The Rosenbaum Law Firm P.C. Blog

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.

In the movie “Back to School”, Rodney Dangerfield doesn’t understand why his son is buying used books because they have already been read. His son says because they have already been already underlined. Rodney’s character said the person who could have underlined it might have been a maniac, so he implores his son to buy new books.

When I was working for a third party administration (TPA) firm, our plan administrators never read the plan documents. Using a Chris Rock line, I joked that if you wanted to hide something from a plan administrator, you should put it in a plan document file folder because they never would open that. Seriously, plan administration was done according to a spec sheet that was placed on to the Relius recordkeeping system. The problem is that the head of administration who drafted the spec sheet was not a maniac, just incompetent.  I remember having a new client go ballistic because the administrator stated that the plan allowed for multiple loans even though I limited it to one on the plan’s new loan policy. Well Norma had multiple loans down on the system.  She was incompetent and tried to pin the error on me even though the loan policy was drafted correctly.

This allergy to reading plan documents wasn’t just at my old firm. Years later, I was working with a nurses union which had split off from a much larger union and kept their plan at Vanguard, like the union that they split off from. My client had to leave Vanguard because they were just too small. As part of the transition to the new TPA, I had to get discrimination testing results from Vanguard. Vanguard said there weren’t any because the plan was a safe harbor 401(k), as per what the computer system stated. The problem was the plan was never a safe harbor plan, the union that they split off was. Instead of making good on correcting this error, Vanguard said they would do nothing because my client never paid for discrimination testing in the first place. They pawned us off to another TPA to perform discrimination tests for the 3 previous years, which my client luckily passed.

From my experience with good TPA firms, they actually do read the plan documents and actually question when they don’t see provisions that are supposed to be there. They used to always tell you that you lose something when you read Cliff Notes and not the actual books you were assigned to read in high school. Well administrators do lose out when they rely on spec sheets drafted by a superior because that superior may be a maniac and/or incompetent.

When it comes to retirement plan administration, too often retirement plan sponsors pick a third party administration (TPA) firm on price. This is a mistake because good TPA firms can provide a value in plan design and minimizing a plan sponsor’s liability that outweighs any savings by hiring a low cost TPA. Plan sponsors should be concerned on fees, but quality of plan administration is a more important criteria in choosing a TPA.

To read more on the value of a good TPA, check here.

I was at a 401(k) Rekon last week in Bridgewater, New Jersey, speaking in front of 50+ advisors. When my good friend, Carlos Tariche of Kravitz gave a speech on Cash Balance Plans and how they started in 1985 and were only finally approved in the Pension Protection Act of 2006, I got a chuckle.

I got a chuckle because as an ERISA attorney, working with clients and third party administrators (TPA), you always read the rules of the Internal Revenue code and try to abide by them. What we fail to remember is that so many of the changes that have happened to retirement plans were not because of legislation, but because of an interpretation of the rules by someone who fought to have their interpretation approved. For so long, the word on the street is that the Internal Revenue Service was against cash balance plans and conversions of defined benefit plans to cash balance. For years, the IRS had no process to approve cash balance plans.

The same was true of new comparability/cross tested allocation. I remember when I first started work in the industry in 1998 and looking at a plan with a cross tested allocation. The language in the plan amendment was pure gibberish.  Thank G-d for the ne comparability regulations and the minimum gateway which simplified the allocation formula language in a plan that offers it.

Automatic enrollment is a euphemism for negative election which the Internal Revenue Service only accepted in a 1998 Revenue Ruling and finally codified in the Pension Protection Act of 2006.

So forget about legislation, much of the changes in the laws regarding retirement plans have resulted from someone taking an interpretation of the Code and fighting the Internal Revenue Service until the IRS finally learned to love it. So before you dismiss a new way of thinking with retirement plans, it might be setting the rules tomorrow.

My latest newlestter geared towards financial advisors, can be found here.

My new article can be found here.

In the movie GoodFellas, Paulie Vario played by Paul Sorvino is offered an ownership stake in a nightclub to protect the owner, Sonny, from the attacks of Tommy DeVito, played by Joe Pesci. Instead of taking an interest in running the nightclub, Paulie simply starts buying items on the credit of the club without the intention of paying the money back. He intends to “bust the joint out”. When no credit is further issues, Paulie’s gang burns the nightclub down.

December always reminds me of the mad rush to implement new retirement plans before the year is over. At my old employer, we had an insurance agent who referred us work. His name was Charlie. While he thought he knew about retirement plans, he didn’t. All he knew how to do was write extravagant insurance policies to be placed within defined benefit plans. Out of every 10 defined plans brought to us, nine would blow up within 3 years as the plan sponsors struggled to make the minimum contributions that was needed to fund the plan and fund the whole life policies within the plan. Eventually, the plan sponsors eventually had to freeze the plan and forfeit the policies. What the plan sponsors had thought was a vehicle for retirement savings was merely a vehicle for Charlie to write extravagant whole life policies.

There is a proper place of insurance for retirement savings. Insurance can augment retirement savings, but retirement savings should not augment the sale of excessive insurance. As with any profession, there are good and bad insurance agents. The good agents will sell you the insurance you need. The bad agents smell the quick buck and sell you insurance that you don’t need and can’t afford.

A defined benefit is the most attractive savings vehicle for retirement planning because it gives you the potential of the most allowable deductions for the employer and it is funded by the employer. Using the wrong insurance agent, it merely serves up an opportunity to bust the plan out for an onerous life insurance policy that will end up lapsing.

Like brain surgery, there should be no dabblers in retirement plans. Whether it’s an attorney, financial advisor, insurance agent, or recordkeeping firm, you have to be an expert, partner with an expert, or just leave the business. With such difficult rules to master, there is no room for people who want to dabble in the industry.

The reason is because the people who do have the background and the expertise in retirement plans always have to clean up the mess left by dabblers.

Two men built a third party administration (TPA) practice from the ground up to one of New York’s largest, unbundled, TPAs. It was built on hidden fees, fake audits, and poor administration. This is the story of the life and death of Geller Group, LLC, the greatest TPA scandal you never heard about until now. Click here.