The Rosenbaum Law Firm P.C. Blog

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.

Saw this in my junk folder, one of the worst follow-ups on an unsolicited sales pitch: “Hi Ary This may be my last email to you (or not.) Kinda sucks tbh because usually people respond. Either they hate me or they adore me or they’re at least amused by me. You’re indifferent, which means I failed. Anyway, you’ve got my deets. The cybersecurity briefing is every week. So if you change your mind, don’t be a stranger As a parting present, this is a pic of a pirate doggie.”

I have to ask one question, how does anyone think this can work? I hate unsolicited emails and I know people can be successful at it, but can’t imagine this garners any kind of interest.

Artificial Intelligence (AI) will help plan providers reduce cost. At least that’s what one article I read stated. Yet it will cost people their jobs. Just like with the assembly line, technological developments will lead to many people placed in the industry, on waivers.

I think AI will eliminate many third-party administration and recordkeeping positions. I can imagine AI being used for compliance testing, even plan document drafting and design. The problem is AI is only as good as the people who designed it. So people who make errors will develop AI that will make compliance errors. There will be some need for human oversight. There will always be a need for ERISA attorneys, thankfully.

The fewer assets you have in a 401(k) plan, the less support you get. I know that since I have a Solo 401(k) plan. You open a plan at the local custodial firm and you are left to die.

So I certainly approve of anyone trying to create a better system of running these plans, whether it’s a master plan or a Pooled Employer Plan (PEP). The problem is I haven’t seen much success because it’s like collecting nickels and dimes. A hundred grand here or there isn’t going to become a huge asset base so quickly. You need distribution and you need interest. I wish anyone luck in pursuing this goal because Solo 401(k) plans can have unknowing compliance issues, coupled with that lack of support.