If you are like many business owners you don’t call yourself plan sponsor. You refer to what you do: architect, attorney, manufacturer of widgets, etc. However, when you provide a retirement plan governed by the Employee Retirement Income Security Act you are a plan sponsor.
Outsourcing plan sponsor functions
In many areas of your business, you likely pick providers that you expect to get work done. You may have even outsourced your customer service or information technology functions to another company. You may have believed that you can do so with your retirement plan. For safety sake you may have chosen a “deep pocketed” firm to bundle the record-keeping and investment selection for your plan. You may have even chosen a financial advisor from a “deep-pocketed” investment firm to help with investment selection.
Unfortunately, you have not passed on the fiduciary liability that you have as a plan sponsor. You only are sharing risk when your providers acknowledge in writing that they are accepting fiduciary liability. You should have an ERISA specialist attorney review the contract. Even if you pick the 402a named fiduciary (investment fiduciary expert Scott Simon calls the “big kahuna”) you still have the responsibility of wisely making that decision. Also you have an ongoing duty to monitor that provider.
Plan sponsor duties
You have several duties as a plan sponsor that include:
- Duty of loyalty duty of prudence
- Duty to know what options exist in the marketplace
- Duty to monitor the fees that your employees are paying.
In my experience, I have not found a plan sponsor that fully understands the fees that their employees pay. Most plan sponsors know the fees that the organization is paying but have little concern over the fees that their employees pay. That however is a major concern for the Department of Labor who is charged with upholding the law that states it is your fiduciary responsibility to make sure your employees are getting services align with what they are paying.
Originally thought of as a convenience, the investment fees are bundled with the investments. Think of this as grossing up the actual costs of your plan to cover the cost of staff, research and marketing and distribution. You may not be aware that many investment strategies have multiple cost structures depending upon where the investment is being distributed and how much of it is being purchased. Think of buying toilet paper. Costco typically sells the same paper at the Mariano’s grocery store or at Walgreens at different costs. However, you have to buy a larger volume to get the discount.
No time to research what it means to be a plan sponsor?
I don’t think it’s wise to blindly believe that your providers are taking care of you or that you won’t get investigated by the Department of Labor or the IRS. You should find a retirement plan consultant, 401(k) advisor or 401(k) architect that shares in your liability to guide your plan. Choose one that is licensed, designated and insured. That means they are an Investment Advisor Representative, have a designation such as Accredited Investment Fiduciary® and has fiduciary liability insurance.
Recently, a judge determined that several 401(k) investors who had selected investments from Bernie Madoff were out of luck. However, they did not say that the fiduciaries were not at fault. Would the plan sponsor and their employees been better off working with a co-fiduciary investment advisor or even better yet an ERISA 3 (38) investment manager who took on the legal liability for selecting, monitoring and removing investments? Time for a plan review?
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The target date is the approximate date when investors plan to start withdrawing their money. No strategy assures a profit or protects against a loss.
