Managing unnecessary 401k plan risk and potential liability
Do you know how many employees are on track to retire at the normal retirement age? If not, why should you care? Attorney Marcia Wagner¹ said in a recent webinar that “employers who improve the retirement readiness of their plan participants can also avoid unnecessary fiduciary risk and potential liability and can enjoy significant economic benefits from enhanced workplace productivity.
A “happy” employee is much less likely to be a litigious employee. Generally speaking, if employees are satisfied and confident that their retirement plan savings will help them meet their retirement needs in the future, they should have little motivation to file legal claims against the plan’s fiduciaries or join a class action lawsuit…The better participants are at saving and managing their plan accounts, the smaller any potential economic loss would be, which, in turn, would reduce the plan sponsor’s potential fiduciary liability in any plan-related litigation. “
Financial planner led pre-retirees are more confident
Historically advisors and well known providers have provided group education, typically focused on enrollment. Unfortunately, many participants have felt that the education was more about how much the educator knew about investing and how little the participant knew. Worse, for man providers, the person charged with education was not a seasoned professional and was not held to any specific result. It is commonly known that participant working with an advisor that gets to know them and provides a custom retirement blueprint are more confident and save more.
One-on-one retirement planning education vs. investment education
One-on-one retirement planning education can and should be offered to each employee. This retirement planning education focuses on generating annually recurring income or simply a retirement paycheck. The analysis focuses on answering:
- How much should the participant save?
- For how long? and
- What rate of return (level of investment risk)?
Ed Dressel, developer of TRAK Software says “Consider the participants’ simplest decision: selecting the percentage for 401(k) contributions. What does it mean for participants to increase their contribution from 3% to 5%? Obviously, any increase means less take-home pay, but how much? And an increase may mean receiving a greater employer contribution, but how much greater? The increase also means more savings at retirement, but how much? And what difference will it make if participants wait a year before deciding to increase their contribution? These are the participants’ key questions. Receiving answers to those questions will help them understand the effects of their retirement savings and how their decisions impact their situation. This type of education is relevant and meaningful.”
Your fiduciary duty to monitor
Now that you have determined that one-on-one education is a good idea. How do you know if it works? Let’s say you establish a goal that 90% of your participants should be saving at least 10%. You need a tracking report. This report will help you see if what demographic groups need further assistance. Might you need to have semi-annual one-on-one meetings? Should you add a communication program? Should you have webinars to address topics that appear to affect everyone or just certain groups? Documenting that you have contemplated these questions will go a long way in demonstrating that you were working in the best interest of your employees.
1 Marcia Wagner’s supporting white paper entitled Plan Sponsor’s Fiduciary Calling to Improve the Retirement Readiness of Participants.
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