Many plan sponsors assume that picking brand-name investments from a brand-name investment company sold by a brand-name advisor ensures them of having a pretty good small business retirement plan. A Google search of “401(k) lawsuits” will show many familiar names associated with some high profile legal action. How could this happen?
Many small businesses want to provide a 401(k) or profit-sharing plan to their employees. They rarely employ experts in this area. They tend to look for familiar companies who offer all the services required to run a retirement plan in one convenient package. The plan is often referred to by the most well-known brand-name provider. Some assume that they are doing everything. This lack of transparency can be financially harmful to unsuspecting employers and employees.
Small business retirement plan- Legal responsibility?
However most plan sponsors have not selected a provider who shares in the legal responsibility of the plan sponsor to work solely for the benefit of the employees. That is known as a fiduciary standard. Many plan sponsors aren’t aware that they are legally responsible for running the plan for the benefit of their employee(s) and their beneficiaries.
Fee disclosure- I thought the small business retirement plan was free?
I recently purchased a refrigerator. I know that the price pays the retailer, the salesperson and the employees who assembled it. Many employees believe that there small business retirement plan is free; believing that 100% of their contribution is going to their retirement. The plan sponsor and participant fee disclosures show that this is definitely not the case.
In fact, some sponsors were told that the employees could pass on some of the fees. Human nature says out of sight out of mind. Not being investment experts they weren’t aware the extent to which fees negatively impact return and retirement savings. Many plan sponsors might be concerned to find out that the investment information being provided to their employees may not be the same investment in their small business retirement plan. While the investments share the same name and underlying investments, they may not share the same expenses, which affect return.
Many believe that 100% of the investments sold by a familiar brand-name must be good. Plan sponsors can also be victim of this assumption. This is particularly dangerous when they are using a provider that bundles investment, recordkeeping, guidance and custodial services all into one package. Typically these providers aren’t offering benchmarking against alternatives to demonstrate the quality of their services. What they maintain is convenience and their profitability.
It’s important to get a 401(k) review so that you can have a better picture to see if what you have is truly what you expect.
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