How a 401(k) Financial Advisor Can Limit Their Liability.

There is the old saying that the cobbler's children have no shoes. I know that firsthand when my mother threatened to call an electrician because my father the electrician didn't have time to do some electrical work in our house. The phrase about the cobbler's children is less about a cobbler and more about how certain 'professionals' in any given area are so busy with work for their clients that they neglect using their professional skills to help themselves or those closest to them. The same can be some of retirement plan financial advisors who worry so much about reducing their plan sponsors' fiduciary risk that they often neglect their own risk as the plan's financial advisor. So this article is about how as a retirement plan financial advisor, you can limit your liability.

DOL proposes a guide to fee disclosures.

The guide to the fee guide will be needed.

Any radical change to a business, industry, or an organization is going to take some time to adjust. Sometimes it becomes a work in progress because there maybe some tinkering with that change because of some negative blowback or unintended consequences.

The retirement plan industry was an industry that was cloaked in legalese, hidden fees, and jargon. I blame the legalese and jargon on the attorneys and many retirement plan providers who felt that using jargon was a clever way to hide their fees.

The Department of Labor (DOL) tried to fix that issue through fee disclosure so plan sponsors and plan participants so that they finally knew what they were paying for.  Many plan providers were able to clarify these fees with easy to understand disclosures for both plan sponsors and plan participants. Many other providers did not, either because they were trying to continue to hide their fees or (in the most likely scenario) were drafted by attorneys who only speak in legalese.

Since many plan sponsors are confused, the DOL is seeking comments on a proposal to require some sort of guide to fee disclosures if the fee disclosures take up quite a few pages. I call it the guide to the guide, mainly because the initial disclosure was supposed to be that guide to fees.

I'm a big fan of easy to understand fee disclosures and one of the big reasons for this mess is that the DOL did not provide sample plan sponsor disclosures that they had done with the participant disclosures. Maybe it was difficult for the DOL to come up with sample language that any plan provider could use, but any point of reference would have helped.

I just know when it comes to my retainer agreements with clients; my fees are explicit and easy to understand so that the client knows what it will cost them. Except for government audits, my fees are flat and have a point and an end (unlike fees based on the hour). There should be no reason that a financial advisor or third party administrator's fee disclosure should be more than a page or two. That's just my opinion.

So for those plan providers that were slaving away on those fee disclosures, you may have to go back to the drawing board.

Fidelity wins the high fee battle, but loses the war.

They escape liability in the Tussey case, but exact a price for winning.

Often time the newspaper will have big headlines on the front page when somebody gets busted, but a small paragraph when that same person gets cleared of all charges. That's the nature of the newspaper business; if it bleeds, it leads.

In 2012, Tussey vs. ABB, plan participants were awarded $36.9 million by a United States District Court. The note was that ABB's 401(k) plan record keeper, Fidelity, was also a defendant and held liable in its part that the plan was charged excessive fees. Fidelity was ordered to pay legal fees and $1.7 million for breaching its duty on the float rates it charged on plan assets it invested. ABB was paying the bulk of the award, but any advisor or third party administrator competing against Fidelity was trumpeting Fidelity's liability.

Fast forward two years, the Appeals Court for the 8th Circuit still held ABB responsible for $13.4 million in not monitoring excessive fees, remanded to the District Court to fight over from scratch, the $21.8 million ABB was at fault for using the wrong share classes on $1.4 billion 401(k) plan, and most importantly, vacated Fidelity's liability.

Fidelity won the battle, but has lost the war, the war of public opinion. While it was cleared of wrongdoing, the fact is that ABB's 401(k) plan paid excessive fees that Fidelity was helping to run. The fact that Fidelity can skate by because it's not a fiduciary is irrelevant because the fees were too damn' nigh and most people don't know that the mammoth $36.9 million award was just reduced. Fidelity's competitors may tout the original Tussey decision without detailing the facts that Fidelity won on appeal.

The lesson to be learned here is that plan sponsors are alone in the need to benchmark fees (which ABB did not do) and if you're a provider charging excessive fees, being a defendant in an excessive fee case that you win on appeal and the plan sponsors loses, isn't much of a victory. It's hollow when everyone knows you charged too much.

A Plan Provider Success Story.

How plan providers grow and how I can fit in.

I always talk about my open door policy with financial advisors and third party advisors where I will help these plan providers out without me actively seeking their business. I kind of have that liberty because it's my own law practice and I don't have the stress to bill when everything at the end of the month is mine anyway.

The reason that I take the phone calls and respond to the e-mails is the belief that the retirement plan business is a relationship driven business and I learned that by a friend of mine named Richard Laurita (may he rest in peace). He was the salesman at two TPAs I worked with. Rich was all about developing relationships in this business. I once joked that he probably couldn't spell 401(k), but he didn't need to because the relationships he developed over time brought him and his employers business. I follow the same approach and quite honestly, most of the plan providers I have talked to over the past 4 years never brought me business and that's fine because some day they might. The help I give in these types of conversations are free and I can probably say on one or two fingers how many plan providers abused that free help. I believe that if you help people, they will remember you.

So here is the part where I talk about one of my success stories. There was a registered investment advisor with absolutely no retirement plan clients and he wanted in this business. For over two years, we spoke on the phone and met where he introduced me to people and I introduced him to people, but no business for me. I'm a patient man, that's what happens when you go to school for 22 years straight. Over time, he took my advice on how he can partner with other advisors and he attended conferences that I suggested he attend.

Well that registered investment advisor who was honest that he didn't know much about that retirement plan business and wanted to seek help from those that could, including yours truly, has netted a few retirement plan clients and is now an ERISA �3(38) fiduciary (hiring me to develop his service agreement at a flat fee).

This story isn't about me, to me, it's about how plan providers can get ahead just by being honest on what they don't know and developing the relationships with those that do.