Here’s 5 Things You Need To Know To Create A Bulletproof 401(K) For Your Company
Are you responsible for your company’s 401K plan? A study of 401K Plan Sponsors conducted by Fidelity Investments shows 38% are actively looking to make a change. A recent uptick in employees taking their employers to court caused Plan Sponsors to look closer at their plan design and seek a second opinion. Here are some reasons 401K Plan Sponsors are on the wrong end of the 401K litigation stick:
Not Playing By The Fiduciary Rules
In general terms, a Fiduciary is a person who owes a duty of care and trust to another and must act in their best interest. As a 401K Plan Sponsor, you are acting in a Fiduciary capacity. If a company does not have an HR specialist and the Plan Sponsor wears many hats, the risks are high things may fall through the cracks. Studies show most plans with less than $10,000,000 in assets and less than 50 employees are handled by the business owner. If this describes your situation, a review of your plan documents and administration procedures is a prudent thing to do. Even if you outsource some management of the plan, you retain fiduciary responsibility. The good news is plans can be designed to minimize your exposure.
Click here for an article by the IRS that provides details of a Fiduciary’s Responsibilities. Here is a summary of what you need to know about being a Fiduciary:
- acting solely in the interest of the participants and their beneficiaries;
- acting for the exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries, and defraying reasonable expenses of the plan;
- carrying out duties with the care, skill, prudence and diligence of a prudent person familiar with the matters;
- following the plan documents; and
- diversifying plan investments.
As the 401K Plan Sponsor, you have a responsibility to all parties of the plan to understand all plan expenses, and who pays for what. Since the employee is dependent on the funds chosen by the Plan Sponsor, they are limited in how they can control costs. A 401(k) fee study by Deloitte found total plan costs at small companies are nearly four times higher than larger plans. Click here for an article from Nerdwallet that highlights what 401K Plan Sponsors should be looking at. Here is a summary of the article:
- Plan investments. There are probably as many mutual funds as there are people. To add to the complexity of determining costs, many fund families offer a variety of share classes that vary in fee structure. Details can be found in your plans’s 401(k) prospectus. It is essential for the Plan Sponsor to understand what they are offering employees.
- Administration costs: Who pays for the maintenance and administration fees, such as Third Party Administration (TPA) and Recordkeeping costs? Is the plan on a Group Annuity platform? Some plans have a “wrap” feature where administrative and annuity fees are rolled into the fund costs. Other plans are designed for the 401K Plan Sponsor to foot the Administration bill.
Plan Design And Options
How many investment options does your plan offer? Can you honestly say the choices cover all investment style boxes? Here are some things a good plan will offer:
- The plan is user friendly. Does the plan offers a simple automated enrollment process with an easy to use website?
- For novice investors, default options, like Target Date or Lifestyle Funds are an easy way to get started without getting overwhelmed by all the options.
- If your plan doesn’t offer a Target Date or Managed Account option, it’s a sign the plan is outdated and needs an overhaul.
- The plan has a dedicated service professional that can provide advice and education. Having access to investment tools through a website is great, but some employees prefer the personal touch. Look for a Servicing Advisor with Fiduciary capacity that can provide personal advice to an employee as well as general education.
How To Minimize Liability Exposure
Your plan should have and Investment Policy Statement and policies and procedures in place. Make sure you are following them. If they are no longer a fit for your organization, document the changes. Here are some common reasons 401K Plan Sponsors get sued:
- Excessive Fees. Remember, every dollar an employee/participant pays in fees is money that is not invested.
- Poor Plan Design. Not enough fund diversification, too many proprietary funds, and a plan that is not user friendly all add up to a poorly designed plan.
- Inconsistent administration. What is done for one, is done for all. The rules of the plan need to be followed consistently. If you make exceptions without documenting a plan design change, you leave yourself wide open for litigation.
Often to keep costs down for smaller plans (less than $10,000,000 in assets and less than 50 participants) companies will offer a “DIY” plan. Vendors of inferior 401(k) plans focus on customer acquisition instead of improving the user experience for existing customers. Look for a plan that will give you your dedicated Service Representative and not just an 800 number to call. Click here for information about what your service agreement should cover.
Questions? If it’s been a while since you’ve reviewed your plan design, costs and service agreement, it’s time to evaluate your 401(k) Plan! I can provide a free assessment of your plan design and expenses and report back what could be a huge improvement and big savings! Find out how much money we can potentially save your business and your employees while improving service! Click here to schedule your free 401K Plan Assessment Conversation. The call will only take a few minutes of your time. So, what do you have to lose?