Many employers and their designees take their cues on what they need to do from the providers that they select. While the law expects that you would go through a due diligence vendor selection process, many firms simply select a well-known name brand. They may have told you that once the participant count exceeds 100, than the law requires you to have an independent audit done by a CPA. You may also have been told that you don’t really pay an additional cost for terminated employees in your plan. This assumes that most of your plan fees are being paid by the participants. If that is the case you are paying as a participant.
In this case, while the company may not directly be paying for this cost, it exposes the company and you as a fiduciary to unnecessary liability. It’s typically the terminated employees who have nothing to lose regarding charging you with negligence plan oversight that led to their dismal retirement savings.
Does your 401(k) advisor have a terminated employee’s strategy?
The combination of your current employees plus the terminated employees may be the reason that you meet the 100 participant audit threshold. The company can decide to pay for the audit in one of two ways:
- The company pays
- The company passes the cost on to the participant
First, let’s examine passing the cost on. If you’re passing the cost onto your participants, you may not care. However, with the recent fee disclosure, you now have to explain why are you still having your participants pay for the cost of an unnecessary audit? This is the type of questions that a knowledgeable investigator or an attorney would likely ask. Second, if you are the owner, CEO or CFO and could cut the company’s costs, it stands to reason that you would. Investigators aren’t interested in company costs.
If this is the first you have heard about cutting the cost of the audit, it may be because you providers have conflicts of interest. Unless you talk to an Employee Retirement Income Security Act (ERISA) attorney, independent fiduciary or investment fiduciary, you probably would not be aware of the potential conflicts of interest. If your company already is using an auditor, the auditor who is not a fiduciary, has no interest in telling you that by rolling out your terminated employees you could get rid of their service. Unless the companies that provide your investments are fiduciaries it’s not in their interest to decrease the assets for which they get a percentage.
Fee disclosure 408b 2 (408b2) and Participant Fee Disclosure 404a5
A fiduciary advisor is obligated to tell to share this information. One of the best ways to increase plan assets is by increasing the savings of your employees. It’s been well reported that many financial professionals believe that individuals should be saving at least 10% of their income for their future retirement needs. Very few employees are adequately saving for their retirement. This is one of the first elements of your plan that should be addressed.
I recommend that you seek out an independent fiduciary or fiduciary 401(k) advisor for an independent 401(k) review. If you can cut the cost of the audit, ask them about their strategy for rolling out your terminated employees. This 401k review just might save you a host of problems and money down the road. You never know when a former employee or the Department of Labor might question you on your process for controlling their costs.
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