The Rosenbaum Law Firm P.C. Blog

Is it my imagination or does every 401(k) plan that wants to offer a self directed brokerage account option for participants is either a law practice or medical practice?

In 12 years as an ERISA attorney, I cannot recall a client that put in self directed brokerage accounts that wasn’t a law firm or a medical practice.

My second observation is that the participants that go the self directed brokerage route, always do worse than what other participants do under the mutual fund menu set up by the plan’s financial advisor.

If my experience working for, with, and sometimes against third party administrators (TPAs) can be summed up about plan errors is the following. The best TPAs make mistakes rarely and when they do, they take the blame and correct it. The worst TPAs constantly make errors and blame everybody else, but themselves for these errors.

Growing up as a kid in the 70’s and the 80’s, there only seemed to be one variety of Tide detergent. These days, there seems to be a couple dozen varieties of Tide detergent with different fragrances and features. The same can be said of mutual funds. There are now 8,000 mutual funds out there with almost each mutual fund having an alphabet soup of share classes, with different fees and expenses. Larger mutual fund accounts are allowed to purchase a less expensive instutional class share of a specific mutual account, while a smaller account may have to purchase a retail class share of the same mutual funds with a larger expense ratio. While choosing any variety of Tide will get your clothes clean, choosing a mutual funds share class that is inappropriate for the size of your 401(k) plan may unknowingly subject you to potential liability.

In the recent court decision in California Federal Court regarding Edison International’s 401(k) Plan was a real eye opener when it held that the plan sponsor violated its fiduciary duty of prudence because it never asked whether a less expensive institutional share class of mutual fund was available for their plan.

For example, I reviewed with a financial advisor, a retirement plan that is the largest client of a third party administration firm who also acts as the Plan’s registered investment advisor.  A review of the fund lineup (someone actually posted their enrollment form online!) indicated that higher expense laden mutual fund share classes were being offered instead of institutional share type classes, which were available for a Plan of that size ($75 million). So even if the plan sponsor reviewed the mutual funds with the RIA on a consistent basis and did all the ERISA §404(c) homework, they still could be sued for a breach of the fiduciary standard of prudence because they never bothered to ask their RIA what less expensive share classes of mutual funds were available.

So an extra duty for a plan sponsor is out there. It’s not enough to determine whether the mutual funds in the Plan are appropriate for investment due to the Plan’s investment policy statement, the plan sponsor also must ask about the fund share class. Usually, the plan’s investment advisor will be knowledgeable and honest about the mutual fund share classes. If not, find a financial advisor that will be.

Outside the 401(k) world, you can buy a product and pay more. In the 401(k) world, you may be liable if you pick a mutual fund and pay retail when you could have bought the same mutual fund at a discount. Once again, another item of concern for the 401(k) plan sponsor.

What is fee disclosure? What should be a simple answer to a simple question gets a little tricky when it comes to the administration of 401(k) plans. While the Department of Labor will require fee disclosure in 2011, it is kind of sad and amusing what some third party administrators (TPA), think what fee disclosure is.

What is fee disclosure to me? Pretty simply, an explanation to a plan sponsor on what fees the TPA is collecting and how those fees are being paid and from whom. As an attorney, my fees are pretty simple. Aside from IRS and DOL audits, I charge a flat fee. My Retirement Plan Tune-Up is $750 and plan documents are around $2,000, that’s it. Unlike most law firms, I don’t charge for copies, postage, binding and other petty things like phone calls. Starbucks doesn’t charge me for a straw after they got me for a $5 Frappuccino, so I won’t charge for the little extras because they are little.

When it comes to some TPAs, finding out how much you’re paying for 401(k) administration is like poker. You don’t know who has the best hand or who’s bluffing.  These TPAs collect revenue sharing payments from mutual funds to offset administration fees and they play games as to how much they received or what they are being used for. In my mind, full fee transparency means the TPA tells you how much they got from the mutual funds companies and how they were being used. If the TPA is not telling you exactly how much they are receiving, they are not practicing full fee disclosure.

A few years back, there was a TPA who also had an RIA business in the Northeast that was known for taking revenue sharing payments and putting it in their pocket. After being bought by a national collector of RIA firms, they were told that this practice had to end and that they had to disclose their fees. Rather than being honest about these revenue sharing payments, they did something that was quite novel. They sent letters to all their clients with the intent of establishing an asset based fee for custodial platform administration services from between 10 and 20 basis points which revenue sharing payments will be used to offset. In English, this TPA invented a fee to justify the pocketing of revenue sharing. So it should be no surprise when I reviewed a plan from that TPA which when considering this asset based custody fee (which the plan custodian does not share), the plan sponsor was paying 200% more in fees than from a TPA with the same platform. Yet this TPA claims they practice full fee disclosure on their website. Full fee disclosure does not involve inventing fees to continue pocketing revenue sharing.

So in conclusion, full fee disclosure to me means a full breakdown of actual fees and how these fees are being paid, from the plan sponsor, the plan itself, or through reimbursements from the mutual fund companies. Anything less is hiding the ball.