The Rosenbaum Law Firm P.C. Blog

This past weekend, my wife and I signed up our children for summer camp. At $10,000, it was actually more than more than 3 years of my tuition at Stony Brook. I met the camp owner and just being so fascinated about liability issues, I told him that I can only imagine his liability insurance premiums. The owner said between the umbrella and liability, it was a lot. To add further discussion, he also told me that any vendor showing up on his property including a magician or a carnival operator also had to have proof of liability insurance as a condition of his insurance coverage.

The same really should go for retirement plan sponsors. Ultimately, plan sponsors need that required ERISA bond and should always purchase fiduciary liability insurance to protect the plan fiduciaries. As one of my clients once found out the hard way, the plan fiduciary is ultimately responsible for the errors and omissions committed by plan providers. My clients who invested plan assets in Bernie Madoff also know that as well.

So while plan fiduciaries are ultimately responsible for the malfeasance of plan providers, they can still recover against them on the grounds of malpractice. It’s very hard to recover on the grounds of malpractice if the plan providers are not properly insured because a large award on a malpractice claim can trigger a quick plan provider bankruptcy and the plan fiduciaries will recover pennies on the dollar of the reward.

So to further protect their interest, the plan sponsor needs to ensure that all plan provider s are properly insured including third party administrators, financial advisors, accountants, and ERISA attorneys.

For disclosure purposes, I have malpractice insurance.

I have some simple rules to live by. I never bet on the Mets, eat Kosher Chinese Food, or do business with family.

Yet I have come across so many financial advisors who bemoan to me that they couldn’t net a new retirement plan client because the current broker/advisor is someone’s relative.  Since when did running a 401(k) plan all of a sudden become someone’s patronage mill for family members.

Seriously, being a plan sponsor or a plan trustee is a tremendous responsibility and must act in a prudent manner. All plan providers must be screened carefully through a process involving the interview of other competing plan providers. Simply handing the role of financial advisor to someone who is related to one of the plan’s decision makers or participant may be a breach of the fiduciary’s duty of prudence in selecting a plan advisor.

Being a plan fiduciary bears a tremendous amount of responsibility. It requires the retention of responsible plan advisors, monitoring those advisors, monitoring plan fees, shopping the Plan to determine whether plan fees are reasonable, working on an investment policy statement, review of plan investments, and ensuring participant education. So why would a plan sponsor and/or plan fiduciary by hiring a financial advisor or any type of service provider because that person is someone’s cousin? There are quite a few hundred of thousands of financial advisors not related to anyone who will works for the plan sponsor, so I would recommend hiring someone who is not related to anyone connected with the plan sponsor.

For fair disclosure purposes, I am not the ERISA attorney for any plan where the plan fiduciaries or participants are related to me.

Retirement plans with more than 100 participants (I won’t mention the 80/120 rule) have a requirement to get an independent audit for their Form 5500 filing. The failure to obtain an independent filing is the same consequence of making no Form 5500, so there will be harsh consequences for failing to obtain one.

As far as picking an auditing firm, it’s rather simple. Don’t pick an auditor on price, but pick an auditor based on experience. Find out how many audits they do a year and see how many auditors work on them. From experience, any auditing firm that has one auditor work more than 12-15 audits a firm is more of a mill and less of an actual auditing firm. The audit ensures that the plan is operating correctly and is in good financial condition. Paying thousands for an audit report that is suspect is the same as paying thousands of dollars for a worthless piece of paper.

Beware of referrals from third party administration (TPA) firms unless the TPA makes more than just one firm as a referral and you have indicated that the auditing firm in question handles plans from different TPA providers.

While some companies would want an audit from a Big 4 firm, it’s not necessary. There are many accounting firms that do just as good a job, if not better than the Big 4 firms, at a better price. I recently came across one plan where a Big 4 firm charged $54,000 for a limited scope audit, which is about $40-45 K too high.

The question for the last couple of years for me is independence. Auditors of retirement plans need to be independent and should not have any financial interests in the plan or the plan sponsor that would affect their ability to render an objective, unbiased opinion about the plan.

A TPA in New York had to fold its operation into a sister TPA because the people running it had a pecuniary interest in the auditing firm that they referred their audit required clients to. I have also come across an auditing firm that is also the financial advisor of plans that it audits. While many plan sponsor probably don’t care about a nefarious situation, they will if the Department of Labor ever came around and declared that the plan sponsor’s independent audit requirement was not met, so their previous Form 5500 were considered invalid. After being socked with hundreds of thousands of dollars in penalties, they would care.

 A good audit ensures the financial condition of the plan and serves as a check and balance on the other plan providers. The requirements to get an audit should never be taken lightly.

People complain a lot about 401(k) plans. Some complaints are warranted, some like comparing 401(k) plans to a Ponzi scheme are a bit overdone. While most of my blog and articles tackle 401(k) plans, there is one group of plans that are actually in worse shape than 401(k) plans from a compliance and investment standpoint and that group is 403(b) plans.

403(b) plans are in a bit of a legal limbo since they may not be qualified plans or they may be qualified plans with many plan sponsors unaware that the plans may have inadvertently been covered by ERISA. First off, 403(b) plans are only available for employers that are public education organizations, some non-profit employers (only Internal Revenue Code 501(c)(3) organizations), cooperative hospital service organizations, and self-employed ministers.

Why are 403(b) plans in worse shape than 401(k) plans?

1. The 403(b) market is still dominated by insurance companies with such huge fees, that they would make some of the more expensive 401(k) providers blush. Some 403(b) plans allow plan participant to choose multiple vendors, which becomes an administrative nightmare. In New York, the state teachers union was sued for endorsing an ING 403(b) plans that was high in fees and didn’t disclose the union’s endorsement fee.
2. If the 403(b) is not an ERISA based 403(b) plan, there was actually no written plan requirement until 2009.
3. There was a general fallacy that what made a 403(b) plans qualified under ERISA was only employer contributions. A 403(b) plan can become ERISA based just based on what administrative responsibilities than an employer takes in managing a 403(b) plan. So there may be many 403(b) plans that are ERISA based and don’t know it, who should have had a written plan document and filed Form 5500s since the plan was qualified, which can result in hundreds of thousands of dollars in penalties if caught by the Department of Labor. So there are many non-profit employers (governmental plans are not ERISA based) with huge compliance problems.
4. While many financial advisors don’t understand 401(k) plans, fewer that that understand 403(b) plans. There have been too many financial advisors and third party administration (TPA) firms too interested in converting these plans into 401(k) plans without realizing some of the testing and reporting benefits that these 403(b) plans offer.

If you are a 403(b) plan sponsor or a financial advisor, I suggest speaking to an ERISA attorney who can describe some of the intricacies that make 403(b) plans such a potential mess.

My latest article on JDSupra can be found here.

With news that Schwab intends to be in the all-ETF 401(k) market only means good news for those who believe that exchange traded funds (ETFs) will get a bigger foothold in the 401(k) market. While I have been skeptical of ETFs in 401(k) plans being just a niche player, I am very supportive of anyway that ETFs can increase their foothold in the industry because it offers competition in an industry that has been dominated by the mutual fund industry. Competition has a way of decreasing costs and for plan participants, that’s a good thing.

I think Schwab’s move is very proactive because I believe that full fee disclosure will increase the appeal of ETFs. My only concern why ETFs won’t be a dominant player within the 401(k) industry because most of the no fee transaction trading platform for 401(k) plans are controlled by mutual fund or insurance companies who have less incentives for ETFs to increase their exposure.

ETFs will get a bigger foothold in the 401(k) industry because of wider distribution and wide demands by plan sponsors, participants, and financial advisors. What will happen? We shall see.

Having been in the retirement plan business for the last 12 years, I have learned something new almost every day and I’ve seen a lot of things that I could never believe I would see when I was an L.LM student learning about qualified plan.

Having survived 9 years as an attorney for third party administration firms and 3 years as a law firm attorney, you learn how to do business and how not to do business.

The most important value that I believe a retirement plan provider should have is honesty. You don’t have to be the best, the smartest, the hardest working, or the best value. You need to be honest because honesty maintains the trust that your clients have in you and if you are caught lying, then you have betrayed that trust and then you lose the client. The most important asset that you have in the retirement business is your reputation because providers with poor reputations don’t do as well as those that have good reputations.  Honesty only enhances your reputation, it will never besmirch it.

Honesty is not just about being honest about fees, it’s about being honest with mistakes you make and forthcoming with any changes that the plan sponsor needs to make to improve their plan and limit their liability. Sometimes that honesty will cost you business; especially an actuary who tells the plan sponsor that it’s time to terminate their defined benefit plan and the actuary will lose that client. At the end of the day, the client’s needs do have to come first.

I have seen retirement providers of all sorts (TPAs, financial advisors, attorneys, and auditors) do wrong by their clients by being dishonest and less forthcoming with their clients. I never wanted to take that road because my fear is that the client would find out that I did wrong and I never want to betray my client’s trust.

With fee transparency and so many tools out there to gauge a provider’s work, the incentive to be dishonest is being minimized.

As a retirement professional, your word is your bond with your client. Without that bond, then you will not have that client or a good reputation in the industry.

My latest newsletter geared to retirement plan advisors can be found here.

There was a recent article in the Wall Street Journal regarding 401(k) plans re-enrolling plan participants. Re-enrolling plan participants usually occurs when there is a change of the plan’s third party administrator (TPA) or a significant change in the plan’s fund lineup.  At that point, the plan sponsor may change plan participants’ investment selections to a qualified default fund if they deem employees are not properly diversified,

While most plan participants may opt to keep their current investment election, the thought of re-enrollment is to help plan participants who never change their investment allocation or don’t have the time, background, or knowledge to make changes.

Of course, the default fund is usually going to be a Target Date Fund and we can argue all we want, but a Target Date Fund is not the best fit for everyone.

My problem with this whole idea of re-enrollment is that it is really just a tacit admission by the plan sponsor that plan direction of investments doesn’t really work.

The idea behind directed investments by plan participants was that it was going to limit the liability of plan sponsors as long as plan participants received education and the plan sponsors followed the prudent process of selecting plan investments according to an implemented investment policy statement.

I think if a plan sponsor thinks that plan participants do a poor job of selecting investments, and then perhaps it’s as a result of poor employee education or the belief by plan sponsors that many or most plan participants can’t make investment elections on their own. If that’s the case, perhaps a trustee directed 401(k) plan may be an option for those concerned plan sponsors. Also, if they are so concerned, I was wondering if the plan sponsors that institute re-enrollment actually pay for the administration fees of the plan or is that borne by the participants. Just wondering.

There is nothing wrong with a participant directed 401(k) plan as long as the plan fiduciaries fill their role in selecting investments and educating participants. If a plan sponsor thinks that the investment decisions of a plan participants that should be overridden, I think there is a larger underlying problem for the plan sponsor. That problem is either a fiduciary breach or a lack of confidence in the idea of participant directed investments.

My latest article on JDSupra can be found here.