The Rosenbaum Law Firm P.C. Blog

There are those TPA that sell financial products, there are some that sell insurance, and there are those that just administer and record keeping.

This story reminds me of another producing TPA that is only a few villages over from where I live. I interviewed for an attorney position there around 20 years ago before my son was born when I was serving as the lead attorney for another New York-producing TPA. The owner of this TPA said my TPA was not in the administration business but in the asset-gathering business. Looking back, it was kind of funny because this TPA was consistently butting heads with the IRS over these special trusts with special trustees for these defined benefit plans stuffed with life insurance policies. In addition, I once reviewed a plan of theirs when the plan moved over to my TPA. The defined benefit plan has a normal retirement age of 35! This was not the defined benefit plan for professional athletes, this was a plan for a food wholesaler. This was before the IRS instituted that any normal retirement age before 62 is suspect, so we didn’t take the plan over since I stated that the normal retirement age was not reasonable for that industry and was just used as a gimmick to have inflated tax deductions. In other words, it was a tax evasion scheme.

The lesson to be learned here is that some TPAs are in the insurance-selling business, the asset-gathering business, and the administration business. Pick a TPA whose main business is plan administration.

As Michael Corleone said in the very underrated “The Godfather Part III”, “Just when I want to get out, they keep bringing me back in.”

Since 401(k) plans are not subject to the joint and survivor annuity requirements of the Internal Revenue Code, very few plans offer them. The very few that offer them usually do so because there may be assets in the plan that are subject to the joint and survivor annuity requirements such as assets from a previously merged money purchase plan. When the Internal Revenue Code allowed many of the 401(k) plans that had them (and didn’t have assets from a plan subject to the joint and survivor annuity requirements) to eliminate them without running afoul of the Internal Revenue Code §411(d)(6) anti-cutback rule, many of them did to avoid the added paperwork of purchasing an annuity or having to get a joint and survivor annuity waiver if the participant and spouse wanted another payment option.

There has been a call to add back annuities as an option for 401(k) plans because most plan participants won’t have enough savings to last through retirement if they get a lump sum.

It should be interesting that with the discussion about fee transparency plan sponsors and their financial advisors would consider adding back an option to 401(k) plans that are laden with fees.

I am certainly no annuity expert, it has always been an assumption that the more exotic the features that annuities have, the more fees it has. Just like straight-term policies have lower fees than those term policies with a return of premium. Exotic insurance products come with heavy a premium that is what I always have been taught. So while straight life and joint and survivor annuities should be considered, I am always wary of exotic insurance products such as some of the new retirement plan-centered annuities that are currently being developed.

While the Department of Labor has made it easier for defined contribution plan sponsors to use annuities within their plan, there is still concern about cost and a review of annuity fees would be an added burden for plan sponsors to master.

In addition, plan participants always have the right to pick an annuity upon distribution by rolling over the 401(k) assets into an individual retirement annuity. So the option is always there outside of the plan if it’s not offered within the plan.

While I am not going to state whether I am against annuities within 401(k) plans, I am always cautious about offering insurance products within a retirement plan. So plan sponsors and their advisors should be cautious as well if the benefits of adding an annuity are outweighed by some of the risks.

When I was at law school at American University Washington College of Law, I was the Executive Editor of The American Jurist, which was the student news magazine for my final year of law school. I wasn’t a particularly fond fan of my law school, I think they made promises to students that they couldn’t deliver on and some of the great opportunities like their law clinics were only available to a small group of students. For example, while I was led to believe my interest and coursework in tax law would merit my consideration in the tax clinic, I did not get a slot for the tax clinic because my name was not pulled out of a hat. So my year as the top editor was dedicating my columns to lambast what was wrong with the school and suggestions on how to improve certain aspects of it like the career services office, the journal and law clinic selection process, and orientation.

Certain students and faculty were very critical of my views because they said my columns would hurt the school because potential students would read the columns and then not get to our school because of what I wrote. It was pure nonsense because my columns criticized the school and then offered suggestions on how to fix the problems I pointed out. After I graduated, many of my suggestions were acted upon by the administration and I am proud of my role in helping the school out.

People don’t like criticism, they can’t handle it. If you criticize, you get labeled as a hater. It’s a label to discredit you and your opinion.

Years ago, an advisor I know sent an e-mail to one of the big movers and shakers in the 401(k) industry. The e-mail had a quote from an outspoken columnist who has been critical of the abuses of the 401(k) industry. The 401(k) big shot was very offended by the quote and took many exceptions to it.

My point is that there are enough problems within the retirement plan industry to criticize and simply attacking those that do is certainly not going to help the industry out. Those who try to shout down those 401(k) critics do a disservice to the industry because it is those critics of fees and investments that have helped spur change within the 401(k) industry. That being said, some consistently attack 401(k) plans without a suggestion to improve them or a realistic way to help the retirement savings crisis in the country. When managed correctly, a 401(k) plan is one of the best employee benefits out there that has helped plan participants save for retirement and lower their current taxable income. People within this industry don’t have to be like Anthony’s neighbors in the Twilight Zone episode “It’s A Good Life” and think “nice, happy thoughts.” If you see something wrong within the industry, say something and offer a way to make things better.

The uniqueness of the §3(38) proposition is that the §3(38) fiduciary has discretionary authority, assuming the liability of the fiduciary process from the plan sponsor. It’s a nice proposition because many 401(k) plan sponsors don’t do a job of handling it on their own or with the help of a financial advisor. Development of an investment policy statement (IPS), selection and review of investment options based on that IPS, and offering education to participants for participant-directed plans isn’t an easy task. Please note that the hiring of an ERISA §3(38) is a fiduciary function, so plan sponsors may be on the hook if they hire a poor §3(38) fiduciary.

While many other professionals think that the ERISA §3(38) boom is just the flavor of the month, I disagree. It’s here to stay. There are too many financial advisors in this industry that have skirted taking on any fiduciary role with their clients; I worked for a producing third-party administration (TPA) firm that disclaimed any fiduciary role as an RIA. So it’s nice to see someone take on the liability and the risk at a management fee that is as good as those who want no fiduciary role in their role as a financial advisor.

That being said, an ERISA §3(38) fiduciary does not have to be the choice for every plan sponsor. A plan sponsor who is diligent in working with a competent retirement plan advisor can do a good job as well. Then again, every solution in the retirement plan business isn’t the solution for everybody, just like an ERISA attorney who charges a flat fee that is as reasonable as what the legal departments of TPAs charge. Then again, that’s another story for another time.

Being an ERISA attorney for a couple of third-party administration (TPA) firms when I first started helped me develop a sense of humor because there were too many people I was associated with who had absolutely zero training when it came to plan administration.

One of my favorite jokes that I created which is something I stole from Chris Rock was “If you want to hide something from an administrator, hide it in the plan document file.” The joke was that I knew very few TPA administrators who bothered to read the plan document. They would just review what the plan specs were on the system. The problem is that often the specs were posted on the systems that were inconsistent with what the plan document said. That relates to another joke, stolen from Rodney Dangerfield in Back to School: “What if the person who put the plan document specs on the systems was a maniac?”

While I worked for a TPA where it wasn’t a maniac who put the specs on the system, but someone who had some authority and once started in the file room. It was a great rags-to-riches story except for the fact that she should have stayed in the file room and would blame anyone else but for ineptness. I can never forget the new client who wanted 1 loan outstanding in their plan document because participants were taking out 8 loans each. So I drafted what they wanted, but Ms. File Room put no loan limit on the system. When the advisor found out about the error, Ms. File Room blamed me even though the document had one loan cap.

When it comes to plan specs, the plan document is the last word except if mistakes were made from the previous restatement. That happens for many reasons, but at least you start from there then something on the recordkeeping system that carries no weight. Of course, many use the summary plan description as a resource. It’s a great resource except when it’s inconsistent with the plan document.

In the end, the plan document is an important resource and it always needs to be made sure that the plan is operating according to its terms.

When you meet retirement plan sponsors just at different networking events and they find out that you’re a retirement plan provider, they may volunteer that their retirement plan is in perfect shape. As we know as retirement plan providers, they often don’t know if that is true. However, they volunteer that information because they don’t want to talk about their retirement plan and don’t want to be solicited.

I’m not saying that you should harass them, but I certainly don’t think you should take their word for it. I had an advisor call me up where he approached a company and was told that they had a $1 billion 401(k) plan and everything was fine. Of course, the advisor checked and the plan was about $930 million short of $1 billion. It was also on an expensive bundled platform and had 95 investment options on them.

What’s the advisor likely to do? Take that information and delicately approach the plan sponsor and how they’re probably paying too much in plan expenses.

The point is that you can have multiple bites at the apple and that just because a plan sponsor is trying to dismiss you, doesn’t mean you shouldn’t check up to see f they’re telling the truth about your plan.

When fee disclosure regulations were implemented, there were a few industry chicken littles that suggested that the disclosures would be a race to zero and only the cheapest providers would win out. History has proven that while fees have gone down, there hasn’t been that race to zero because plan sponsors are willing to pay more for more service.

With a lot of consolidation in the retirement plan business, there are industry chicken littles that suggest that only the largest plan providers will do because of their mass, lower cost, and bells and whistles with their services. I think there is room for everyone.

Compare it to beer. When I was a student, we would drink whatever was on sale at the local 7-11 (usually a Molson or Michelob), I avoided Budweiser and some of the cheaper brands like the plague. When Samuel Adams started hitting the stores and started the microbrewery renaissance (my village now has two small breweries), it didn’t mean people stopped buying Bud and Coors Light. There are enough budget drinkers or beer drinkers who don’t care about taste (yes, I’m a beer snob) that still buy the budget brews. Bud Light was the best-selling beer in the United States for quite some time before politics got in the way. The point besides making me thirsty for a Boston Lager is that there is enough space out there for every provider of every size because plan sponsors have varying asset sizes and budgets. There is enough space at the table for you, it’s up to you how to handle the space.

A buddy of mine has been out of work for over a year. He’s a plan administrator who worked for several third-party administrators (TPAs) and he let me now that several changes were affecting a TPA I recommended he contact.

I’m the last to know anything and I found out a few months later that this TPA was bought by private equity. How did I find out? The decision-makers there I knew who didn’t own a price of the business were working places elsewhere. You like a TPA because of the people who work there and the first thing that buyers of TPAs do, is run people like that out. They keep the owners in place because of some earn-out/buy-out deal, but the people who didn’t have an equity stake exit stage left. There was a Long Island-based TPA, staffed with so many former co-workers I worked with. Those people they pushed out, the insufferable co-owner that I had a bad interview with so many years ago, well they kept him.

The most valuable asset that a TPA has is their employees and very few TPAs recognize this.

For the past 12 years, fee disclosure has certainly helped you as a plan sponsor to understand the true cost of plan administration. That’s important because you have a fiduciary duty to only pay reasonable plan expenses.

The problem is that fees are only one part of the picture. You only have to pay reasonable plan expenses and not the lowest. It would help if you weighed the cost vs. service. Just hiring a cheap plan provider is an absolutely bad idea. Nothing wrong with picking up the same product at a discount at Target as Macy’s, but retirement plan services don’t work that way because plan providers don’t offer the same service. Provider A charging $25 a head might probably offer a lower level of service than Provider B charging $50. It’s your job to compare the pricing and services between Providers A and B.

As a plan sponsor, you can’t just shop on price. Price is important, but it’s just one factor in considering hiring a plan provider.

As discussed so many times in the past, I went to that crappy law firm and thought I could use social media to bring in clients. The managing attorney had so much disdain for it. She thought it was such a lowly concept, like selling fish and lobster in the back of my car on the side of the highway (they do this on Long Island on Sunrise Highway and Route 110).

Weeks ago, I wrote about the terrible fines and penalties associated with 5500. The article is published by my friends at JDSupra.com and I get a call from a plan sponsor facing hundreds of thousands of penalties for late 5500s.

Social media isn’t about selling your services, it’s about putting out relevant content so that people will want your services.