How a Plan Sponsor Can Avoid Being a Deer Caught in the Headlights.

A plan audit by the government shouldn't cause plan sponsor paralysis .

 

The term "deer in the headlights" explains the mental state of a person who shows behavioral signs that remind us of a deer subjected to a car's headlights where the deer is in such panic that they show no motor reaction to avoid the car. A retirement plan sponsor acts like a deer in the headlights when the plan sponsor is paralyzed by fear when a plan participant has sued them or when their plan is under Internal Revenue Service (IRS) or Department of Labor (DOL) review. The retirement plan sponsor is paralyzed by fear because they don't know the responsibilities of being a plan sponsor or what to do, so this article will help a plan sponsor avoid being the deer in the headlights if there ends up being an issue with the plan.

 

For the article, click here.

When It's Time To Hire An ERISA Attorney.
There is a time for it.

 

When I tell people that I'm an ERISA attorney, most people (including attorneys) don't know what I do. While I'm not going to do a Rodney Dangerfield impersonation and claim I get no respect, the fact is that many plan sponsors also don't know what an ERISA attorney does either which is scary when their plan is an ERISA plan. ERISA attorneys are an excellent resource and can certainly help plan sponsors out when they are audited by the government and even in the day-to-day aspects of plan administration. So there are many reasons why a plan sponsor should hire an ERISA attorney and this article will inform you on when it's the best time to call an ERISA attorney.  

To read the article, please click here.

Plan sponsors need to know why they need to hire a good TPA.
 
One of my favorite movies of all time is The Deer Hunter. It's a story about the Vietnam War and the post-traumatic stress disorder a group of friends from Western Pennsylvania who were drafted together and fought alongside each other suffer from after the war. There is a scene where Robert DeNiro's character threatens the character of John Cazale (who died shortly after filming and who appeared in only five movies, all nominated for Best Picture) by holding up a bullet and saying: "This is this. This ain't something else. This is this. From now on, you're on your own." The problem for retirement plan sponsors is that they don't know that this is this, so they don't what their third party administrator (TPA) does and why they need to make sure their TPA is a good one because this isn't something else and because a plan sponsor will pay the price in penalties, headaches, and increased liability by hiring a bad TPA. So this article is this, an explanation of what a TPA does and why they need to hire a good one.
 

To read the article, please click here.

Seeing the Retirement Plan Dentist to avoid a Plan Root Canal.
Good preventative care can avoid later harm. 

 

About a dozen or so year ago, there was a medical report that dental plaque could cause heart disease.  The cynic in me tells me that this was some sort of dental conspiracy to increase revenue as fluoridated water and other dental hygiene has had to have a negative effect on the dentists' bottom line. Regardless of my cynicism, good oral health is important.

 

While some people only see a dentist when something in their mouth hurts them, many visit the dentist for annual or semi-annual checkups as preventative care, to avoid dental problems later. Brushing, flossing, and checkups help avoid the root canals, caps, and dentures.

As an ERISA attorney, sometimes I see myself as a retirement plan dentist. While some plan sponsors only seek counsel from an ERISA attorney when something terribly goes wrong with their retirement plan, there are many plan sponsors these days that seek ERISA counsel as a form of preventative care for their retirement plans. Seeking counsel from an ERISA attorney can be like seeking a dentist in avoiding greater harm. Part of the marketing of my practice has been to advise plan sponsors and their financial advisors that their retirement plan should be reviewed on annual basis to determine whether it's being properly administered and whether the expenses for the plan are reasonable. These are preventative steps to avoid potential liability as a plan fiduciary. My Retirement Plan Tune-Up (which you will be hearing more about in the near future) is a legal review where I look at the plan terms; plan administration, and fiduciary to determine what works and what needs to be corrected.

 

Plan sponsors should review their plans to determine whether the plan still fits their needs and whether there are potential liability pitfalls in plan administration and the fiduciary process.

In my articles and my blog posts, I highlight the potential liability pitfalls that a plan sponsor needs to avoid. Whether it's the lack of an investment policy statement or high fees, these are pitfalls that plan sponsors can minimize through best practices.

 

Some critics of my writings claim that small to medium sized employers rarely get sued for breaches of fiduciary duty, so I am in the market of selling useless legal services. I guess that is my version of the plaque causing heart disease theory. While the chances of a small to medium size employer getting sued are slim, the threat is still there. The chance of getting hit by lightning is remote; we still minimize the risk of getting hit by avoiding standing near trees or staying outside. In addition, ERISA litigation progresses and when ERISA attorneys run out of suing the larger plans for fiduciary duty breaches, where will they turn next? Regardless of the small risk or not, plan sponsors should follow good practices because good practices tend to avoid bad results. In addition, poorly run small retirement plans have other things to fear such as an audit by the Internal Revenue Service and the Department of Labor or just the threat of litigation by a terminated employee who just wants a couple of shekels after termination of employment.

 

Like their teeth, plan sponsors should have their plans checked on an annual basis to avoid a retirement plan root canal later.

Defined Benefits Plans are to save $$$, not to make insurance salesman crazy $$$$.
Be wary of life insurance salesman selling defined benefit plans.

 

While the talk about retirement plans is usually centered on 401(k) plans, the value of a defined benefit plan for those companies that could afford it should not be discounted. Thanks to the generous deductible contribution of the requirements of minimum funding, small business owners can certainly sock away more money than they ever could do with a defined contribution plan.

 

The problem with these huge deductible contributions, is that there are always some unscrupulous plan providers that exploit the defined benefit plan sponsor's ability to make large contributions to their own advantage.

 

Defined benefit plans are huge savings vehicle for retirement, but they should not be used solely as a vehicle to purchase life insurance. I have seen too many defined benefit plan sponsors purchase large life insurance policies where their minimum funding contribution is used solely to pay the premium of a large insurance policy within the plan. The problem? When times go bad and the plan sponsor doesn't have the financial wherewithal to continue making the contributions, they essentially forfeit the goal of the life insurance policy. A company that didn't buy a policy or bought a smaller policy is in a better spot as ceasing future accruals isn't such a calamity as to those that lost their policies.

 

Life insurance is an attractive tax savings vehicle with a defined benefit plan, but like red meat and wine, it should only be used in moderation. I would recommend avoid setting up a defined benefit plan with the whole purpose of funding life insurance. I would recommending not using a third party administrator (TPA) who also sells life insurance because I believe it's the ultimate conflict of interest when your plan designs you create as a TPA is used to sell life insurance you're selling. Let's face it; there are bigger margins in life insurance than plan administration. Also avoid defined benefit plans that feature special trusts and special trustees as the Internal Revenue Service have found these as possible grounds for plan disqualification.

 

How to avoid these insurance hucksters? Pick a TPA that is independent from an insurance sales person, make sure your entire annual minimum contribution isn't fully used to pay the life insurance premiums, and get a second opinion from an ERISA attorney.

 

Defined benefit plans should be used to save for retirement, not to net an insurance salesman a huge commission. 

They can be a pain to deal with, but there is a way to curb the pain.  
 

They often say that the road to hell is paved with good intentions. I don't know who said it first (I heard it was originated with St. Bernard, the saint, not the dog), but perhaps they were a 401(k) plan sponsor that had a loan provision that did the plan a lot of harm.

 

While the idea of a retirement plan is for a savings vehicle and any access by the participant to that money defeats that purpose, I like offering the provision so that a participant can leverage it when they are in a cash bind. If it's their money, they should be able to tap it if they really need it.

 

The problem with the loan provision is that I have come across too many compliance issues with it that has caused plan sponsors lots of grief. The grief usually involves the requirement that the loan be paid back in at least a quarterly basis or be considered a default, where the participant is required to receive a 1099 form for a deemed distribution. This error is as result of the third party administrator not keeping tabs on the loan. This may be a result of an incompetent administrator, incompetent plan sponsor, or as a result of the plan offering multiple loans. Any loan that does not meet any of the plan loan requirements is considered a prohibited transaction, which risks the plan's tax qualification.

 

How to avoid the mess? I still think having a loan provision that offers multiple loans is a recipe for a disaster, I always recommend only allowing one loan outstanding at a time. In addition, make sure the TPA you work with has the software necessary to track these loans, as well as making sure the payroll information is correct for loan repayments.

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The Rosenbaum Law Firm Review, May 2014, Vol. 5 No. 5
The Rosenbaum Law Firm P.C.
ary@therosenbaumlawfirm.com
734 Franklin Avenue, Suite 302

Garden City, New York 11530

 

Phone 516-594-1557 

Fax 516-368-3780    

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