Mistakes that Every Retirement Plan Financial Advisor Should Avoid

Some potholes to avoid in budiling your practice.

 

We all make mistakes, well except my mother. There are mistakes we made that we thought were in good in hindsight when like I thought joining a semi-prestigious Long island law firm would help build my dream of building a National ERISA law practice. Then there are some mistakes than we should have known when we made it like when I ordered a hamburger the day after the Great North American Blackout of 2003. Despite what some other kinds of plan providers think, being a retirement plan financial advisor is a hard enough job thanks to the recruitment and retention of plan sponsor clients. So this article is to advise financial advisors on what mistakes to avoid in their role when working with their retirement plan clients. 

 

 
To read this article, click here.
 

The Many "Deaths" of Open MEPs.

Some things you can't kill and the death of Open MEPs has been greatly exaggerated. 

 

Khan: Kirk? You're still alive, my old friend?
Kirk: Still, "old friend!" You've managed to kill everyone else, but like a poor marksman, you keep missing the targe

 

 

Like Khan Noonien Singh's faulty aim, the Department of Labor (DOL) seems to have a faulty aim in trying to kill off the legality of multiple employer plans (MEPs) that are considered open, meaning it does involve belong to a trade group, PEO, or association. Of course, if you believe the DOL wants to kill off Open MEPs.

 

I am a firm believer in Open MEPs. If done correctly, they can lower plan expenses, which lowers the participant's expenses, limits plan sponsor's liability, and opens up plan participation to employers who might not have considered a plan if they had to go out on their own. As my good friend Tom will point out, I have helped third party administrators (TPAs) work on MEPS, as well as starting one on my own.

 

So while I'm certainly biased, those tooting the horn against Open MEPs tend to biased as well. While there are some that have no allegiance, some Open MEP critics are those that feel very threatened by them, namely some TPAs whose pricing would be threatened if they go head to

head with TPAs offering a MEP solution as an alternative. Suppose you are a TPA whose bread and butter is cash balance plans and you charge $5,000 a plan document and $5,000 to $10,000 in administration, of course your business is threatened if someone offers a MEP where an employer joins for a fraction of that administrative expense. That being said, most everyone on either side of the argument has a bias and financial interest.

 

That being said, common sense should never lose out. The DOL is a governmental agency, so this is 2012, a political year (which year isn't?). Does anyone think the Obama administration will kill off a plan that can offer on its best day, lower plan expenses, lower fiduciary liability, and more professional plan management? So when a certain ERISA attorney made claims that the DOL was cracking down on Open MEPs based on a comment made by a DOL official at a benefits conference, a lot of rumors, lies, and innuendoes were spread.

 

The DOL was looking at MEPs in terms of the plan sponsors. Did they meet the definition of the employer for purposes of ERISA, or where they offshoots of the service providers that can create a whole host of prohibited transaction rules? Are the plan sponsors being compensated from plan assets in excess of actual plan expenses? Thanks to a lack of developing some 36 year old rules set forth by the Internal Revenue Service, the Open MEP space delved into the Wild West and we needed some law and order. In those great Westerns, the Sheriff went after the folks with the black hats, not after the folks with the white hats, or the guy owning the general goods store. In the Western envisioned by an Open MEP critic, the Sherriff kills off the entire town including the women and children.

 

In the very recent Department of Labor ruling 2012-04A, the DOL took on a MEP or at least a MEP sponsor. It held that since the plan sponsor wasn't a proper employer for ERISA and there was no commonality between the adopting employers (such as the association, trade group, "closed MEP"), then it wouldn't be considered a single employer plan for ERISA which means every adopting employer of this MEP is going to need a 5500. Since it wasn't an employer and had no commonality, then it was no good which means that an employer can maintain a MEP that has no commonality.

 

I am not going to bore you to death with the nuances here, but if the DOL wanted to kill off Open MEPs here, they could have, but they didn't. They killed off one (or seriously wounded one) which had structures that were problematic, the plan sponsor was just an offshoot of the registered investment advisor, the RIA was the 3(16) administrator, and the plan fees from assets were high.

 

The DOL gave a blueprint to operate an Open MEP, or something resembling a blueprint. So if you get an email from someone killing off Open MEPs again, it's alive. Just like Admiral Kirk, well at least in Wrath of Khan.

 

 

A straight, a flush, and an ERISA 3(38) fiduciary.

The ERISA fiduciary numbers can be confusing and deceptive
 

I am not much of a gambler, but I used to watch poker on TV during its recent boom. Only then, did I understand that a straight couldn't beat a flush or a full house.

 

When it comes to retirement plans these days, plan sponsors may know a straight from a flush, but they are confused between a 3(16) administrator, a limited scope 3(21) fiduciary, a full scope 3(21) fiduciary, and a 3(38) fiduciary.

 

While the proliferation of these fiduciary services is welcome to an industry where many plan

sponsors aren't doing a good job of handling their fiduciary responsibility, the problem is that the numbers are confusing the people that it's supposed to help, the plan sponsors.

 

The problem is that the 3(38) investment manager does offer the plan sponsors the most protection in the fiduciary process, but the confusing jargon may make the plan sponsor think a 3(21) fiduciary offers the same protection, which it doesn't. In addition, people are being tricky with labels, where now I hear that some people are trying to advertise a limited scope 3(38) fiduciary, which really doesn't exist because the 3(38) fiduciary has nothing that limits its scope in handling the fiduciary process.

 

So anyone in the field of ERISA fiduciaries need to explain the difference between the different levels of ERISA fiduciaries so a plan sponsor understand what type of fiduciary service they are buying. Well, that will be next week's article.

The battle to cure 401(k) participant apathy.
Anyway you look at it, it's a tough nut to crack.
   

The old joke is that they once found a cure for apathy, except no one has shown the slightest interest in it.

 

When it comes to the retirement plan industry, apathy comes on many different levels: the plan sponsor level and plan participant level. The plan sponsor apathy in maintaining their retirement plans has been curtailed slightly because of the rises cases of litigation brought against plan sponsors and the move to fee disclosure in 2012.

 

Participant apathy is a much tougher nut to crack. Thanks to a lost decade of investing, a hurting economy, and a poor way of providing assistance to plan participants, there has been a lack of interest in plan participants in utilizing their 401(k) plan.

 

CFO Research Services, on behalf of Schwab, surveyed more than 200 senior finance and human resources executives about their perceptions of 401(k) plans in the workplace. Key findings show more than half (54%) of employers report that employees participating in plans are not taking full advantage of the investment options, features and services offered in connection with their 401(k) plan. In order to better engage employees, the majority of employers plan to make as much or more extensive use of traditional outreach methods, including interactive planning tools (93%), printed educational materials (93%), and in-person workshops (81%). Only 16 percent of employers plan provide investment advice through a third-party adviser, despite evidence that it does increase a participant's rate of return. To my surprise, automatic enrollment is growing at a strong clip. The survey showed that growing number of employers are using or considering the use of automatic solutions. In total, 45 percent are currently auto-enrolling employees and another 25 percent are very or somewhat likely to do so.

 

A separate survey of 401(k) participants clearly shows the participant apathy. Koski Research, on behalf of Schwab, surveyed more than 1,000 workers enrolled in 401(k) plans across the country and found that: more than half (52%) say they don't have the time, interest or knowledge to properly manage their 401(k) portfolio and a majority of plan participants (56%) do not review plan-related education materials they receive.

 

Let's face facts, participant apathy is a fact of life and plan sponsors should do what they can to decrease it. While plan sponsors should focus on handling their fiduciary role and mitigate their liability risk through good practices, plan sponsors should do their best to decrease apathy. The cure? Your guess is as good as mine, but whatever the size, participant apathy will always exist. So while it will always be there, there is no reason a plan sponsor should raise their hand sup and do nothing.

 

I think plan sponsors and their advisers should think outside the box and consider ideas that could help spur participant interest in deferring under the 401(k) plan. Is it offering advice through a third party like rj20 or Smart 401(k)? Is it offering a $20 gift card raffle at a plan participant education meeting? I don't know, but I always feel like plan sponsors and their providers could make an enrollment/education meeting more interesting and less frightening than a dental exam.

 

Why should plan sponsors spur participant interest even if they are managing the fiduciary process well? Increased participation equals more interest which increases assets which decreases plan administration expenses as a percentage of fees. In addition, a 401(k) plan is an employee benefit that is supposed to be a reward for employees and a recruitment tool for potential employees.

 

Like Gary Hart said in his 1984 presidential campaign, we need new ideas. So I am always interested in new ideas in decreasing participant apathy. If you got an idea, I am interested in hearing about it.

Introducing Retirement Plan LegalEase.
The legal protection that plan sponsors need at the price they can afford, $1,000.
   

When I started my own law firm more than 2 years ago, I wanted to deconstruct the law firm model that has been predicated on hourly billing and exorbitant legal fees. That is why I have always touted the use of a flat fee and have tried to make my services available to retirement plans of all sizes, many on the small and medium sized level who never thought they could afford an ERISA attorney....until now.

 

I am now offering Retirement Plan LegalEase, a low-cost legal solution for retirement plan sponsors that offers legal protection for only $1,000. Included in this package is a Plan document review; plan administrative review; a review of the fiduciary process; a review of plan provider contracts/fees; a review of fee disclosure compliance; and unlimited phone support (since unlike most attorneys, I'll never charge for phone calls).

 

Some say this is some sort of pre-paid legal insurance, but this is no lousy insurance product as the plan sponsors gets legal services they can use to limit their liability as plan fiduciaries.

 

If you are interested in promoting this service to your clients and/or marketing opportunities with your services (fiduciary, TPA, or accounting), please contact me.

Last licks to join the Retirement Advisor Renaissance at Charlotte Motor Speedway.

A great event from June 12-13 and the program fee is only $150.

 

I come up with a lot of marketing ideas, except a chunk aren't very good. A good idea that I came up with was regarding hosting a summit for financial advisors.

 

I always believe that events for retirement plan advisors are either free because they are loaded with too much commercialization for the folks sponsoring it or they are too prohibitively expensive. I thought there should be a retirement plan advisors bootcamp where the goal was educating advisors without breaking their back on attendance fees and making sure the pitch was education and not product.

 

I told James Holland of MillenniuM Investment & Retirement Advisors of my idea and then he did all the work and got it going.

So join me, James Holland, and other retirement plan leaders at the famed Charlotte Motor Speedway from June 12-13, 2012 for the Retirement Advisor Renaissance. The program fee is only $150 and there are preferred hotel rates available. Just check here for more details.

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The Rosenbaum Law Firm Advisors Advantage, June 2012
Vol. 3 No. 6
The Rosenbaum Law Firm P.C.
734 Franklin Avenue, Suite 302
Garden City, New York 11530
516-594-1557
Fax 516-368-3780


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