The Rosenbaum Law Firm P.C. Blog

Many retirement plan advisors and third party administration (TPA) firms have been harping about 401(k) plan administration fees and in a belief that fees should be transparent, we now have fee disclosure that will come into effect in July.

While plan sponsors have the fiduciary responsibility to understand all the fees that they are paying and whether those fees are reasonable as to what is out there, I think plan sponsors lose more money in poor plan design than they do through excessive fees. Why there are no articles about poor plan design then? Well, poor plan design isn’t as sexy as high 401(k) fees and at the end of the day, there is more liability from excessive fees because with poor plan design, the only people who could sue the plan sponsors are plan sponsors and what’s the chances they will sue themselves?

What are poor plan designs? Plan designs that either no longer fit the needs of the plan sponsor or don’t include the efficiencies offered by current plan design. Case in point, a 401(k) plan that barely fail discrimination testing and the plan doesn’t offer automatic enrollment which would artificially raise the deferral participation rate of non-highly compensated so the plan will pass.  Another poor plan design is when a plan offers a new comparability/cross tested design with a safe harbor matching contribution. The problem? A safe harbor non-elective contribution could be used to satisfy required minimum gateway contributions to non-highly compensated employees, while safe harbor matching contributions do not which means that a plan sponsor using new comparability and safe harbor matching contributions may end up putting a lot more in contributions than they have to.

Poor plan design may also involve the lack of not augmenting the current plan with another plan like a cash balance plan or a non-qualified arrangement.

The value of a good financial advisor is not just relegated to helping manage the prudent fiduciary process of picking suitable investments and the development of an investment policy statement. A good financial advisor can clearly stand out by either being informed about plan design or being surrounded by TPAs and ERISA attorneys that do. The best TPA salesman I ever met, the late great Richard Laurita knew very little about the operations of retirement plans and he was honest about it. That is why on many occasions, he would have me accompany him to meetings with potential new clients or to be available by phone.  This level of service helped him nab a few more clients because it was something that a lot of low cost or bundled providers could not provide.

Retirement plan advisors need to stand out and I think it’s an added bonus to use a retirement plan consultant from the TPA or an ERISA attorney in the client solicitation process because it may save the clients money in improving the efficiency of plan design, but it also may impress the potential client that the advisor’s service is highly sophisticated, professional, and at a good value.

When it comes to advisors trying to net new business, I have always been supportive and I have an open phone policy because I believe retirement plans need to be improved and saved, one plan at a time.

A few years back, I met a broker from my area and I developed a networking relationship with him in the hope of getting some ERISA related work when I was an associate at a Long island law firm.  I helped the broker out with questions he had, but business never came my way which was fine by me.

As a broker, he had very few plans on the books and they all tended to be south of $1 million. Being part of a broker-dealer with few agreements with mutual fund companies, he was relegated to use some of the bundled, insurance company providers. For small plans, these providers are a great fit. However in a discussion with him, I was rather surprised when he swore that the funds he picked within one of the bundled programs were no load. I told him the concept of a wrap fee and how these wrap fees are what makes the insurance company money on its platform. Clearly, he had no idea as to how 401(k) plans paid an insurance company provider.

I really believe that as time passes, brokers and financial advisors that I just described will disappear from the retirement plan industry. Brokers and advisors who fail to get the needed retirement plan background or surround themselves with the professionals that do, will be at a great disadvantage with the changing times.

I believe that the Department of Labor and the Securities and Exchange Commission changing the fiduciary standard may have the impact of many brokers leaving the industry because many of the small broker dealers may not want to deal with the added liability of their brokers serving as co-fiduciaries of retirement plans.

Fee disclosure requirements of service providers may also have force some of the smaller advisors and brokers out of the industry because of the added regulatory burden, as well as the fact that plan sponsors may get sticker shock from some of the expensive retirement plan programs that an unsophisticated broker or advisor placed the plan with.

In addition, greater regulatory burdens for plan sponsors and advisors will also have smaller brokers and advisors to  deal with larger advisors who are more sophisticated and knowledgeable about how the retirement plan industry works, especially those that serve as ERISA 3(21) and 3(38) fiduciaries.

How can a small potatoes retirement planbroker and advisor survive in a changing environment? Pretty simple. If a broker or advisor wants to look retirement plan smart, that broker or advisor needs to surround themselves with smart retirement plan people such as supporting third party administration firms (TPAs) and ERISA attorneys. Picking out a menu of funds and the development of an investment policy statement are important roles of a retirement plan advisor, but a retirement plan advisor will need to have the background or those that support him or her to understand plan design, costs, and proper plan administration.

As an ERISA attorney, whether it was working for a TPA or out on my own, one of my important roles has always been devoted to help advisors and brokers develop and maintain a retirement plan book of business. That is why I was the very first ERISA attorney to sponsor and partake in 401(k)Rekon seminars because of their support of retirement plan advisors, as well as my open door policy of answering questions and providing support to brokers and advisors around the country at no cost.

Whether it’s Brightscope, Fiduciary Benchmarks, f1360, rj20, Advisors Access, 401(k)Rekon, TPAs, ERISA attorneys, and consultants like Sheree Tallerman of PlanPerfect Retirement, there are enough support for advisors and brokers who want to be sophisticated and major players in the retirement plan industry. At the end of the day, only the sophisticated brokers and advisors will survive, as the small potatoes retirement plan brokers and advisors will likely leave the industry.

As many of you are aware, the producing TPA that I worked for was folded into a sister company TPA because of an ongoing Department of Labor investigation into its practices of steering clients to revenue sharing funds without disclosing that the money was being pocketed and a nefarious relationship between the managing directors of the TPA and an auditing firm referred to prepare audits for the biggest clients. Google “Geller Group” for further details.

I recently met an advisor and he told me that he spoke to one of their clients, who happened to be a former client of mine because I drafted the plan document as Director of ERISA Legal Services. He claimed that the client was being inundated by advisors and brokers who were informing this client about the TPA/RIA’s transgressions. This advisor sat down with the client and talked about his attributes as an advisor and didn’t feel the need to lambast the TPA/RIA, which has been the scorn of the industry since the story broke last February.

I have been working in this retirement plan business for 12 years and quite honestly, I don’t recall anyone ever getting a new client by being negative on the current providers. Clients ultimately hire you as a plan provider on what you have to offer them as a plan advisor, not as to the shortcomings of the current advisor. At the end of the day, retirement plan sponsors that are fully happy with their current providers don’t seek to speak with another provider, unhappy sponsors do. Heck, I was unhappy working at Geller after about two months working there and the reason I stayed for almost 5 years because I didn’t want to go to another place to work to leave Geller, I wanted to go to another place because I wanted to go to another place.  So if you are speaking with a current prospect, it’s because they are somewhat unhappy with their current arrangement.  Talking about the positives of your practices will net a client, constantly dwelling on the negatives of the current providers won’t.

Just proof positive, you should never go negative in the pursuit of getting a new client.

The latest newsletter for clients, friends, and partners of my firm can be found here.

My favorite comedian was George Carlin and George had a great act on euphemisms and how toilet paper became bathroom tissue and how a used car became a pre-owned automobile. All George was saying that euphemisms can cloud meanings of words and confuse people.

Of course, the retirement plan industry has euphemisms and loves to package simple products into some intricate wrapping and make it sound more important that it really is or denote that this product offered by countless plan providers is somehow exclusive.

I was at a conference and a third party administrator was touting their proprietary volume submitter retirement plan document with special allocation groups with a group for each employee. A colleague asked me about this unique proprietary plan and I told him what it really was, a 401(k) plan with a new comparability formula. There is nothing unique about is as countless ERISA attorneys and TPAs offer these plan documents.

I remember a former TPA competitor touting a retirement plan that was specifically tailored for medical practices and law firms. All they were really offering was a cash balance plan that was participant directed (before the cash balance regulations disallowed there.

We of course have bundled providers offering fiduciary guarantees that sometimes aren’t worth the paper it’s written on and we have several plan providers touting their co-fiduciary services which kind of reminds me when my mother was touting how well my brother in law folded clothes, so what?

Plan sponsors should concentrate more on substance than on flash and if they love flash, understand whether what the plan provider offering is actually unique or something no different from what every other plan provider is offering.

Twice today I was asked by a TPA and a major mutual fund company/TPA about my view concerning some of the bundled providers touting fiduciary guarantees or fiduciary roles that they are serving.  Using the term fiduciary can be very misleading because it may give the idea that if the plan sponsors utilizes the services that these bundled providers will assume fiduciary responsibility for the plan sponsor’s plans when all they really is making some sort of money back guarantee gimmick that they may indemnify you if you adhere to their programs and their fund lineups.

The word fiduciary being thrown around is useless and misleading unless the plan sponsor knows that the level of fiduciary role is co-fiduciary, ERISA 3(38), ERISA 3(21), or none of the above. The way fiduciary being thrown around reminds me of Kosher foods. Kosher foods adhere to Jewish dietary laws and are under rabbinical supervision. While most non-observant Jews don’t think twice about who supervises the food’s Kashruth, observant Jews do. Observant Jews wants to know the Rabbis behind the rabbinical supervision and whether their supervision can be trusted. It is irony that most observant Jews won’t eat Hebrew National hot dogs even though they answer to a “higher authority.”

While most plan sponsors won’t think twice into looking into what exactly the fiduciary roles that a bundled provider is touting, a more vigilant plan sponsor will. I think it is extremely important for plan sponsors not to trust any fiduciary marketing gimmick that any provider or investment advisors throws out there and actually determine what fiduciary services they are getting for their money. If not, they may be in for a shock when they get sued by an angry participant.

I am writing an article about what 401(k) plan provisions that I think are mistakes and coincidentally, I was asked by a financial advisor about self directed brokerage accounts within 401(k) plans.

I used to joke that the only clients that used to ask about self directed brokerage accounts were medical practices and law firms. I stopped telling the joke when so many advisors told me that was the truth. My opinion about self directed brokerage accounts is like my view on smoking, it’s dangerous for your health and if that’s the path you want to take, so be it.

Since I work as an attorney for plan sponsors, I’ll be a little more specific. First off, most participants that opt for self directed brokerage accounts do worse than participants who utilize the investment options selected by the plan sponsors, as advised by a financial advisor. Second, I think there are compliance and liability issues for plan sponsors in offering them. 

A major problem that plan sponsors have with self directed brokerage accounts is that they only want to offer it to highly compensated employees. Problem is there is something called benefits, rights, and features, meaning you can’t offer a benefit, right, or feature that discriminates in favor of highly compensated employees. A discrimination test has to be done, so only offering to highly compensated employees won’t work.

My other problem that I see for the plan sponsor is that I think most plan sponsors don’t do enough to cut down their liability in offering these accounts. I think plan sponsors need to advise participants interested in their accounts about the dangers of brokerage accounts within 401(k) plans and I think they should request a hold harmless agreement for those who opt for it. I always remember the guy who tried to kill himself by jumping in front of a New York City Subway who received a settlement from the MTA for injuries he received because he survived. Plan sponsors should put guidelines and agreements in place to minimize liability.

Another issue is that self directed brokerage accounts raises fees for 401(k) plans that offer revenue sharing funds because revenue sharing will not be applicable to individual stocks, bonds, options, or ETFs offered within a self directed brokerage account. Also, a financial advisor for the plan may charge a greater amount in fees because the financial advisor cannot assess a fee against self directed brokerage accounts if they don’t serve as the financial advisor for those accounts.

All and all, I don’t think brokerage accounts are a good fit 401(k) plans.

A friend of mine and I were talking about a financial advisor that we knew that had a tremendous and respectable book of 401(k) business and how he actually uses a payroll provider for the third party administrator (TPA) for many of his client’s plans.

As many of you, I have a tremendous bias against payroll provider TPAs because I think they do a poor job of what they are supposed to do, actual administration. Regardless of my bias, I believe that a financial advisor with a book of business should always consider the TPA they refer business to because I believe that more clients leave a financial advisor over the terrible job that a TPA did that the advisor recommended than on the actual performance of the financial advisor.

I always point as an example of an excellent financial advisor from the Mid-South who brought my TPA quite a few cases. We did a particular poor job of administering the plan and the client was interested into adding an employee stock ownership provision to the 401(k) plan that people call a 401(k)SOP. Rather than sending an actual ERISA attorney like me who understand the mechanics of the Plan, they sent our fearless leader who was an ERISA attorney, but was more salesman in those days. Our fearless leader went down south to meet the client and proceeded to do such a poor job of presenting the concept of the 401(k)SOP that not only did we lose the client, but so did this terrific advisor. There can be a high price for a referral made.

Referrals are an important part of the 401(k) plan business and I have been a fortunate recipient of referrals from TPAs and financial advisors nationally and it is incumbent on me to do my best because I want to do the best job possible (as a professional) and I do not want to disappoint the people that have referred me business.

A financial advisor should consider the TPA referral they make. Price should never be the only factor because with most TPAs, you do get what you pay for and a financial advisor should only use a few TPAs because one TPA can’t handle all different types of retirement plans for all different sizes. A TPA is like clothing, it has to be a proper fit for the client and financial advisor because if it doesn’t fit, the financial advisor will get quite a bit of the blame.

My latest article on JDSupra can be found here.