The Importance of Legal Counsel Review

By Jeb Graham CEBS, CIMA® of CapTrust Financial Advisors, an independent consulting/advisory practice focused on the institutional retirement plan market, serving corporate, closely held, non-profit and governmental organizations. You may contact Jeb at 813.218.5008 or jeb.graham@captrustadv.com.

One of the questions we often hear is, "Why should I pay an attorney to review my plan?"

It is hard for plan sponsors to grasp this idea. When we suggest they spend another few hundred dollars to have an ERISA attorney review their plan, the response is predictable as many individuals are already skeptical of attorneys. The CFO or HR Director looks at me and says, "You are an expert in the plan design and you brought in a third party to handle compliance and plan administration. What do I need an attorney for?"

That is a great question and it's easy to understand why it is asked. And here is my answer. "The plan document that governs the administration and operation of the plan is, in effect, a contract between the employer and the employees…and I am not an expert in contracts. I can design a plan to best fit the employer's objectives, evaluate and monitor investments, and provide oversight of the plan administration and compliance functions, but I can't tell you if the contract is 100% valid and consistent with the operational process and form currently in place."

It is generally expected that when the pension administration firm (TPA) or recordkeeper provides the document, they should be responsible for what they provide. And they are responsible…for keeping the document in current compliance with all the laws and regulations.

But here is the tricky part. Problems often occur not because a plan sponsor is failing to comply with the law, but rather because they are failing to comply with the provisions in their document (contract). The law may allow a particular provision, but if the plan does not include specific reference to that provision, it could cause plan qualification problems if applied. Other common document problems include inconsistent provisions or unclear language, or the Summary Plan Description (SPD) given to employees being inconsistent with provisions in the plan.

Without review by appropriate legal counsel, I have a 90% confidence level that the plan is in full compliance and at no risk of disqualification. Most of the mutual fund firms, insurance companies and banks that provide service to plan sponsors have attorneys on staff to review documents and compliance related matters. However, a key point that must be made here is the plain fact that these attorneys work for the provider, not the plan sponsor. These in-house attorneys employed by providers may also be less experienced than an ERISA partner in a regional law firm.

If a plan sponsor is comfortable with a 90% confidence level and wishes to avoid additional fees, it is OK with me. Chances are they will be fine. But I have seen problems arise with documents provided by even the most well known 401k providers, so it is not like the problems were a result of inexperience in the market. For this reason, I always suggest that the plan sponsor consider a review by ERISA counsel to raise that level to 100%. This allows me the comfort of having given our client the opportunity to fully protect themselves, and letting them make their own decision.

This material is distributed solely for information purposes and is not a solicitation of an offer to buy any security or instrument or to participate in any trading strategy. The views contained herein are the opinions of the author. It is not intended as legal or tax advice. CapTrust Advisors, LLC is a Registered Investment Advisor with the SEC. CapTrust is not a legal or tax advisor.

Other articles by Jeb Graham: Looking Under the Hood of Your 401k to Understand the Real Costs, Does Your Organization's Retirement Plan Measure Up? and The Importance of Legal Counsel Review.

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