The Rosenbaum Law Firm P.C. Blog

My latest article on JDSupra can be found here.

My comments in the FiduciaryNews.com article by Chris Carosa can be found here.

A big part of my practice is assisting financial advisors, third party administration (TPA) firms, and plan sponsors nationally with what I call an open phone policy. Financial advisors, TPAs, and plan sponsors can call me up with any questions they have about qualified and non-qualified plans without having to worry that they are going to be charged for just getting an answer to a question. I am all about building relationships and helping people in the retirement plan community, save one retirement plan at a time. So if you need any quick answer or help, give me a call (cheap plug).

That being said, I got two questions on the left coast that were different but both ended with that saying I have heard so many times over the last 12 years as an ERISA attorney.

The first question came from a TPA in California. A defined benefit plan sponsor wanted to invest in a mortgage in a building that the plan sponsor would buy and the plan sponsor would live in. Of course, there is something called a prohibited transaction and an exemption from the Department of Labor won’t happen. Of course, the client’s financial advisor claimed that what the plans sponsor wanted to do was fine “because everyone does it.”

In the second question for today, an attorney friend of mine asked me about a client of theirs who had a retirement plan, but wasn’t covering the leased employees in their office. Since the leased employees didn’t meet any of the exceptions set out by the Internal Revenue Code, they had to be covered. Of course the client thought that not covering the leased employees was fine “because everyone does it.”

As an ERISA attorney, I have to counsel my clients to operate their sponsorship of retirement plans within the limits of the Internal Revenue Code and ERISA.  I don’t care what everyone else is doing if what they are doing would result in plan disqualification or sanction if caught by the Internal Revenue Service and Department of Labor. Plan sponsors and plan trustees are plan fiduciaries and have to act prudently within the confines of the law. Simply saying everyone is breaking these laws is no defense.

I have a client being sued by the government because as a plan fiduciary, they didn’t make sure the TPA was doing their job. Saying that they aren’t liable because most other plan sponsors don’t make sure their TPAs are doing their job is no defense.

When I was 13, I bought my very first computer, an Apple IIe for $2,000, which would be about $4,067 in 2010 money. Last year, I bought my latest Dell laptop computer for about $600.

In 2008, I was reviewing the 401(k) plan of a soon to be defunct mattress retailer that was on an insurance platform that was on their side. A copy of the 1995 contract that actually expired in 2001, charged the plan sponsor 267 basis points in fees.  Obviously for a plan that had almost $4 million in assets, that was a lot of money. In 1995 when daily 401(k) plan were the exception and not the norm, 267 basis points was reasonable. In 2008, that was outright theft.

Since 1995, fees for daily recordkeeping plans and the margins in 401(k) administration have fallen in price as technology and economies of scale reduced costs. The advent of revenue sharing fees where mutual fund companies kick back fees to the third party administration (TPA) firm has helped as well. Since TPA firms had no requirement to breakout revenue sharing fees, the true costs of plan administration was actually masked to the plan sponsor and the plan participants.

With the advent of fee disclosure in July 2011 and participant fee disclosure in 2012, the mask of revenue sharing will be taken off and that revenue share subsidy will be exposed as another cost of plan administration that will act as sticker shock to plan sponsors. Hungry financial advisors and competing TPAs will use that opportunity to recruit new plan sponsor clients by promising lower fees with the use of lower fee mutual funds and/pr exchange traded funds (ETFs).  This will put the pressure on revenue sharing paying mutual funds, who may take that as an opportunity to lower the amount of revenue sharing payments they would promise to make to appear on the approved 401(k) fund menus of 401(k) platforms and TPAs. Of course, the cutting of the fees would save these mutual fund companies money, but would of course hamper their access to these approved fund lineups used by mutual funds platforms and TPAs.

The cutting of revenue sharing fees would hurt the margins of TPAs that tout these more expensive funds, but it is my belief that fee disclosure regulations would have already put pressure on these margins. If TPAs and 401(k) platforms ditch revenue sharing funds because they no longer pay sizeable revenue sharing/ sub ta fees, this would allow less expensive mutual funds and ETFs to pick up the slack which would save participants money and squeeze TPA firms to lower their fees.

Am I off the mark? Only time will tell.

When it comes to a discussion of excessive fees in the administration of retirement plans, everyone takes a look at the third party administration (TPA) firms.  TPA firms get an inordinate amount the blame because when it comes to the continued qualification of a retirement plan, they do an inordinate of the work. Fact is that excessive fees can be charged by any retirement plan provider such as investment advisors, TPAs, audit firms, and ERISA attorneys.

What is excessive? It’s hard to define, but like former Supreme Court Justice Potter Stewart would say, I know it when I see it. Excessive fees really are dependent on the services provided. If a service provider is charging a lot more than another service provider and the amount and level of services provided is the same. Is a full blown retirement plan audit that a CPA firm charges $30,000 for, excessive? Maybe not, but a CPA firm charging $54,000 for a limited scope audit is (Yes Virginia, I recently saw that on a Form 5500).

For investment advisors, I see advisors charge anywhere from 25 basis points to 75 basis points to advise participant directed investment plans. The range of fees is dependent on the level of service, but most importantly based on assets. Small plans are charged more, percentage wise, because advisors need to be compensated for their work. Is 100 basis points for investment management on a participant directed 401(k) plan, excessive?  Considering that the mutual funds already charge 50 to 150 basis points in management fees, I think so. Perhaps, advisory firms that charge that much add a level of service that I don’t know about.

As far as charging excessive fees, I think the biggest violators are ERISA attorneys. While most ERISA attorney fees are reasonable, I have seen some fees that are outrageous. A financial advisor advised me of a client who was charged $100,000 for a review of the plan document and administration services. I have seen plans charged hundreds of dollars for annual safe harbor notices when the only change was a find and replace of the year. I have seen plans charged $7,000 for a custom made plan when a less expensive volume submitter plan would have sufficed. To steal a line from former Supreme Court Chief Justice John Marshall, the power to bill by the hour can be the power to destroy. Except for Department of Labor and Internal Revenue Service audits/investigations, I charged a flat fee because after 12 years in the business, I know how much time plan document drafting takes. That is why a plan document is $2,000 and an amendment is $300 because I have low overhead, I don’t have 5 people in billing, partner lunches, or the law firm administrator drafting articles about why he had his Blackberry in Chile.

Fees need to be reasonable and not excessive, there is enough for any provider to survive and thrive in the retirement plan business.

My latest article on JDSupra can be found here.

Having survived working for a very bad third party administration (TPA) firm, I always wonder how many errors are really created by the TPA or created by the TPA’s neglect.

A TPA sends a questionnaire form to the client to ask them about the owners of the business, as well as who can be a key employee, and some other vital information like controlled group and affiliated service group information.

I once knew of a client who got a questionnaire from their payroll provider TPA. For key employee information for the top heavy test, the client thought that key employee was someone key to their operation. So the client checked off everyone as a key employee, including the folks who made $30,000. Since the payroll provider TPA just took the garbage info, they had a garbage result and they said that the plan was top heavy. Of course, a decent TPA would have bothered to ask the client on whether all the employees could really be a key employee, according to the actual definition of key employee.

When I was working for that TPA, a former politician started a defined benefit plan for his consulting business. About a year later, he was so amazed by our work that he asked whether we could take over his firm’s 401(k) plan. What 401(k) plan? Call me crazy, but when starting a plan for a new client, you should always ask whether they have any other retirement plan for a wide variety of compliance issues.

From my 12 years as an ERISA attorney, I learned that you could only get the right answers if you ask the right questions.  Whether you are a TPA, an ERISA attorney, or financial advisor, you need to probe your client when the answers to your questions don’t seem right. Don’t assume that the client understands your questions, especially if it relates to the operation of a retirement plan. I had a client who claims they never saw their plan document, so you should never assume that the client is giving you the correct answer.

One of the positive aspects of full fee disclosure is that many third party administration (TPA) firms have dusted off an old idea as a viable vehicle to offer unbundled, 401(k) services to small employers at a reasonable fee.

The multiple employer plan has been around for years, but so many plan sponsors and their financial advisors are unaware of their benefits. Thankfully, several TPAs through LinkedIn and 401(k) Rekon seminars have been highlighting this alternative for small plans, rather than the expensive, bundled route.

A multiple employer plan is a single-employer plan maintained by two or more contributing sponsors that are not members of the same controlled group. Under the multiple employer plan, all plan assets are available to pay benefits to all plan participants and beneficiaries. While the multiple employer plan is one plan, it can be treated as separate plans because each sponsoring employers is  responsible for funding contributions solely for their own employees. Each employer is also subject to separate testing under the plan. What makes the multiple employer plan attractive is that the employers benefit from the simplified documentation and administration of having one multiple employer plan rather than separate plans. Since there is one plan document and only one 5500 annual filing with assets grouped together, there is tremendous savings on the part of a small employer who joins this type of plan since the administration cost is borne by all employers operating under the plan and fiduciary liability is minimized because the plan will be handled by a sponsoring group or association. Since daily 401(k) plan pricing is based on the size of assets, a multiple employer plan offer economies of scale that would never be offered to a small employer starting a plan as its own. As a small employer, being a part of an unbundled multiple employer plan is probably a lot cheaper than the typical insurance based 401(k) platform,

Bar associations and other industry groups have offered this type of arrangement to its members. If you are a financial advisor or a small sponsor, consider the virtues of a multiple employer plan .

Lately, I have had a number of people who have contacted me about these ROBS plans that they see on the Internet as some sort of manna from heaven where an entrepreneur can tap their retirement savings to start a new business, tax free.

People have asked me whether these plans are legitimate within the boundaries of the Internal Revenue Code and ERISA. As I say with anything that deals with retirement plans, a lot of things are possible as long as you work with the rules and regulations set for retirement plans. Reading some of the promotional work placed by these ROBS plan “hucksters”, the rules regarding prohibited transactions, plan permanency, and benefits, rights, and features aren’t considerations. With the IRS taking closer look at these plans, it is more important than ever to make sure these type of plans adhere to every retirement plan rule out there.

This industry is littered with plan sponsors who have run into qualification blunders because some promoter was more interested in pushing product than protecting the client. So any client interested in a ROBS plan should consult with a reputable third party administration firm and an ERISA attorney. As you well know, if it’s too good to be true, it often is.

Having see it first hand, my diatribe against third party administration firms that handle recordkeeping and investment advice under one roof can be found here.