The Rosenbaum Law Firm P.C. Blog

Through my experience in the 401(k) industry, I have been a firm believer in fee transparency and providing value to retirement plan sponsors. I also carry that same belief in my law firm practice by flat fee billing all my retirement plan documents, while only using the billable hour for IRS and Department of Labor audits.

I always jokingly state that my clients and their financial advisors love me, law firm managing partners not so much.  If you met my old law firm’s managing partner, then you certainly know that to be true. She never understood my practice, the value I provided to my clients, and how I was marketing myself to financial advisors in helping with their clients. A perfect example is when I joined the firm in 2008 and I wanted to solicit the business of my old TPA’s plan document clients. When I left my old TPA, they replaced me with 2 attorneys and a paralegal, so they raised their plan document fees by at least 25%. A boilerplate required IRS amendment for the Final 401(k)/Final 401(m) Regulations prepared by my old TPA was $600. I wanted to solicit my old clients and do the amendment for $300. My reason for doing the amendment for half what the TPA was charging is because I wanted to show value for these old clients and because it would give me the opportunity to do these EGTRRA restatements a year later. I thought it was a can’t lose situation.

My law firm’s managing partner and the advertising committee (which consisted of an associate who drew no business) stated that I should not advertise price and just state to my old clients in a solicitation letter than I can draft the amendments in a cost effective manner. When you get a letter from a TPA that says they will draft an amendment for $600 and a law firm states they will draft the very same amendment in a cost effective manner.  Who do you think is cheaper? As we know, law firms are not known for providing low cost legal services, especially with fancy offices and 5 employees in billing. Needless to say, I didn’t fetch one client out of more than 600 solicitation letters.

The only reason that I am able to represent small to medium size retirement plan sponsors and work with their financial advisors to cut down their administrative expense, minimize their liability, and help maximize their retirement savings is by providing a value to my service. I can only provide a value to my service by charging a flat fee. Chief Justice Marshall stated in the Supreme Court case McCullough v. Maryland that “the power to tax is the power to destroy.” I think the power to bill by the hour is the power to destroy because the legal bills can be limitless and encourages overbilling plus a law firm can also charge other incurred expenses like photocopying, binding, and postage. Small to medium size plans sponsors would reject my services and use the plan document services of the third party administration firm (which offer no independent attorney-client relationship).

So in a nutshell, an ERISA attorney like a TPA needs to provide a value to their clients at a fee that is transparent and can be easily understood.

The MTV reality series The Real World ends their opening intro with “to find out what happens… when people stop being polite… and start getting real.” As an ERISA attorney working with retirement plan clients I often find that what determines a good third party administrator (TPA) from a bad one is when we find out what happens, when the TPA gets fired, and we start getting real.

TPAs get fired for a multiple of reasons and for a good chunk of the time, it’s not for a lack of competence. TPAs can get fired for higher fees, change of advisors/brokers (who want to make the change), or because the brother of the law firm’s partner works for the mutual fund company that will now be the new TPA. So it’s business, not personal.

Again, it’s easy to determine who the good TPAs are from the bad ones. The good TPAs will not take it personally and will try to make the transition to a new provider as seamless as it can be. I think reputation means everything and since it’s such a close knit industry, making it easier for a former client to transition business away from you will only help your reputation. Also, there is always the chance that the former client maybe your client once again, especially if the new TPA fouls things up. I always believe in the concept of paying it forward, that making it easier for former clients to leave will only make it easier for new clients to come in. The good TPAs will also spell out in their original service agreement with the client, the exact cost (if, any) of the de-conversion when the TPA is replaced.

The bad ones are easy to spot out. They take things so personally and they feel the need to take out the frustration of being fired on the former client. Again, it’s business, not personal. I had a client who changed TPAs a few years back. During the change to a new TPA, an IRS audit discovered that the Top Heavy test was done incorrectly because a couple of law firm partners were misidentified as non-key employees. Rather than admitting the error, the TPA placed blame on the client for the error and then whined that the client still did not pay all their invoices, forgetting that the client had spent thousands in legal representation to correct that Top Heavy error.

As stated in previous articles, I worked for one of those bad TPAs. My boss always projected a professionalism that was not there and when we were fired for whatever reason (usually poor service), he took things personally.  He could easily take things personally because our de-conversion costs were never mentioned in our service agreement with our clients. So based on the level of frustration of being fired and based on who the financial advisor was on the Plan, a client could pay anywhere from $1,500 from $5,000 in de-conversion costs, which effectively became a ransom because we would not release any plan data until we were paid. Of course, screaming three letters, D.O.L. (an acronym for the Department of Labor) usually got fees reduced or waived.

Divorce can be difficult, changing TPAs should not. I think it’s important for TPAs should maintain a high level of professionalism, especially when it comes to the time when the TPA is being replaced because it’s at those times that delineates the good TPAs from the bad ones.

Please join me for a free 1 credit course “Introduction to Retirement Plans and Hidden Liabilities for Plan Sponsors” that will be hosted by Chernoff Diamond at their Garden City offices on Friday, November 19, 2010 at 8 am at 990 Stewart Avenue, Suite 520, Garden City, New York 11530.

This free course will merit 1 hour CE for New York certified public accountants and 1 hour CLE for New York attorneys. Refreshments will be served. For reservations, please call me at 516-594-1557 or e-mail me at ary@therosenbaumlawfirm.com.

I will not win any popularity contests amond the nation’s leading payroll providers, but that’s how I roll. My latest article, which is a larger diatribe of a previous blog post can be found here.

The Department of Labor woke up from its 36 year coma and realized that the definition of fiduciary under ERISA is no longer working.

The Department of Labor will implement a regulation to update the definition of “fiduciary” to more broadly define the term as a person who provides investment advice to plans for a fee or other compensation. It would broaden the definition of “fiduciary” to further protect 401(k) participants from conflicts of interest, such as investment advisers recommending an option that brings in higher fees or promotes their own firm’s funds.

The 401(k) industry is littered with many brokers and insurance salesman pushing their own product at the expense of their clients and other providers like payroll companies who offer menus of funds, but disclaim any fiduciary role.

If a retirement plan advisor offers investment advice, they are a fiduciary, no matter how much they will disclaim that role in their contractual relationship with their plan sponsor clients. So while the client may be barred contractually from suing their advisor for a fiduciary breach, it will not deter from the Department of labor seeking action.

My latest issue of the Perspectives issue, which is geared towards retirement plan sponsors can be found here.

Imagine if you asked your friend for a favor and recommend a plumber. The friend recommends a plumber he knows and the plumber does a decent job. Imagine if you later discover that the friend received a portion of the plumber’s fee for the referral. How would that make you feel? Well, it would make me a little livid because what I thought was a genuine recommendation was actually a paid referral.

When I left the TPA world and joined a semi-prestigious Long Island law firm, I was asked by the top salesman at my former TPA whether we could work together by my referral of clients to them. I quickly nipped the bud on that notion by saying no because I knew his intent.

My old TPA also had a registered investment advisory (RIA) arm and it was a common practice that many of the referrals came from accountants and ERISA attorneys. What was common practice is that these accountants and ERISA attorneys (including one of the top ERISA attorneys in the country) would receive a portion of the RIA fee by referring clients to our RIA practice. They called this practice a “Paid Solicitor Solution” and used to proudly advertise it on their website. Perhaps because of a possible lack of disclosure to Plan sponsors or a crackdown by the Department of Labor, that service is no longer advertised.

Regardless of the legality of the paid solicitor solution, I have problems with it on a few fronts. A non-financial professional such as an accountant or ERISA attorney should only be compensated once and not compensated in an area where they have no license or background (such as financial advisory work).  I charge a flat fee for my plan document work, so I only deserved to be paid once.

A TPA that took over a client from the renowned ERISA attorney discussed above notified the client that the ERISA attorney charged $7,000 for a plan document (pretty high for a individually designed plan when a less expensive volume submitter would have sufficed) and received a 20 basis point paid solicitor fee. Needless to say, the client was not amused.

As a “respected” ERISA attorney, I also believe that any referrals to TPAs and financial advisors should be based on my belief who will do the best job at the best price, not tainted by my financial ambition.  Since I also believe that the client should make the ultimate choice, I tend to offer recommendation on 2-3 professionals per referral to ensure that the referral is based on finding the right fit for the client.

So when receiving recommendations from an accountant or an attorney on asset advisory or brokerage firms, make sure that there are a number of recommendations because multiple referrals probably ensure that a paid solicitor solution does not exist. If this paid solicitor solution does exist and the referral was biased, make sure this arrangement is disclosed to you.

I believe the best referrals are the ones that are unbiased and that the only people who should be compensated for financial advisory work are licensed, financial advisors.

In “The Outlaw Josey Wales” Josey, played by Clint Eastwood approaches a man in a bar and asks if he is a bounty hunter (there to kill Josey). The bounty hunter replies that a man has to do something for a living and Josey replies that “dying ain’t much of a living, boy.”

I have been an ERISA attorney for 12 years and I am always asked by people I meet whether I give financial advice as an advisor and/or whether I do plan administration as a third party record keeper. I tell these people that I do neither, that I stick to what I know as an ERISA attorney. While people may say that being a financial advisor and/or record keeper may be a nice segue from being an ERISA attorney, I believe that these experts positions are so vastly differently that I couldn’t effectively wear more than one hat.

Too often in the retirement plan industry, we have people that claim to be experts that are really hacks in disguise. Too often, inferior work is done. The retirement plan industry is such a highly specialized field; it’s the amateurs that make it extremely difficult for the expert to clean up the mess. While people may have to work as third party plan administrators for a living, being incompetent ain’t much of a living.

In the 401(k) world, the two largest payroll providers in the country feel that retirement plan administration is a natural segue from doing payroll. I respectfully disagree.  Providing payroll service is an automated, computerized system that is dependent on getting the correct tax rates from the Federal, State, and Local Government.  As long as the employer provides the weekly payroll, the numbers should be consistent.

Except for the withholding of salary deferrals, 401(k) plan administration has nothing to do with payroll. 401(k) plan administration is a highly specialized field, dependent on getting correct data from the Plan sponsor and making the correct calculations on the administrator side. Bad data will always get a bad testing result. So a large portion of what a 401(k) administrator might have to do is to check whether the data being provided by the client is error free.

Too often, I find that payroll providers who act as third party administrators (TPAs) run retirement plans the way they run payroll. I have seen too many instances where the client provides completely wrong key and highly compensated employee situation and the payroll provider TPA will run the tests with the wrong data. I remember one case when an employer did not know the definition of key employee and checked off everyone as a key employee because they were “key” to the operation of the company. So the folks making $30,000 were considered key. It was no surprise that the payroll provider TPA found the Plan to be Top Heavy even though a skilled TPA would have contacted the company about the correctness of the data.

I have had a client for the last eight years because the Plan consistently failed ADP and ACP testing and the payroll provider TPA never bothered to explain about the benefits of 401(k) safe harbor design or that if my client would make a $7,000 qualified non-elective contribution, the owner would avoid a $10,500 ADP deferral refund.  Perhaps this was because the plan was small enough that the payroll provider TPA offered a “team” approach by not allotting a dedicated administrator to that Plan. Regardless, I have always find the better TPA to go above and beyond when it comes to correcting plan design and plan data defects. They also offer a highly experienced, dedicated plan administrator to each client because the team approach allows too many balls to be dropped and the client always wants one person in charge to talk to.

Another problem I have with the payroll provider TPA is the fact that they play a little too close to the role of a financial advisor/co-fiduciary. Many plans of these payroll provider TPAs do not have an advisor or broker to give them a level of protection for a participated directed ERISA 404(c) 401(k) plan. So while these payroll provider TPAs offer financial experts who select their menu of mutual funds and meet their clients, they do not offer any financial advice nor do they offer any co-fiduciary role.

I had a client with one of these payroll providers with $10 million in assets. While this Plan was large enough to have its own dedicated plan administrator/contact person, they had no financial advisor. I was at a meeting with the client, their payroll provider TPA administrator, and one of the TPA’s financial “advisor.” This advisor suggested that the Plan needed to add a small cap fund to the lineup, but he then insisted that he was not offering any advice; it was just a suggestion because he could not legally give advice. I jokingly called it a wink and a promise because while the advisor was offering a suggestion, the client could not legally rely on this suggestion.

In 2010, I cannot fathom how any TPA could offer financial suggestions from one of their advisors, knowing that these suggestions cannot be legally relied on and allowing their clients to function without the use of broker or registered investment advisor. No participant directed 401(k) plan should ever operate without the use of a broker or financial advisor and no TPA should ever take the any role where any client may think their winks on selection of mutual funds is financial advice.

Payroll providers provide a necessary function at an affordable price. I have yet to be swayed that they can do the same job as a 401(k) TPA.

I get kind of queasy this election season when politicians suggest that government pensions should be replaced by 401(k) plans for government workers.  I guess because 401(k) plans have worked so well for the private sector. As if.

While I understand the cost involved with providing pensions and how they will become a black hole for government like Social Security, I thought the beauty of government work is the great benefits. If you take away the benefits, will that stop government from being able to recruit skilled employees? Just wondering.