The Rosenbaum Law Firm P.C. Blog

I was speaking to a financial advisor friend of mine and we discussed some of the tricks and sleight of hand performed by old third party administration (TPA) firm in its capacity as both TPA and RIA on plans, Apparently, my friend also had worked at a TPA/RIA where they performed the very same trick.

Even with full fee disclosure in July, it won’t stop creative fees that will be disclosed to plan sponsor, but will actually be deceptive. So what’s the hidden fee trick for these TPAs?  One thing that has never been discussed about 401(k) fees at great length are plan custodian fees.  For daily valued 401(k) plans, there are trading platforms where plans trade mutual funds on a daily basis.  While the trades lf no load funds are done on a no transaction fee basis, the plan custodians like Fidelity and Schwab do levy a charge for the plan custodial services. The fees range from 5 to 10 basis points, which are levied against plan assets. What are these TPAs doing? They are levying a plan custody fee on their client’s plans at 25 basis points +. Why are they doing this? With fee disclosure coming in 2011, it will be nearly impossible to hide fees like the pocketing of revenue sharing, so it will be easier to inflate certain fees to compensate for the fees lost through fee disclosure.

So if you are a financial advisor or a plan sponsor look for the sleight of hand in fees that don’t make a whole lot of sense like inflated plan custodial fees. Just because a fee will be disclosed still does not make the fee legitimate.

My latest article on JDSupra.com on my time as an associate attorney stifled in enteprise by my old law firm can be found here.

Enclosed is a list of the most read article on JDSupra.com. Two articles of mine are listed at #7 and #10. The list can be found here.

In 12 years as an ERISA attorney, I have probably worked on a couple of thousand of retirement plans and if you ask me what the worst plan I ever worked on, it’s pretty clear.

I was perusing Brightscope.com and for the first time, I typed in the name of the largest plan (in assets size) that the third party administration) firm worked on. To no surprise, the plan got a 59. The only surprising part is that it was only 18 points less than the highest ranked plan in their peer group (77).

Problems with the plan? Low participation rate and an average account balance of $9,900 for 5,800 employees since the nature of the company is a publicly traded, employee outsourcing company. Brightscope states that the plan had high fees and boy they weren’t kidding. I remember when my old TPA switched the platform from Fidelity 278 to Fidelity 251 to get better revenue sharing funds. My old TPA who was also the registered investment advisor (RIA) told the client that the switch would cut their fees. What they didn’t say was that they were going to rake more in fees because of the increased revenue sharing that they weren’t disclosing.

Since my old employer based their level of service on the size of the plan, this client knew how to make demands and push buttons. There were plan designs on eligibility that were quite unique and they were constantly changing them in some misguided attempt to help them on their discrimination testing. I learned later that administrators who had handled the Plan were told that this client had to pass testing no matter what,

What makes this plan the worst plan ever? Years after I left, a financial advisor I knew visited the client and informed them that the fund lineup was loaded with high expense mutual funds and reiterated what was known publicly, that the TPA was being investigated for improper connections with the audit firm that they referred work to, which was the same audit firm that was auditing this plan. Rather than looking into the rather substantiated accusations and how they could save their participants thousands in fees, the executive vice president pledged his allegiance to the head of the TPA who was forced to retire only a few months later.

I have represented clients who had their defined benefit plans lose millions to Bernie Madoff, but this client was the worst because they knew of accusations of fraud in their plan and never bothered to conduct any investigation whatsoever.  A man may well bring a horse to the water, but he cannot make him drink.  A financial advisor may tell a plan sponsor how their continued use of a provider will incur liability, but he or she cannot make them change providers.

My latest article on JDSupra can be found here.

My latest newsletter can be found here.

Stephen Rosenberg, a top notch ERISA litigator from Boston and writer of the Boston ERISA Blog made mention of my article on The Value of A Good ERISA Attorney and I certainly appreciate the plug from such a highly regarded, fellow ERISA attorney.

When I was at college, I was very involved politically. Someone I met my freshman year at Stony Brook and a friend to this day was someone I met through these political circles and has made a name for himself as a state party chairman in California. One of his pearls of wisdom is “Get Them In Early and Get Them Involved.”

When I started out as an ERISA attorney, I first heard of automatic enrollment in 401(k) plans when it was known as negative election. Pre-Pension Protection Act of 2006 (PPA), employers could only put that money from participants who were negatively enrolled in some sort of stable investment because there was no QDIA or any relief from liability under ERISA 404(c). Taking money from employees without their consent was something out of the Soviet Union.

After I got older and became less of a red baiter, I finally understood why automatic enrollment can be a good thing after PPA. PPA offered some sort of relief to the employers for liability with QDIA, so participants would be automatically enrolled in a fund that was better than a money market fund. The fact of the matter is that when it comes to 401(k) plans, younger participants don’t defer as much as older participants and if something is not done within the next 20 years, I think you will actually see a negative outflow from 401(k) plans. So I think automatic enrollment can be a tool to increase the size of plan assets, prevent negative outflows, and getting young participants in early. I think if a plan’s financial advisor gives good investment education with one on one meetings, I think it is possible to get these automatically enrolled participants involved by eventually getting them interested in retirement savings, which will get them to affirmatively enroll in the Plan by increasing their deferral rate from that automatic amount. Get them in early and get them involved, automatic enrollment can be that hook.

When I was working for a producing TPA, I suggested that they push automatic enrollment because it would increase plan asset size (which would increase their revenue) and prevent that retirement crisis I see when baby boomers start pulling money out of 401(k) plans, faster than when Generation X and Y participants put money in. Of course, my opinion was ignored. The argument is that employers don’t want the hassle of employees complaining after they were automatically enrolled. I think that employers don’t like the idea of automatic enrollment because they don’t see the benefits of an increased deferral rate for non-highly compensated employees, increased plan size, and adding a benefit to employees who may not be aware of that benefit.

If I was a financial advisor and I got a fee based on plan assets and I wanted to tout my education capabilities, I’d always broach the subject of automatic enrollment. It’s not for every employer, but it should always be a topic for conversation.

An article I wrote in August, that will always be relevant, the Top 10 Major Misconceptions that Plan Sponsors Have About Their Retirement Plans, can be found here.

As an ERISA attorney for 12 years, I have seen a lot of strange things that plan sponsor have done to risk the ire of the Internal Revenue Service (IRS) and the Department of Labor (DOL).  Many of these strange things could have resulted in plan disqualification and the agent from the IRS or DOL let it pass while I’ve seen plan sponsors make more innocent mistakes and pay through the nose. So sometimes it’s not what you do the counts, but the type of agent you get reviewing your mistake.

In 2001, I handled an IRS audit of a client when I was working with a third party administration (TPA) firm.  The IRS agent reviewing the case notices that the owners of the company were taking out loans in excess of the $50,000 limit. That was a major error. A bigger error was the fact that these owners were shareholders of an S corporation and prior to 2002, were not even allowed to take out loans.  This was a major error that the prior TPA never caught. The punishment, the illicit loans were treated as taxable, deemed distributions and the company had to pay an excise tax for the value of the money loaned out to these owners. To this day, I am shocked that the agent didn’t want blood from a stone, because he was entitled to get it.

On the flip side, I had a client being audited by an IRS agent. The matching contribution was misallocated because the TPA didn’t allocate it correctly, according to the terms of the plan document they drafted.  If we added all the years under review, the error was probably less than $1,000. For some reason, the agent was reviewing this thing for months and demanding that the company pay some sort of penalty. In addition, a shareholder of the company who had no salary nor ever worked for the company was not listed as a highly compensated employee. The IRS agent demanded that this owner be listed as an employee even though he was not and his listing as a highly compensated employee would have helped the client in their discrimination testing.

On the DOL end, I had a client who put in all their defined benefit plan money with a fellow by the name of Bernie Madoff. The client, for all purposes, had no investment advisor (since Bernie was busy, running other things) and no investment policy statement. The DOL agent got a promise from the client to make up all the benefits to the employees and that was that.

On the flip side, an owner of a bankrupt business who was entitled to the bulk of the assets from a defined benefit plan was being sued by the DOL because the owner’s actuary failed to produce valuation reports and distribution forms for when the owner was receiving her benefit. While she certainly breached her fiduciary duty by not watching the actuary, this happens all the time when there is a terrible TPA. Is this worth a lawsuit? Not in my mind.

Whether a plan sponsor gets their hands slapped or pay through the nose for plan errors and breaches of fiduciary duty may not depend on the offense, but the DOL or IRS agent reviewing the case. Sometimes, the plan sponsor’s fate depends on the luck of the draw.