September 15th, 2008: The day the financial industry changed forever!

You may be thinking what does 9/15/2008 have anything to do with ERISA?

The short answer is nothing!

On September 15, 2008, we saw two of the world’s largest financial institutions fail on the same day. And it did not affect ERISA law in one iota.

However, it was the “birth” of the ERISA Nerd!

Here is the back story . . .

I had a boutique investment firm I was running in the suburbs of Chicago in 2008 called Quintessential Retirement Services, Inc (QRS, Inc). We specialized in “bringing the tools of the wealthy to the middle market”.

The stock market had been steadily falling since October 2007.

It seemed that there was more bad news that moved the markets lower on the new every single day.

So, the Fed, yeah that “Fed”, started cutting interest rates to try and ease economic fears (it didn’t work).

Friday, September 12th, 2008, there were rumors that many financial institutions were on the brink of disaster.

I remember waking up around 3am on the morning on Monday, September 15th. I walked into a spare bedroom I converted to an office (way before “working from home” was en vogue).  I flipped on the small TV and turned on CNBC. Normally at 3am, there would be an infomercial for a vacuum or some other useless home product.

But to my surprise, the morning news anchors were live.

This was bad. Very, very bad!

I sat down in my chair and turned up the volume.

And to my horror, I heard the news. Lehman Brothers and Merrill Lynch had failed over the weekend and needed to file bankruptcy.

And many other firms were on the brink as well.

OMG!

Two of the largest and most respected names in the industry were done!

On the same day.

At first I thought, “this is great. I’ll be the richest guy in my suburb when all those Merrill clients need to find a new home. I’ll have my assistant print out blank ACAT forms and we will have a line outside the office made up of new clients moving over their accounts from their bankrupt firm”.

Then I thought, the markets!?!?

What’s going to happen to the markets? This is going to be a disaster!

Especially after the Bush administration said they have no intentions of bailing out Wall Street.

And to my surprise, there was not much reaction on Monday to the news. It seemed a big nothing burger that two financial firms are going to file bankruptcy. It seemed like, ok, we have BK courts for a reason. There will be a systemic winddown of both firms and life goes on.

Until . . .

The Federal Government got involved.

The government forced Bank of America to pay full price for the (technically, but not legally) bankrupted Merrill Lynch. And then a few days later bailed out financial insurance giant AIG. The bailouts had begun, and the ramifications were disastrous.

We have never seen bailouts in the modern era.

So, the markets went into full “panic” mode. Like they always do when “uncertainty” creeps into the economy.

The S&P 500 lost over 30% from September -December 2008.

Stocks lost money. Bonds lost money. Cash lost money.

It was a “free for all” and no one had ever seen anything like it.

And then, and this is how the ERISA Nerd was born, my clients started calling me.

They would say, “Kevin, forget the money you are handling, look at my 401(k). I am getting crushed. I am losing half my money. Help! Please help me!”

I only needed to hear that from a dozen clients before I knew I had to do something.

I knew enough about the risks of giving 401(k) advice, because up to that point, I always was dually registered with the SEC as an IAR and with a Broker/Dealer (B/D) as a FINRA rep. The B/Ds would constantly remind us to never give advice to 401(k) participants due to ERISA law.

At that time, I didn’t understand what they meant or why they were so scared of ERISA.

So, I bought every book on ERISA I could find (there were not many), printed out all of ERISA law and googled “ERISA”, “401k Advice”, “ERISA compliance” and read.

And read.

And read.

I got a very good crash course in how powerful ERISA was and why my B/D was terrified of it.

Specifically, it was Section 1109, which requires “personal liability” to pay back any losses if you lose an ERISA lawsuit.

And the fact that a participant can file a lawsuit and turn it into a “class action” lawsuit. The B/Ds knew what I didn’t (at the time), working with an ERISA participant is about the only thing you can do as a “financial professional” that can land you in court!

Every agreement I have seen always has a Mandatory Arbitration Agreement in its language.

ERISA gives participants direct access to courts.

So, I had to convince my B/D that I knew what I was doing.

Specifically, I had to show them that ERISA requires every adviser to follow a written prudent process. And it requires you to document that you followed this process; each and every time you advised your client for a fee.

So, I got to work, showed them I knew what I was doing, how I was going to document my work and that I had all my ducks in a row and that I could compliantly offer advice to my clients with ERISA covered accounts (like a 401(k).

And my B/D signed off on what I was doing and the ERISA Nerd was born!