The Rosenbaum Law Firm P.C. Blog

Years ago, I was the Executive Editor of my law school’s news magazine. In one of my final issues, a friend of mine wrote an article that was serious, but funny at times. His bone of contention was over professor evaluations and how they were given before the final exam, so it was before we got our grades. This author contended that evaluations should be given after we got our grades because the grade turned his view of a specific professor based on the grade. In his critique, he said a grade turned him from wanting to say hello to a professor on the street into not wanting to take a leak on them if their rear end was on fire. It was a really funny article because it was so truthful, a grade most of the time would tell us whether we would enjoy the class or not.

When it comes to retirement plans, I often find that plan sponsors only start to understand the competency of their third-party administrator (TPA) during the de-conversion process. The de-conversion process is what it says is the de-converting of a retirement plan from a TPA during a change of providers. I often liken the de-conversion process to moving your residence because it can be a harrowing experience.

Why is de-converting so harrowing? It can be based on the competency over the TPA you are leaving, as well as the plan sponsor’s diligence in their role as a plan fiduciary. For a plan that has reviewed their TPA’s work by themselves the use of a third party or a plan being handled by a competent TPA, it isn’t so harrowing. For a plan sponsor that doesn’t know the ADP test from ADP, the payroll company, it can be. The reason why it can be so harrowing because if there is no review of the TPA’s work, the de-conversion process is the only time that a plan sponsor will beware whether there are any compliance issues that need to be fixed. So often, I have worked with clients who didn’t know they should have failed their Top Heavy test because the TPA did it wrong or realized they were being overcharged for services. Again, there are so many competent TPAs that offer such a seamless transition during the conversion process; it’s almost so clean that you can eat off the floor. However, there are too many times when plan sponsors get a little shock as to the compliance problems they are now forced to fix as a new TPA will not like to assume the administration of a plan with so many issues.

That being said, to avoid the shock of the conversion process, I recommend that a plan sponsor have an administrative review of their plan annually. Whether it’s the use of my Retirement Plan Tune-Up for $750 or whether it’s someone else’s independent review, I always say the devil you know is better than the one you don’t know. say the evil you know is better than the evil you don’t.

I am still shocked at how often I find participant-directed 401(k) plans without a financial advisor. While I understand how solo 401(k) plans don’t have an advisor because individuals think they can do it on their own. I have a solo 401(k) and I handle my investments. I always say that the moment that I add an employee, I am going to hire a financial advisor and there is an easy reason why.

I am often amazed that in the age of the Internet, there are still travel agents around in business because the Internet has allowed us to book trips and hotel rooms with a simple click button. In the old days, unless you had the travel agent software, you couldn’t do it on your own. Thanks to the internet, we can invest on our own, and buying and selling securities can be done with the click of a mouse as well. While many people think that the usefulness of a financial advisor has gone the way of a travel agent, I respectfully disagree.

When it comes to participant-directed 401(k) plans, the main role of a financial advisor, in my opinion, isn’t picking mutual funds as a broad range of investments as required under a Section ERISA 404(c) Plan. I believe that with all due respect to Commander Montgomery Scott from Star Trek III, a monkey, and two trainees can pick a mutual fund lineup to meet that broad range requirement.

I think the value of a financial advisor is having them a part of the fiduciary process, drafting an investment policy statement, reviewing the current fund lineup, and most of all, employee education.

I worked at a semi-prestigious (sorry, Lois) law firm on Long Island and there was no financial advisor on the 401(k) plan for a review of the mutual funds for 10 years. I knew we needed one when someone on the office staff stated that he only invested in the mid-cap mutual funds because “it represented the middle of the market.” That is why you have s financial advisor.

Even 401(k) plans that offer index funds or exchange-traded funds need a financial advisor because while index investing beats most of the active funds consistently, participants still need investment education to make an informed decision that will get the plan sponsor ERISA §404(c) protection. Index funds and ETFs are great, but what about asset allocation and risk tolerance? Index funds and ETFs won’t solve those issues on their own. So even a plan offering only a passive approach needs a financial advisor.

The moment I hire an employee will force me to hire a financial advisor for my plan because, despite my knowledge of 401(k) plans and investments, I don’t have the background or training to review funds and offer education. I stick to what I know, so I stay out of trouble.

When it comes to health and fitness, you constantly hear studies about what foods fight or cause cancer. Of course, those studies are then debunked. I remember how oat bran was cited to cut down on cholesterol and how margarine was better than butter. Plus I have heard how coffee can prolong life or kill you. I joked that one study will suggest that constantly eating broccoli will cause cancer too.

I blogged once about how the paranoia in me figures that a plan provider that quickly cuts down their fee might have been overcharging the client, to begin with. People tend to think I have a bias against plan providers such as third-party administration (TPA) firms and I certainly don’t because I see the overwhelming value of a good TPA.

With fee disclosure regulations around for 8 years and constant news articles about 401(k) fees, I think the fascination and concentration on fees could be detrimental if that is the major or sole criteria in selection plan providers.

401(k) plan sponsors, as plan fiduciaries have important responsibilities. These responsibilities include: acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them; carrying out their duties prudently; following the plan documents (unless inconsistent with ERISA); diversifying plan investments, and paying only reasonable plan expenses.

While paying unreasonable plan expenses is a breach of fiduciary duty, picking providers solely or mainly because they are low in fees can also breach a fiduciary duty. Retirement plan sponsors also have a duty of prudence as one of their fiduciary duties. Prudence is about the process of making fiduciary decisions. Prudence requires the plan fiduciaries to document decisions and the basis for those decisions. So in hiring any plan provider, a fiduciary should survey several potential providers. By doing so, a fiduciary can document the process and make a meaningful comparison and selection.

Governmental contracts are typically decided by the lowest bidder. Sometimes it works, but lots of times it doesn’t. The same thing goes with selecting plan providers. There are many low-cost providers out there and some do a very good job and some do not. Some low-cost TPAs may be good if there is a limited amount of work on a 401(k) plan with a safe harbor design and terrible if the plan requires a discrimination test.

Paying only reasonable expenses is not the same as paying low expenses. Plan provider expenses are less about cost and more about value. A financial advisor charging 15 basis points providing no help in the fiduciary process such as developing an investment policy statement, reviewing investment options, and educating participants in a participant-directed 401(k) plan is less reasonable than paying another advisor 50 basis points to serve as an ERISA §3(38) fiduciary. Why? The advisor charging 15 basis points is increasing the plan sponsor’s liability as a fiduciary because they are doing nothing while the ERISA §3(38) fiduciary is assuming almost all of that liability. Reasonableness is not about cost, it’s about the value of the services provided. A TPA that can help develop a plan design that maximizes contribution for highly compensated employees through a safe harbor/new comparability or a cash balance design is a better value than a TPA who only knows a 401(k) plan with comp-to-comp allocation.

Plan sponsors need to focus on the competency of plan providers, the services they offer, and the value they provide. Concentrating on how much a provider charges may cost more in the long run if that provider offers incompetent services. I have seen too many plan sponsors forced into the Internal Revenue Service correction programs to fix the errors of plan providers that were picked solely on cost.

A federal judge in Kentucky threw out a case against Humana Inc., claiming former employees had failed to provide sufficient evidence that the company charged excessive record-keeping fees and failed to adequately search for a less expensive record keeper.

U.S. District Judge Rebecca Grady Jennings accepted the expert testimony of the defendants’ expert Pete Swisher that Humana had a prudent process while rejecting the comparisons put forth by the plaintiffs’ expert. The judge excluded the testimony of Veronica Bray.

“Because Bray provides no reasonable explanation for her selection of the six plans and herself acknowledges they are not comparable to the Humana plan, the Court will exclude her testimony,” Jennings wrote in Moore et al. vs. Humana Inc. et al.

The judge claimed that the plan’s record keeper offered the lowest fees of any provider solicited via an RFP and that annual benchmarking revealed as “still reasonable” the record-keeping fees. Again, it’s all about a process.

According to a new Government Accountability Office (GAO) report, only a third of plan participants receive an important notice that could help them make a decision about their retirement savings.

The GAO claims that about 80% of eligible 401(k) participants aren’t aware of all four of their distribution options after terminating employment, which are 1) if above the plan cash out limit, leave the retirement savings in the former employer’s plan, 2) roll the money to the new employer’s plan, 3) roll the savings into an IRA, and, 4) take a lump sum taxable distribution.

My two cents are that it’s the result of the legalese of the 402(f) notice that participants are supposed to get. I always felt it’s written an ERISAese and an executive summary for someone who isn’t a tax expert would go a long way.

One of the plan providers sponsors for the Arlington That 401(k) Conference gave me some compliments on LinkedIn and someone else posted the same on the same thread.

I’ll be honest, I don’t do well with compliments. Some would say I’m bashful, I just think it’s because I didn’t get many compliments from my parents. I remember taking the 11th-grade high school regents exam as an 8th grader, getting an 82, and it was treated as some sort of failure. Whatever it was, it was never good enough. But yet I’m sure my mom still thinks my brother-in-law folds well and is proud of that (he worked at the Gap once).

I know we are supposed to do work, but we should just accept that compliment and say thank you. Just like when my grandmother would tell me to shut up and say thank you when I protested the gift she gave.

On the flip side, we should give compliments. For those close to me, I’m not good with that. Again, not getting compliments probably had something to do with that. I can assure you that people in the service industry are likely to get more complaints than compliments, so a compliment goes a long way.

I’ll get the referral from and advisor or third party administrator (TPA) with the plan that hasn’t been restated for 15 years and haven’t filed for a 5500 in just as long. They introduce me to the potential client, I offer them my help, and then crickets.

Even when presented with possible plan disqualification and 5500 penalties that can be thousands of dollars a day, I hear nothing. They’re looking for the one provider who suggests they can terminate the plan or merge into a new plan, to cover the “dead bodies.” Even with all their issues, they still think they can skimp.

The older I get, the more I’ve become Larry David in Curb Your Enthusiasm. I’m at the point where I won’t stop by withholding complaints when something annoys me.

I’ve been in my practice for 14 years, and I’ve been an ERISA attorney for 25 years. So safe to say, I knew quite a few financial advisors. Heck, I’ve run almost two dozen events around the country to meet advisors.

Yet, I’ll still get a phone call from an advisor who claims they want to know what I do and almost all the time, they want to know if I could refer them business. To be explicit here, most of my business is from referrals from advisors and third-party administrators (TPAs) mainly because my articles over the years have helped my reputation and might have helped them in business. Plan sponsor clients coming to me directly, happens, but not as often as I would like. Many have an advisor already, some don’t. Let’s be honest, if I had referrals to make to make plan sponsors for advisor referrals, am I going to refer someone I’ve known for a long time or someone I just got off the phone with?

Relationships take time, they don’t happen overnight. It requires time and trust. I met a few advisors in Texas, I’m sure it will take time for them to refer me, to clients, because they’re probably trying to see if I can be trusted with their clients. Trust and relationships are a big thing in this business and they don’t happen overnight.

When I was a kid in Hebrew day school, I enjoyed going to the synagogue services for kids, that were led by kids. Then my parents attended service too. It was to the point that my father met a bunch of synagogue insiders and was invited to the special club, called the Kaddish Club, which meant you had one dead parent that you could say the Kaddish memorial prayer. What was great about it was their own special Kiddush meal after services ended.

My father quit in a huff because another member criticized his role as a membership director and was upset that none of his friends spoke in his defense. The other member never criticized my father by name and my father wasn’t the only membership director. Most importantly, he didn’t speak up in his defense if he thought the criticism was directed at him.

Years ago, I left a third-party administrator (TPA) to join a law firm. If you’ve read my books, you’ll know it was not amicable and we all took things personally. Let us just say that TPA no longer exists. None of my former co-workers spoke in my defense. I wasn’t upset by that because they never spoke up in their defense when they were mistreated by the guy running the place.

There may be people that criticize you and no one may defend you, but you should defend yourself. You can’t expect people who are. Passive to speak in your defense when they don’t speak in their own defense.

The Federation of Americans for Consumer Choice (FACC) has filed a second lawsuit against the Department of Labor (DOL), in an effort to stop the new fiduciary rule.

The FACC, along with other independent insurance agents, filed for a preliminary injunction in the U.S. District Court for the Eastern District of Texas. The suit argues that if applied, the new fiduciary rule would cause “dire consequences for tens of thousands of independent insurance agents and their clientele if not stopped.” Therefore, its implementation should be delayed until the first lawsuit is settled, plaintiffs maintained.

The insurance advocacy group has sued the Department of Labor (DOL) in May, where they accused the DOL of violating the Fifth Circuit Court of Appeal’s previous rule that vacated the 2016 fiduciary rule. FACC’s lawsuit claims that the DOL is again attempting to regulate industries outside of retirement plan advisors through the new rule and the PTE 84-24 amendment.