Advisors Advantage - July 2014

by Ary Rosenbaum
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A 401(k) Financial Advisor Shouldn't Refer a TPA Just Because They're Cheap.

 

There is a price for good TPA service.

Animal Farm by George Orwell was a clever allegory of the Bolshevik Revolution and the Soviet Union where the oppressed animals overthrew Farmer Mr. Jones, only to start oppress- ing each other. A similar situation is when I find retirement plan financial advisors who are so sensitive about the fees they charge because of their concern about low cost advisors start recommending low cost third party administrators (TPAs) that underperform for the plan sponsors and themselves. So this article is about why retirement plan financial advisors should avoid recommending a TPA just because they charge low fees.

To read the article, please click here.

More Plan Sponsors are asking for ERISA Fiduciary Services.

 

They are asking for it.

 

I remember when I was in law school and we moved into a new building a few blocks away from the main campus. The computer sync site at the new building had a number of Apple Macs and the former law school Dean didn't understand why we would spend money on what he called the Betamax of computers and in 1995, Apple was on its last legs. Thanks to the return of Steve Jobs, Apple made one of the greatest comebacks. However, it took some time for Apple to get its mojo back and it probably could be traced to the Introduction of the ITunes Store in 2000 and the IPod in 2001. Apple didn't become one of the most successful companies again, overnight.

 

When the proliferation of financial advisors that started offering §3(38), I heard a lot of their competitors claim that plan sponsors weren't really asking for it. I heard the same thing when plan providers (including yours truly) started offering §3(16) administration services. Over time, I have heard more and more plan sponsors asking for these services.  I know firsthand because I have had a lot more opportunities and meetings with plan sponsors wanting to delegate their duty as plan administrator.

 

Cable TV, VCRs, Wi-Fi Internet, smart phones, and tablets. These are just some products out there that took time to get popular. Any new product or service needs time to develop and get enough traction that consumers become aware of it. It takes time and interest, but products and services that offer a value proposition will gain traction if people know about it.

 

So the lesson here is that plan sponsors will further educate themselves on these ERISA fiduciary solutions and they will start demanding them. It just takes time and information.

 
 
Fees are only part of a 401(k) Plan's problem.

Just one small part of it.

 

10 years before I went on my own and started my own practice, I started The Rosenbaum Law Firm P.C. It was a side venture, kind of an attempt to see if I can start my own practice without actually having to leave my day job. If this side venture would be an indicator whether I could go on my own, then I shouldn't go on my own because it was a flop. I started a law practice that was going to be the Wal-Mart of legal services, charging low flat fees for wills, incorporations, and contracts. It flopped because people didn't think that legal services are something they should buy on a deep discount.

 

Since fee disclosure has been on everybody's minds for years, I think there are plan providers that focus too much on fees. While excessive plan fees are evidence that there is a breach of fiduciary duty and part of the problem affecting 401(k) plans, to me, it's not the most important issue that negatively effects retirement plans today.

 

To me, the greatest issue is the fiduciary process or lack thereof.  The issue is about placing the control of investments in the group with the least education to make informed decisions, the participants. This isn't a criticism of the participant directed model under ERISA 404(c) that is supposed to limit a plan sponsor's liability for losses sustained by participants in their investment direction. The problem is that most plan sponsors aren't aware that they are losing the protection of ERISA 404(c) by neglecting their fiduciary duty. Picking a financial advisor who doesn't help the plan sponsor in the fiduciary process, namely developing an investment policy statement and educating plan participants does a lot more harm than good.

 

An advisor friend of mine once was prospecting a case recently where the plan had an ERISA 3(21) fiduciary as the advisor, who didn't change the fund lineup in 5 years, had investment options that were duplicitous, and is missing certain areas of the market for investment. Yet the current advisor was an ERISA 3(21) fiduciary. Let's face it, the number sound nice, but an ERISA 3(21) fiduciary not doing their job is as Dean Wormer would say: an ERISA "0.0" fiduciary.

 

Plan sponsors as a whole don't do a very good job with providing participants with enough education, so that the participants can make informed decisions. While the Department of Labor allowed advisors to provide investment advice, very few have offered it because of the expense and very few know of other provider like RJ20.com that can offer the investment advice for a very reasonable per head charge.

 

So while so many advisors see fee disclosure as a win-win opportunity to gain clients, one should also look at potential clients with ineffective or missing in action advisors. However, plan paying excessive fees are probably more likely to have other fiduciary issues than companies that are paying reasonable fees. At least, that's what I think.

 

So excessive fees are part of the problem, but I think the lack of participant education and lack of fiduciary oversight are bigger problems that won't go away anytime soon.

Some Plan Sponsors will cut their nose to spite their face.

 

It's irrational, but true.

 

I used to spend much time trying to explain irrational behavior through rational thought and it's really impossible. If you're a plan provider, don't waste your time doing that.

There are some plan sponsors out there that would rather cut their nose to spite their face or continue with a bad plan provider because of a crazed notion of "loyalty".

Most of the time, the plan sponsors you will meet will make rational decisions in selecting plan provider and making any plan changes. Some just won't because of an irrational choice or decision.

 

Seven years ago, I helped a plan sponsor out with their 401(k) plan.  They had no financial advisor, they had no investment policy statement, they had no investment education provided to plan participants, and hadn't changed funds in a decade. They eventually fixed the plan, but they hired new plan providers without consulting me. I was offended by that because the same trustees who neglected their plan now all of a sudden thought they knew better than me because they didn't seek my opinion. They also changed third party administrators and picked one that wasn't suited for a plan that size. It's irrational, but that's what people do.

 

Present day, the plan has a huge compliance problem that may cause the plan sponsor over $100,000. One of the trustees reached out to me while the other one spurned my services, probably because of a grudge or because they didn't want to me say: "I told you so." I'm not like that, my position is to help plan sponsors out as much as I can at an affordable price. This plan trustee would rather pay three times as much in legal fees because of a grudge. People who make bad choices usually consistently make bad choices.

 

If they made the poor Plan decisions, they may take offense on your criticism.

They will take offense.
Two years ago, I had the worst call with a prospective client in the 14 years I have been an ERISA attorney.

Without divulging any information about this prospective client, this 401(k) plan sponsor was like many prospective clients, poor participation and paying too much in fees. The plan sponsor was using a reputable provider, but a provider that would be a better fit for plans 10 times their size. Client was paying $100 or so a head plus what looked like an additional 3% in an asset based fee. Clearly, this is a plan that is paying way too much.

 

Why the call was such a disaster was because the person on the call was the one who designed the program with this expensive provider and he basically stated that he had absolutely no interest in changing providers, Funny, the call with the interested advisor was not concerned with changing the third party administrator at the time because you can always have the discussion with the current provider bout reducing. I am provider neutral, heck if the current third party administrator is charging a decent fee and doing a good job, I have no issue with that. You'll be surprised to know that I still had a couple of clients being serviced by that former employer that I had always railed against.

 

So why was this underling in the human resources office so serious? Well, if he designed the program and we have issues with its cost or poor fund lineup or poor participation, he is obviously going to take any criticism as an attack. While plan fiduciaries don't necessarily have to change their providers, they certainly have s fiduciary duty to check whether fees being charged are reasonable or not.

 

I know what I know in life, but if I made a technology decision or a financial decision that an expert may question or offer suggestions for it, I'm not going to take offense. But then again, I'm on my own boss. So if we are a plan provider or a plan sponsor's decision maker, we should understand that sometimes people are so resistant to change or just considering so constructive criticism, because they get defensive as if there job depends on it and maybe it does. That is why we should always consider who we contact about looking at their plan and doing a review.

 

Post script: Two years later, the human resources officer was no longer there and they finally opted to change all plan providers, but did not use the advisor that was initially on the call. The ERISA attorney who drafted the plan? Yours truly. Sometimes, you need a change in the decision makers to get the right decision in changing plan providers.

Comedy Show, Rockville Centre, NY, 8/10/2014.

 

Please consider attending or contributing to benefit Congregation B'nai Sholom-Beth David.

 

I always hate to ask for money, but I will when it comes to something I like. I really like the synagogue I attend called Congregation B'nai Sholom-Beth David in Rockville Centre, Long Island. Since they need a couple of shekels, I have organized a comedy show featuring Sunda Croonquist, a great comedienne who has appeared on The View, Jerry Lewis MDA Telethon, and her own show on Jewish Life TV called "James and Sunda". If you can attend the event, you will have a great time on August 10th. If you can't attend, please consider contributing towards the event. All gifts are tax deductible.

 

To buy tickets or to contribute, please click here.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Ary Rosenbaum, The Rosenbaum Law Firm P.C. | Attorney Advertising

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