPA can only work with you if your broker-dealer has agreements with every mutual fund that you put in a client’s fund lineup. 

The same goes for a broker or financial advisor that also only wants to work with one specific platform or one specific TPA or fund company. What may be good for the broker or financial advisor may not be good for the client. Working in the TPA world, I remember how advisors would come to us with all their plans, regardless of type or size. That’s a mistake because in a TPA world like any business, they serve a specific segment of the market.  A platform and TPA that works for a $100,000 401(k) plan won’t work for a $100 million plan.

The same goes for my brethren of ERISA attorneys, with many parking their clients with one TPA or one specific financial advisor. Unlike the Siths in Revenge of the Sith, I don’t believe in absolutes and I am willing to working with any provider that my clients feels comfortable with. When a client asks for a referral of TPAs and advisor, I always use 2-3 names because one advisor may not be a good fit with a specific retirement plan client. Choice is a good thing and it calms plan sponsors who may think there is some nefarious arrangement between providers.

A plan sponsor doesn’t need unlimited choices in choosing plan providers, but they should never be told that they have to use one specific provider over another.  Plan providers owe their allegiance to the client, not to another plan provider or financial product.