If you are like most 401k responsible parties, your baptism was by fire. You might have inherited someone else’s work and assumed it to be “okay.” The Employee Retirement Income Security Act (ERISA) exposes you to some significant risks.
Take this test to assess your 401k plan risk:
- Do you have a formal Investment Policy Statement that is used during plan reviews?
- Do you know what criteria to use for replacing an investment within your plan?
- Are your plan investments reviewed against appropriate benchmarks annually?
- Do you know how your plan expenses compare to similar size plans?
- Do you have a process to comply with the recently enacted 408(b)2 disclosures ?
- Which of your providers has signed on to keep employee’s interest first (a fiduciary)?
Congratulations if you got 6 out of 6. However, not having document proof to back up your Yes answers can be costly should you face a regulator or attorney.
Big and small companies have found themselves unable to defend their actions. The cost has ranged from a few thousand to tens of millions of dollars when they couldn’t provide proof they followed the 401k rules. Likely they were well meaning. However, they found themselves weighing spending more time on a plan with no revenue generation or helping the company make more money. However, being only half in can be costly.
How can you reduce your 401k plan risk and save time?
If you don’t have time to learn about the ins and outs of what the DOL holds you responsible for scrutinizing consider one or all of the following actions:
- Hire a qualified ERISA 3(21) investment advisor to help guide and educate.
- When you add ERISA and a section reference, you are talking fiduciary. Advisors with designations such as Accredited Investment Fiduciary, Professional Plan Consultant™ or Qualified Plan Financial Consultant show commitment to being a retirement plan pro. They can help you evaluate the rest of these actions.
- Hire a qualified ERISA 3(38) investment manager to delegate your investment duties
- Competent managers will answer questions 1, 2 and 3. It is their fiduciary duty and personal interest not to let extra fees be added to theirs (question 4.)
- Hire an independent fiduciary to delegate your overall operational duties
- They will answer all the questions.
- Hire an attorney that specializes in ERISA and 401(k) matters.
- Some providers say they have 401(k) attorneys on staff. Ask them if they are working in your interest? If they say yes, ask them to show you the contract. Further, be sure to get a 401k specialist, not a benefits generalist.
- Buy fiduciary liability insurance.
- Don’t assume that your Errors & Omissions (E&O) insurance covers the 401(k).
Please email us if you are interested in being invited to one of our presentations on managing your risk.
(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. (2) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI