Problems with Distributions

[Below Ground]

We are a small TPA firm. Lately, we are encountering a problem which use to be an easily fixed problem. Now this problem seems to be "exploding" given the state of the investment markets. It is becoming a major problem for us.

Basically, a few financial brokers associated with several plans we service tell participants that they can do things like close their accounts under the plan at anytime. By plan I do mean 401(k) plans, and by participant I do mean people who are still in service and are below 59 1/2, whose accounts have deferrals monies which are not being paid out under a valid claim of hardship.

Getting right to the crux of the problem, these "professionals" are telling participants that they can do whatever they want; regardless of plan terms or pension law! These participants then go to the plan administrator at the firm, who then come to us to have the payment processed. When we say that the requested distribution is not permitted, the financial broker is contacted who then says we are wrong!

What makes this especially frustrating is that when you produce research materials and/or copies of regs showing why the distributions is wrong, we are still deemed to be in error.

With a long term client this is not a problem as they know we are right; but a new client who trusts the financial broker will typically decide we are wrong. We are then stuck with watching a "wrong payout" and a soured relation with the client. I note that we are not the recordkeeper, so processing does not require our actual input.

My intention is not to just simply whine about the problem. Instead, does anyone have any suggestions on how to address this?

[QDROphile]

Are you bound (and protected) by professional standards that prevent you from sacrificing the client by reporting them to an appropriate regulatory agency and then using the victim as an example for others? It would be more satisfying to get the real culprits, but the IRS probably won't go after the broker just for giving the bad infomation. After all, the plan is not required to break the law.

Or just get used to it. In the area of nonqualified deferred compensation, the consultants routinely gave abusive advice and then castigated the lawyers for being too conservative. Result (with som help from Enron): 409A.

[david rigby]

Ask the "broker" to produce evidence supporting the position?

You provide similar evidence (i.e., plan provisions), and see if the broker can justify his/her position.

[WDIK]

I don't have any great suggestions, but this does give me an opportunity to share (whine about) my most recent "debate" with a participant's investment advisor. According to him, he has been in the business for over 14 years and in all that time has never encountered a plan with a break-in-service requirement. He is sure that this is illegal, that our firm is incompetent and dishonest, and that I am part of a corporate conspiracy. He is also pretty sure that the DOL requires employers to guarantee that there will be no investment losses (which were substantial in 2008) in a balance-forward plan.

After enduring a glut of insults, I told him that it would be necessary for me to speak directly with the participant to answer additional questions. When I did speak with the participant, he told me that he had not been working with this broker ever since the broker showed up unannounced at his house one night at 9:30pm and triumphantly declared, "I thought this was where you lived!"

[Below Ground]

QDROphile - I need to check the ASPPA Code of Conduct on that. In short, I'm not sure. Lets say I'm not "bound", who could you report this too? Of course, I really wish there was something more "constructive" to do. I don't think I will ever get use to it. I will try but so far, no joy on that.

David Rigby - That's part of the problem. We show why you can't do it, the broker simply says we are wrong even in the face of proof, and the client goes with the broker. I guess because it is easier to let people do what they want. Oh, the proof we always hear about is that other TPA firms say it is okay. In writing? No chance on that. How dare we question the broker's veracity!

WDIK - You are welcomed to the opportunity. Maybe someone will have solution that both you and I missed. Oh, and boy do I have stories upon stories like your broker story. Maybe some day we can trade war stories. Perhaps I should write a book... We TPAs are really bad people I guess. I have been told that on many occassions.

Anyway, thanks for the feedback!

[pmacduff]

Hey BG - I have a client with a TWO year break rule for payout (small company owner is afraid someone will take the money and start a competing business!) The 2 years really gets to the participants when some of the funds are 401(k) and they remind me that "it's MY money". Oh what fun we have. I do agree about the bad advice that can be out there; I've been in pensions for 18 years and it never seems to change. I think if a client is not willing to hear you out and realize that your expertise is part of what they are paying for...maybe the client isn't worth keeping.

There is an ASPPA or Corbel webcast coming up in regard to distributions and the "it's MY money and I want it now" philosophy...should be interesting.

[rcline46]

My suggestion is to have the participant call the EBSA and/or the IRS, explain their situation and ask if they can take their money.

[A Shot in the Dark]

As an owner and lead marketer of our firm, all I can say is choose wisely who you conduct business with.

90 Percent of our clients are referrals from investment advisors. So much different than "back in the day" when referrals came from CPA's.

Our firm will never be the largest and I can tell you our revenue stream is signficantly lower than it would be because of the amount of business and referrals that we turned away from investment adivsors who refuse to ("folow the rules") legal and otherwise.

We spend (I spend) an inordinate amount of time educating the investment advsiors that work with us. It doesn't take long to weed out the ones we don't want to work with.

Likewise, depending upoon my relationship with the client, I would have no problem discussing the issue of an advisor giving bad advice.

BG - That doesn't answer your question or give you a solution, other than to say our solution is not to work or limit our work with those types of folks in the first place.

[J Simmons]

My suggestion is to have the participant call the EBSA and/or the IRS, explain their situation and ask if they can take their money.

Respectfully, rcline46--Yikes! Unless you know the exact right person at those agencies to give them the phone number for, I would hesitate on that suggestion. I've experienced more than one situation where the person talked to at the government agency either left the participant more confused or more misled re the rules than the adviser did.

[Below Ground]

We are slowly weeding out the bad clients, and the bad advisors. It's just a shame since many came to us with problems that we worked hard to fixed, which they will soon have again. (They never learn.) We try very hard to educate both clients and advisors, but I guess you can't win them all.

And don't forget, getting new clients is not "cheap", especially with the downturn in the economy. You hope to recoup the "new client costs", but... Of course, ending up in court won't be cheap either so I guess I will just try to keep doing the right thing by doing things right.

I have been doing this for 24 years, and I have never seen it so bad. Liars and cheats have always been around, but it almost seems that clients are too easily duped by these "professionals". Well, enough whining from me.

Thanks for the feedback.

[A Shot in the Dark]

BG:

Perhaps it is time to take a break and head to the Sand Dunes.

A good dune trip clears my head and gives me a new lease on life.

[Below Ground]

I'm in the east, so dunes are not really available. However, a quick lap on the MX Track, or a ride down a GNCC Type Trail at the riding park sounds good. Oh, snow is fun for donuts but I don't like the cold so much anymore. Bottom line is that a day on the 400EX beats a day in the office. I like riding the mud, dirt or sand. Thanks for the thought, it was pleasant.

[Peter Gulia]

Leaving aside any debate about whether a non-fiduciary service provider should or shouldn’t care about an instructing fiduciary’s decision not to follow a plan’s provisions ….

If an employer’s plan is stated using a master, prototype, or volume-submitter document that permits practitioner amendment, a sponsor or practitioner that “reasonably concludes” that an employer’s plan “may [sic] no longer be a qualified plan” must (if the sponsor or practitioner doesn’t submit an EPCRS request) “notify the employer that plan may no longer be qualified, advise the employer that adverse tax consequences may result from loss of the plan’s qualified status, and inform the employer about the availability of EPCRS.” Rev. Proc. 2005-16 at § 8.05 and § 15.07.

A fiduciary’s decision to ignore the plan’s provisions and instead instruct a distribution that’s contrary to the plan’s provisions suggests at least a possibility that the fiduciary does not intend to follow the plan’s provisions. Such an intent might tax-disqualify a plan.

In some situations of the kind described above, some recordkeepers send a form letter that briefly describes the instruction that’s contrary to the plan, and then tracks the language of the Revenue Procedure. Although a letter of this kind is unlikely to change anything with those who are determined, it’s a way for a recordkeeper to make and keep evidence that someone else was responsible for a failure. And while some people feel that it’s unethical to make and keep unprivileged evidence of a client’s breach, some defend the warning letter by saying “the IRS made me do it”.

[Jim Chad]

Here is one idea that I have found to be effective. I suggest a lawsuit.....and here is how I do it.

If you haven't thought of it yet, you will probably be thinking about contacting an attorney. Here is an idea that will save you a lot of money. Be sure to hire a pension attorney. (If I am talking to a broker I say ERISA attorney). Then I name the big law firms in town and say they all have one or two. They are going to charge you by the hour and if you have an attorney expert in pensions, then in 2 minutes he will know what I am talking about...and it will save you a ton of money.

[Jim Chad]

What I said in the previous post has worked very well for me. In fact, I don't think I have ever heard from anyone after suggesting that.

Now I have a question. Has anyone ever suggested that the "expert" put it in writing? And how would you word it so it sounded serious and professional?

I never have.....I wonder how that would work out.

[K2retire]

If the client is trying to do the right thing (as opposed to looking for a way to make a distribution regardless of the rules) suggesting that you've given them the answer in writing that you are will to stand behind and that they should ask the broker if he or she is willing to stand behind his or her position if the government disagrees will usually cause the broker to run for the hills.

[Below Ground]

Thanks for the comments. See Post #5. Confrontation almost always sees broker and client run for the hills.

[BG5150]

Maybe send them a list of the bad things that can happen (to the Employer AND Employees) when the plan gets disqualified.

[J Simmons]

Maybe send them a list of the bad things that can happen (to the Employer AND Employees) when the plan gets disqualified.

If you do, calmly downplay those bad things when listing them out. Otherwise they might mistake you to be Chicken Little (aka Hank Paulson)

[Below Ground]

I find that people ONLY hear what they want to hear, unless the IRS or DOL is knocking at the door. We send plenty of warnings, proof, etc... BUT I find that it does little, if anything, beyond showing we did our job. It is either ignore, or serves to drive the "client" away. I sense there is no solution. Guess I'm back to that "time for the 400EX". Thanks.

[J Simmons]

I find that people ONLY hear what they want to hear, unless the IRS or DOL is knocking at the door. We send plenty of warnings, proof, etc... BUT I find that it does little, if anything, beyond showing we did our job. It is either ignore, or serves to drive the "client" away. I sense there is no solution. Guess I'm back to that "time for the 400EX". Thanks.

I think this post deserves to be nominated for Sagest Post of the Year--do you have an extra 400EX I can ride?

[Below Ground]

But of course! We have quite the selection for you to consider! My oldest son has a "tricked" Blaster. My youngest son has a 250EX. My wife has a Breeze/Grizzly 125. Lastly, my daughter has a BTM 50. I suppose you could ride any but the 50. That has a weight limit of under 100 pounds, I think. It is really small and slow.

I thank you for the award. I accept with all the grace I can muster at this time of year.