The Rosenbaum Law Firm P.C. Blog

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.

My latest newsletter for the month of December is out. Check it here.

My latest article regarding the perils of fiduciary liability for plan sponsors can be found here.

I got a good chuckle at the toy store a few weeks back when any paint by number pictures for sale. The toy store employee was confused as he was speaking a foreign language or asked for an Atari 2600.

Too often, many financial advisors take a paint by numbers approach when it comes to the retirement plan needs of their clients. The not so good financial advisors will look at a plan sponsor’s retirement plan needs and think 401(k) plan with a comp to comp allocation will work all the time. The excellent financial advisor will consult with a retirement plan advisor at a full service third party administration (TPA) firm or an ERISA attorney and determine which specific plan design works best for the plan sponsor and the needs of all the employees. That may take the form of a 401(k) plan with a comp to comp allocation, but sometimes it may not. Sometimes, a new comparability plan design with a 3% non-elective safe harbor contribution works best. Sometimes a cash balance plan or a floor offset works best.

As with my complaint with some of the bundled and payroll provider TPAs, all retirement plans don’t fit within the small boxes that their administration and plan document permits. Sometimes, the best design for plan sponsors fall outside the boxes and into the hands of an unbundled, full service TPA. It takes the good financial advisor to know when to ask for help in plan design, otherwise the plan sponsor and their highly compensated employees may be living money on the table.

When Honda unveiled the 1986 line of Acura cars, it was one of the first entrances of the Japanese Auto industry into the luxury market of cars. While the cars were impressive, they were initially beset by factory defects. Eventually, Honda was able to work out its kinks on Acura and it became the most successful Japanese luxury car brand until the rise of Lexus. Based on that experience, I learned not to buy the first year of a new model or car redesign to ensure the kinks are worked out.

In the 401(k) market, when there is a new product introduced, the financial industry and the third party administrators embrace the product without seeing if the kinks were worked out. The perfect example of this was the introduction of target date mutual funds. The mutual fund industry thought that the target date funds were the cure for participants who were overwhelmed by the many funds that were offered for participant direction. Target date funds were supposed that one stop shop that a participants could rely on, to take them into retirement as the fund would recalibrate to a more fixed income tilt as the fund reached the retirement target date.

As well know, the kinks of target date funds weren’t worked out. The bear market tested out the kinks and the kinks were terrible. Participants were unaware of their large equity exposure in many funds and there was a wide variety of equity exposure within the target date funds offered by mutual fund companies for the same specific retirement target date.

So my point is that the 401(k) industry will churn out new products to help with retirement savings, just make sure the kinks are worked out before you invest in them.

My latest article concerning on predictions on the impact of retirement plan fee disclosure can be found here.