Some employers I talked to are surprised to find out that there 401k plan providers do not have to work in their best interest. When they do not this may potentially increase the risk of costly legal actions against the company and its fiduciaries. However 401k plan providers can also carry out functions as a fiduciary or sometimes not as a fiduciary they can help manage the risk to the company. There are few key areas of support that they can provide.
The Employee Retirement Income Security Act highlights what employers should be doing regarding making sure that the retirement plan serves the best interest of the employees and their beneficiaries. A logical first step would be to determine the needs of the company, its employees and the plan itself. A few questions you might ask:
- Do the plan decision makers have expertise with investing?
- Do the plan decision makers have expertise with the Employee Retirement Income Security Act?
- Do the employees need help planning for their retirement?
Based on those answers, 401k plan providers should be selected to help support those needs. Unfortunately, some companies make a call to a well-known brand and look for them to ask the questions and provide the answers. Unfortunately, the law holds those that make decision responsible, meaning you. Vendors carry out instructions rather than make decisions. The law says they are simply carrying out your instructions unless you hire providers that take on a decision-making role aka fiduciary. You may decide to hire fiduciary investment advisor to quarterback your plan, choose fiduciary investment managers to handle the selection and monitoring of investments, and choose fiduciary administrators to be responsible such things as proper disclosure distribution. You could decide to keep those fiduciary decisions in house.
401k plan providers help with fiduciary process focused activities
What are your 401k plan providers doing today? Does that match your expectations and more importantly their contractual obligations? Is your plan committee educated? Who should do what on the plan?
What’s the strategy for communicating all of this to employees? Who will make sure what is expected actually happens.
There are many provider and employee disclosures. I have yet to find a company that has reviewed their fee disclosure or more importantly, compared it industry averages to assess fee for service. Hopefully you are the exception. Who is watching over the employee disclosure dissemination process to make sure that the intended recipients actually got them?
A key area of concern is investment selection and monitoring. You can do it yourself, get help or find a do it for me provider. A do it for me provider is known as an ERISA 3(38) investment manager. Even if you have an ERISA 3(38) investment manager who is monitoring them. A help me with it provider is an ERISA 3(21) investment advisor who should have specialty designations anda independent performance review documents, 401k plan provider fee analysis reports, etc. If you are do-it-yourself fiduciary, be careful if you are relying on reports given to you by companies that also provide your investments. It is in their best interest to shine the best light on their investments.
One of the tenants of good fiduciary governance is documentation. If you are audited, can you show what you were thinking and why you made the decisions to select the investments and 401k plan providers you did? If not, you may find yourself fully exposed to accusations of impropriety. Who is keeping the notes and where are they being filed?
401k plan providers help with participant outcome focused activities
An Employee Retirement Income Security Act plan is to be run for the sole benefit of the employees. In fact, noted ERISA attorneys Jason Roberts and Marcia Wagner have forwarded that the path to the least potential risk goes through retirement readiness.
How are you engaging employees? Do you have an engaging participant enrollment and communication program? Do you have participants interested in sustainability and gender equity? If so, do you have investments on the menu that speak to them?
I have found few people that know how to calculate their retirement savings needs, much less know much about diversification. Would you employees benefit from services that provide this? Are there ones that help manage your risk?
You should have provided your employees with the required disclosures for plan fees. Did you read your own? Do they need help understanding the disclosure?
At some point, 401(k) account balances need to be turned into income or retirement paychecks. Do your employees know their options such as a single premium immediate fixed annuity or systematic withdrawal strategies? A fiduciary advisor with this knowledge would be a CERTIFIED FINANCIAL PLANNER™ professional.
Want to assess your 401k plan provider risk?
Jason Roberts of the Pension Resource Institute has developed a guide to help see where you stand. After asking 15 questions, you can see where you stand on the continuum of most to least risk. It will also give you some high level ideas as to the areas where the right 401k plan providers can help you find the risk quadrant you would like to be. Please contact us if you are a decision maker on a 401k or 403(b) and would like a copy. Short on time? We can do it for you. You can use the results to have deeper conversations with your 401k plan providers on what capabilities they have to help fill your gaps.
For Plan Sponsor Use Only – Not for Use with Participants or the General Public. This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.