Advisors Advantage - August 2014

by Ary Rosenbaum

How 401(k) Financial Advisors Can Breakthrough to the "Next Level".


Some tips on how to breakthrough.

I have been a New York Mets fan for over 30 years and despite all the jokes, there were certainly some good times (especially in 1986). From 1977-1983, the Mets were going through many of their dark ages. They traded Tom Seaver and a young manager by the name of Joe Torre couldn't do much with a team of the likes of Mark Bomback, Dyar Miller, and Ron Hodges. In 1984 times had changed, they had promising youngsters like Daryl Strawberry and Dwight Gooden, along with veterans like Keith Hernandez and Gary Carter (in 1985) to bring them into contention. Yet they were contenders in 1984 and 1985, but they failed to get over the hump and win the division. There was that next step that they had to get through to win it. I feel the same way with financial advisors for retirement plans. You can be a major player, but there is something else you need to get to the next level. Hopefully, this article will help you along that way.

To read the article, please click here.

 Revenue Sharing is becoming the 401(k) Leisure Suit.


They won't come back in style.


When I was a child, I remember bringing the soundtrack to Saturday Night Fever for my first grade class' Chanukah party (I went to a Jewish day school). To this day, I still don't how to operate a record player. Around the same time, my Uncle's Cadillac had an 8-track tape cassette. A few years later, I had a JVC boom box with a cassette player. If you go to a music store (if you can find one), you won't find much room for LPs, cassettes, and 8 tracks.


When I entered the 401(k) plan business, revenue sharing was all the rage. It was supposed to help plan sponsors reduce plan expenses by using revenue sharing funds. It looked good on paper until the fight for fee disclosure began and plan sponsors (many through litigation by aggrieved plan participants) learned that revenue sharing was nothing more than a shell game because the revenue sharing was only provided because the funds that paid revenue sharing were more expensive than those who don't.


Much like LPs were replaced by cassettes; which were replaced by Compact Discs; which were replaced by MP3s, revenue sharing is being replaced by fee transparency, which makes clear what third party administrators receive from direct and indirect sources (revenue sharing). Litigation has proven that revenue sharing is too costly because litigation is looking more at fiduciary responsibility and making sure that investment selections weren't just predicated on the fact that these investment options were selected because they pay revenue sharing.


Leisure suits were once in style and while people claim style is cyclical, leisure suits never made a comeback. Revenue sharing is becomes a lot like a leisure suit, it's not going to come back in style and most plan sponsors and their plan providers are going to touch it with a 10 foot pole.

Beer Distribution and the Bundled Provider TPA.

It's all about distribution.

In England, many of the top pubs are owned by British breweries because watering holes are an effective means of beer distribution. If a business can control the method of distribution of their own products, they can expand the distribution while saving a couple of shekels by avoid having to pay a third party to distribute.

The 401(k) industry is dominated by mutual funds, so it should come as no shock that many mutual funds companies offer services as a third party administrator (TPA) because it's an effective means of distributing their mutual funds. Mutual funds distribution is extremely important for mutual funds companies because their bread and butter are the funds' asset management fees and more assets under management equal more revenue for the mutual fund company.


While many mutual funds companies only offer TPA services for larger plans, there are a few mutual funds companies that have been rather aggressive in offering TPA services to small and medium size plans. While mutual fund companies do offer an attractive alternative as part of a one stop shop, plan sponsors are under misimpression that the mutual fund companies' TPA services are free or close to free.


As stated in a previous article about 401(k) administration, there is no such thing as a free lunch or free 401(k) administration. Mutual fund companies make their money as a TPA through those very same mutual fund management fees that I had discussed earlier. Many of the same companies that offer TPA services are the very same mutual funds companies that offer revenue sharing or sub TA fees to TPAs for plans that use their funds. So by keeping plans under their roof, these mutual funds companies can keep their revenue sharing/ sub-TA fees to themselves. These mutual fund companies also guarantee the fees they make, by requiring that a percentage of a plan's assets (up to 100%) be invested into their own proprietary mutual funds. I recently came across a 401(k) plan with a mutual fund company as a TPA that offered 12 mutual funds to participants for directed investment and all 12 funds were the fund company's proprietary funds.


For plan sponsors and trustees who serve as fiduciaries under ERISA, it is a question of the prudence rule and whether it is prudent to offer investments into a specific mutual fund company, only because that mutual fund company is the TPA. While some mutual fund companies have sterling reputations, there are a still a number of mutual fund companies who have been tainted by the late trading scandals of the last decade, as well as poor performance and high fees. All plan sponsors that utilize a mutual fund company as a TPA should understand that there is a cost involved with their plan's administration (check those disclosure forms), as well as being advised as to the standing of the mutual fund company within the entire mutual fund industry to make sure it doesn't become the next Steadman fund family.

Plan sponsors should consult with their 401(k) financial advisor to determine whether a mutual fund company as a TPA is the right fit for them. Mutual fund companies may be an attractive option for some, but plan that offer what is known as out of the box provisions may not be a good fit, as well as a plan sponsor that wants unbundled options in the selection of mutual funds. 


Yeah, I know. Everyone does it.

Doesn't make it right.

 I was never part of the in crowd. Look at my picture, could I ever be in the "in crowd"? I'm always the odd one out, that's why I dressed up as the Rodney Dangerfield character, Al Czervik from Caddyshack on Halloween. While I always heard the excuse "that everyone is doing it", I was always the guy who wasn't. That's it for my therapy today.


A big part of my practice is assisting financial advisors, third party administration (TPA) firms, and plan sponsors nationally with what I call an open phone policy. Financial advisors, TPAs, and plan sponsors can call me up with any questions they have about qualified and non-qualified plans without having to worry that they are going to be charged for just getting an answer to a question. I am all about building relationships and helping people in the retirement plan community, save one retirement plan at a time. So if you need any quick answer or help, give me a call (cheap plug).


That being said, I got two questions on the left coast that were different but both ended with that saying I have heard so many times over the last 16 years as an ERISA attorney.


The first question came from a TPA in California. A defined benefit plan sponsor wanted to invest in a mortgage in a building that the plan sponsor would buy and the plan sponsor would live in. Of course, there is something called a prohibited transaction and an exemption from the Department of Labor won't happen. Of course, the client's financial advisor claimed that what the plan sponsor wanted to do was fine "because everyone does it."


In the second question, an attorney friend of mine asked me about a client of theirs who had a retirement plan, but wasn't covering the leased employees in their office. Since the leased employees didn't meet any of the exceptions for coverage set out by the Internal Revenue Code, they had to be covered. Of course the client thought that not covering the leased employees was fine "because everyone does it."


As an ERISA attorney, I have to counsel my clients to operate their sponsorship of retirement plans within the limits of the Internal Revenue Code and ERISA. I don't care what everyone else is doing if what they are doing would result in plan disqualification or sanction if caught by the Internal Revenue Service and Department of Labor. Plan sponsors and plan trustees are plan fiduciaries and have to act prudently within the confines of the law. Simply saying everyone is breaking these laws is no defense.


I had a client being sued by the government because as a plan fiduciary, they didn't make sure the TPA was doing their job. Saying that they aren't liable because most other plan sponsors don't make sure their TPAs are doing their job is no defense.


The DOL and IRS won't care if everyone is doing it; they just want to make sure plan sponsors don't.

Dealing with adversity
It's about how you deal with it.

I'm a huge Aerosmith fan since high school and it's because the music resonates with me because it reminds me of the experiences that I have gone through life, which had some adversity and accomplishment. The lyrics from Dream On say it best when: "You got to lose to know how to win". When I look about many of my defeats in my career, I know that to be the case.


My grandmother Rose (I fund a scholarship at Stony Brook in her memory) told me the story about her time in Auschwitz that really changed my life and changed the pessimism that plagued it. In her bunk, there was a girl her age (around 20) that was crying and declaring that she was going to die. My grandmother insisted she was going to live. Well, that girl died and my grandmother lived, even after the Soviet soldiers left her to die in a stairwell when she had typhoid.


What I learned from the story is that you need to be optimistic in life to succeed, you need hope. You can't say you're not going to make it. When I was younger and pessimistic, I let everything get to me. I let the C+ in Civil Procedure I convince me that I'd never get a job after law school. I let not making the law journal or the tax clinic at law school run my life. After hearing her story, I changed. My grandmother survived the Holocaust and saw untold horror that she took to her grave because they were so painful. Anything I have gone through in life is nothing close to what she suffered. It's thinking about my grandparents and their suffering that made me go on after Hurricane Sandy totaled all of our cars and half our house.

When I worked at other places, I would see people who would complain about their job and just do nothing about it. I was working at one third party administration where most employees complained about their job, their benefits, etc., and just proceeded to work there and not try to find greener pastures.


The point is that in your life, career and in your business, you are going to have adversity and what matters is how you deal with it. You could feel sorry for yourself or you can put yourself in a position to grow.


For many reasons that I have detailed in my writings and in my book, I failed trying to start national, single employer retirement plan practice at this law firm who I have mocked ever since I left there. I tried using social media, tried talking to our law firm partners, and attended so many networking meetings that I can't count. So after I left, did I cry? Did I feel sorry for myself? No, I started my own law firm, using the same tactics I used at that law firm because I'm stubborn and if I was going to control my destiny instead of depending on others, I was going to do well. This time I succeeded. Four years later, it's still a struggle, but we're doing quite well.


When you deal with adversity, learn to take the negative and turn it into a positive.

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

Written by:

Ary Rosenbaum

The Rosenbaum Law Firm P.C. on:

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