The Rosenbaum Law Firm P.C. Blog

There are so many times in business where you may craft the greatest idea out there that will make people money that they’d accept, but they still won’t.

When I was at that semi-prestigious law firm, they had a rule that attorneys who originated a client would be entitled to 50% of the fee, regardless of the practice area. So if the real estate tax attorney got a client for their house tax appeal, he could get 509 cents on the dollar if that client utilized any other attorney at the firm, regardless of the practice area. So I thought it was a no-brainer that I could start a national ERISA practice with our existing clients. I was dead wrong. For some reason, these partners who used to have their practice clung to their client lists for dear life.

Great ideas on paper to generate revenue for someone else are great on paper. The problem is when you’re dealing with human emotions, often it defies logic/common sense. You might be dealing with insecurities or other emotions that get people blinded to great opportunities.

As an ERISA attorney for 26 years, I have seen a lot of strange things that plan sponsors have done to risk the ire of the Internal Revenue Service (IRS) and the Department of Labor (DOL). Many of these strange things could have resulted in plan disqualification and the agent from the IRS or DOL let it pass while I’ve seen plan sponsors make more innocent mistakes and pay through the nose. So sometimes it’s not what you do that counts, but the type of agent you get reviewing your mistake.

In 2001, I handled an IRS audit of a client when I was working with a third-party administration (TPA) firm. The IRS agent reviewing the case noticed that the owners of the company were taking out loans over the $50,000 limit. That was a major error. A bigger error was the fact that these owners were shareholders of an S corporation and before 2002, were not even allowed to take out loans. This was a major error that the prior TPA never caught. The punishment, the illicit loans were treated as taxable, deemed distributions and the company had to pay an excise tax for the value of the money loaned out to these owners. To this day, I am shocked that the agent didn’t want blood from a stone, because he was entitled to get it.

On the flip side, I had a client being audited by an IRS agent. The matching contribution was misallocated because the TPA didn’t allocate it correctly, according to the terms of the plan document they drafted. If we added all the years under review, the error was probably less than $1,000. For some reason, the agent was reviewing this thing for months and demanding that the company pay some sort of penalty. In addition, a shareholder of the company who had no salary nor ever worked for the company was not listed as a highly compensated employee. The IRS agent demanded that this owner be listed as an employee even though he was not and his listing as a highly compensated employee would have helped the client in their discrimination testing.

On the DOL end, I had a client who put in all their defined benefit plan money with a fellow by the name of Bernie Madoff. The client, for all purposes, had no investment advisor (since Bernie was busy, running other things) and no investment policy statement. The DOL agent got a promise from the client to make up all the benefits to the employees and that was that.

On the flip side, an owner of a bankrupt business who was entitled to the bulk of the assets from a defined benefit plan was being sued by the DOL because the owner’s actuary failed to produce valuation reports and distribution forms for when the owner was receiving her benefit. While she certainly breached her fiduciary duty by not watching the actuary, this happens all the time when there is a terrible TPA. Is this worth a lawsuit? Not in my mind.

Whether a plan sponsor gets their hands slapped or pays through the nose for plan errors and breaches of fiduciary duty may not depend on the offense, but on the DOL or IRS agent reviewing the case. Sometimes, the plan sponsor’s fate depends on the luck of the draw.

The Department of Labor (DOL) might be releasing changes to its Voluntary Fiduciary Correction Program (VFCP).

The White House’s Office of Budget and Management (OMB) received the DOL’s final rule updating the VFCP on November 20th. Usually, OMB has up to 60 days to review proposed guidance.

The DOL’s changes were first proposed in 2022. The VFCP allows plan sponsors to send certain administrative errors to DOL and receive a no-action letter. These include prohibited purchases and sales, improper loans, and late salary deferral contributions.

The proposal would allow some errors to be self-corrected, and the plan sponsors could inform the DOL after they’ve been fixed. Errors eligible for the self-correction program (SCP) would include salary deferral contributions or loan repayments that are not executed promptly, provided that the cost does not exceed $1,000 and is not older than 180 days.

Since late deferral contributions are so frequent, I support this change.

Transamerica announced the launch of DWC 401(k) Pooled Plan Solutions, featuring the expertise of DWC – The 401(k) Experts, Transamerica, and Leavitt Retirement Partners serving as the 3(38) fiduciary.

With two plan options under a single recordkeeping structure, employers can implement either The DWC 401(k) Retirement Plan Exchange solution or The DWC 401(k) Pooled Employer Plan (PEP). The structure allows employers the flexibility to change retirement plan structures to accommodate growth without any disruption to their employees.

As a plan sponsor, you need to ensure that participant beneficiary forms are up to date. It’s not enough to ensure that every participant has filled one out; you also have to ensure that they’re updated. Family lives and situations change, so it should make sense that what a participant may have selected as a beneficiary might change because of marriage, divorce, or death.

For any plan education and enrollment meetings, I would stress for the participants to update their beneficiary information because as an ERISA attorney, one of the most stressful jobs is trying to determine who a beneficiary is if an enrollment form is missing or some issues might threaten the validity of an executed form (such as a new marriage).

The MTV reality series The Real World ended 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 multiple reasons and for a good chunk of the time, it’s not for a lack of competence. TPAs can get fired for higher fees, a 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 possible. 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 may be your client again, especially if the new TPA fouls things up. I always believe in 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. They take things so personally and 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 blamed the client for the error and then whined that the client still had not paid all their invoices, forgetting that the client had spent thousands in legal representation to correct that Top Heavy error.

I knew well of one of those bad TPAs. The de-conversion costs were never mentioned in their service agreement with their 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 to $5,000 in de-conversion costs, which effectively became a ransom because the TPS 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, but 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.

Advisors ask me all the time about the role of education in participant-directed 401(k) plans. Participant-directed 401(k) plans that are governed under ERISA §404(c) offer the plan sponsors liability protection based on a participant’s gains or losses on their account when they direct their investment.

There have been so many misconceptions that plan sponsors and advisors have had concerning ERISA §404(c) plans. They had this belief that if they just give a mutual fund lineup and some Morningstar profiles to plan participants they are exempt from liability. ERISA §404(c) protection is about following a process and Morningstar profiles are just not enough education to give to plan participants. You have to provide enough information for participants to make informed investment decisions. On the flipside, education to participants doesn’t have to amount to an MBA education, especially if you don’t want to offer advice.

I think an effective education component to ERISA §404(c) plans should include enrollment meetings where the characteristics of the plan are discussed, as well as the investment options, and offering the building blocks of financial education to assist participants in getting a better understanding on how to choose investments.

Advisors who may have issues in offering education should always consider using some of the online resources out there that do offer advice for a fee.

Also, written materials such as plan highlights and some Morningstar profiles should always be distributed.

Also while many advisors dislike this, one-on-one meetings with participants should always be offered. While most participants will probably shun such meetings, they should always be offered to those who want them because as we know, every participant has a different financial goal and need. One-on-one meetings offer participants individualized attention on asset allocation and fund choices; it can be an effective means of educating plan participants more than what a general enrollment meeting can offer. It can help participants understand how retirement plan assets relate to their other assets as part of a comprehensive financial plan.

Advisors should always look at education as liability protection because offering participant education helps a plan sponsor minimize their liability under ERISA §404(c). While I always stress education as an important part of the fiduciary process, it’s not about achieving a specific result from participants directing their investments. Offering participants investment education is like the old proverb, “You can lead a horse to water, but you can’t make him drink.” So no matter how great the education component is, there is no guarantee that it will help plan participants achieve a better financial result because like they say, there is no guarantee in life, except maybe death and taxes. The participant who put all his money into a mid-cap fund because he considers it the “average of the market” may still do so even after getting an education at the enrollment meeting and through one meeting. As with most things with retirement plans, it’s about following a process and not guaranteeing a result.

The problem with starting college and dorming is that your roommate or suitemate might be a maniac. You get connected to these people through a random draw.

When starting a Pooled Employer Plan (PEP) and running it, you have the problem that these unrelated businesses from all occupations join together. It’s not a random draw, but you might have to deal with their bad habits.

The biggest problem for 401(k) plans these days is late deferrals and with so many adopting employers, you will likely end up with one. That’s a big problem. Just had an issue with an adopting employer who didn’t know his company was still deferring, so the deferrals ended up in his pocket to float a dying business. Needless to say, I made sure that things were fixed. Running a PEP, you might see yourself as being at the mercy of the adopting employers. Shape them up or end up shipping them out.

If you restrict eligibility from your retirement plan to a certain group of employees outside of the statutory exclusions (such as union employees or non-resident aliens), it might make sense to determine whether that exclusion is still proper.

Any definitions that are connected in any way with part-time employees can be a problem, especially since the SECURE Act allows long-time, part-time employees to become eligible for the deferral component in the plan. Exclusions from eligibility have to be reasonable, the days where you could exclude employees just on part-time status or by name are over.

In communications with other plan providers, clients, and potential clients, you have to be clear. There isn’t much room for miscommunication. When dealing with clients, miscommunications can lead plan sponsors to some huge mistakes.

Everything you write or say must be clear, there can’t be room for misinterpretation because the stakes are pretty high. I’ve seen too many plan sponsors that were harmed because the third-party administrator wasn’t clear on the information needed for an end-of-year census.

If you tell people what you need and what they need to know in clear language, a lot of mistakes will be avoided.