The Rosenbaum Law Firm P.C. Blog

Will tape a CLE and Accounting CE course for Lawline.com next week.

The good folks at Brightscope unveiled a list of the top 401(k) mutual funds in the marketplace by distribution. Looking at the list, it will certainly give you an idea of what the top mutual funds were, 5-10 years ago.

American Growth Funds of America, Fidelity Contrafund, and Pimco Total Return were some of the top distributed funds. Unfortunately, some of the funds on the list like Fidelity Contrafund have seen better days.

Too often, there is a herd mentality where some financial advisors run after the hot mutual funds of today and once those funds get too big to manage, their returns start to stall. We saw this with former stars like Fidelity Magellan, many of the Janus Funds, and Federated Kauffman.

It is a sad story that many 401(k) plans have become museums to the former top funds of yesterday. This is the case where the Plan has no advisor or an advisor who never bothers to sit down with the plan sponsor and review the returns of the funds versus the investment policy statement (if they actually have one).

My great grandmother often said that you shouldn’t run after the carriage if it won’t pick you up. When it comes to selecting mutual funds for a 401(k) plan, you shouldn’t run after the carriage if it picks everyone else up.

Whoever said there are no dumb questions is right, stupid questions are another story.

I am outspoken against the idea of a one stop shop where a third party administration firm (TPA) has its own registered investment advisory (RIA) business. The reason was that my old employer was a TPA that had its own RIA business. However the way we operated, we were more like an RIA that happened to be a TPA because assets seemed to dictate everything.

There was an employer that was at another TPA that was failing their actual deferral percentage (ADP) miserably. Refunds were made to highly compensated employees because the employer didn’t want to institute a safe harbor plan design, or a corrective qualified non elective contribution, or automatic enrollment. Somehow, my employer was able to get this plan as a client because they guaranteed the plan sponsor would pass the ADP test. How they could guarantee that is a feat itself.

The salesperson who sold this new plan pulled me aside and told me that the plan sponsor was staffed heavily by illegal aliens and he asked me whether it was proper for the illegal aliens to make salary deferral contributions using fake Social Security Numbers. Yes, you read that right and now you know why I say there are stupid questions.

Forget for the fact it’s identity fraud and you are participating in a conspiracy to aid and abet the employment of illegal aliens, I told the salesperson that illegal aliens don’t make enough income to defer into a 401(k) plan and if they are deported or move back to their home country, how are they going to get those salary deferral contributions back?

Plan asset size should never dictate level of service, level of professionalism, and level of legality. We all have our personal biases, so my bias on the TPA/RIA model is based on prior experience.

Too many retirement plan sponsors leave money on the table by just selecting a financial advisor and setting up a plan vanilla 401(k) or SIMPLE IRA or SEP without consulting an ERISA Attorney and the consultants at a third party administration firm (TPA).

Retirement plan are like a suit. I wear a 40 short and when I get the suit from Jos. A. Bank (cheap plug) after I order it on the Internet (great bargains, second cheap plug), I have to get it tailored so I can get a proper fit.

The same can be said about retirement plans. While so many advisors take the cookie cutter approach to their clients’ retirement plan needs and use a straight 401(k) plan with a prototype document, so many clients leave money on the table by not getting the right retirement plan and specifications to fit their retirement plan needs.

There are so many different retirement plan designs like unit credit defined benefit, new comparability, safe harbor 401(k), automatic enrollment, cash balance, floor offset, that an advisor would be foolish not to consult with an ERISA attorney and retirement plan specialist from the TPA.

As I stated in the past, I had a new client who asked me whether he could have a retirement plan that would save him more than the $49,000 he could save from his SEP. As an attorney, he received a $500,000 fee. With his age (75) and income plus no employees, it was a no brainer that a defined benefit plan would get him more bang for the buck. Needless to say, the $200,000+ he contributed to the defined benefit plan that first year was a lot more than $49,000.

I had another client that I have had for 8 years because I simply added a safe harbor matching  plan design to a client’s 401(k) plan that the payroll provider claiming to be a TPA forgot to bring up. Under my design, the owner was able to maximize her salary deferral limit instead of returning $10,500 of her then $12,000 deferral limit since the plan failed ADP (actual deferral percentage) testing and the payroll provider forgot to also mention that a corrective QNEC (qualified non-elective contribution) contribution would only cost the company $7,000. Thinking only within the box cost that payroll provider, a client and provided me with a client that has survived 8 years and 3 different firms with me.

Every client has different needs and different business arrangements, so the one size fits all approach doesn’t work because the cookie cutter approach doesn’t work as no two cookies (plan sponsors are the same).

So retirement plans should be tailored likes suits, just avoid the seersucker suit in January.

Retirement plans with more than 100 participants require a CPA audit for their Form 5500. However, small plans with less than 100 participants may sometimes require an audit. This often happens when more than 5% of the Plan’s assets are invested in what is called non-qualified assets and a fidelity bond wasn’t purchased in the amount of the non-qualified assets.

For many years, this client held a partnership interest in a privately held real estate partnership that exceeded 5% of assets and was considered non-qualified according to the Department of Labor’s guidance. The previous third party administration firm (TPA) never raised the issue of the 95% rule, even though it’s been around for years. Of course, this issue only pops up after they make the transition to a new TPA. The new TPA tells the client they need an audit for $10,000 and the audit should have been done for years.

If this client never changed TPAs, would they have ever noticed this error? Of course not, because the lousy TPAs out there have no checks and balances to ensure proper administration. The good TPAs have a system of checks and balances where work is reviewed, checked, and checked again.

I hate to shill, but I stress the need for an independent ERISA attorney who can discover these errors. A review of Form 5500 and a plan asset schedule would have easily uncovered this.

As stated before, my Retirement Plan Tune-Up is a legal review that looks at the plan documents, administration, testing, Form 5500, and the investment policy statement for a flat fee of $750.

There two major differences that I see in being an attorney that works for a third party administration firm and my role at my law firm. First, I now offer an attorney-client relationship with my clients rather than protecting my employer’s (the TPA) interest.

Second, I can now take credit for correcting errors caused by a TPA. The reason I couldn’t do it before as a TPA attorney was that it was my administrators making the mistakes.  It’s hard to take credit for correcting your employer’s errors.