The retirement plan industry has stressed the need for 401k plan sponsors to understand their fiduciary duties as plan sponsors and the need to address certain tasks.
That campaign has been somewhat successful, yet there are just too many tasks that 401k plan sponsors don’t complete, which put them in harm’s way. This article is about the tasks that plan sponsors should complete, but many don’t.
Reviewing the plan and plan providers
Most 401k plan sponsors hire a plan provider, delegate certain tasks to them and assume it’ all taken care of.
A 401k-plan sponsor is a plan fiduciary and being a plan fiduciary requires the highest duty of care in law and equity, so simply delegating work nothing else is an awful idea.
If a plan provider messes up, it’s the plan sponsor that will still be on the hook for liability. It’s even the case when a plan sponsor hires an ERISA §3(16) plan administrator or an ERISA §3(16) investment manager, because the duty to hire prudent plan providers is still there’s.
It’s important that plan sponsors review their plan and their plan providers to make sure work on the plan is complete and correct.
Too often, plan errors and omissions aren’t discovered by the plan sponsor, but by a government audit or years later when there is a change of plan providers. At that point, it’s much costlier.
An annual review of the plan and the providers will go a long way for the plan sponsor to avoid unexpected compliance costs years later.
Reviewing plan fees
Thanks to fee disclosure regulations that were implemented by the Department of Labor (DOL) in 2012, 401k plan sponsors get fee disclosures from their plan providers to know exactly how much the plan is paying in administrative expenses.
It was a big deal; while plan sponsors have a fiduciary duty to pay only reasonable plan expenses, they had no idea how much the plan was paying in fees until the regs passed.
While sponsors are receiving the fee disclosures, too many either ignore them or throw them out.
They have a fiduciary duty to make sure that the plan provider’s fees are reasonable for the services provided. The only way for a plan sponsor to determine whether their plan’s fees are reasonable is by benchmarking them by selecting bids from competing plan providers or by using some type of benchmarking service.
When I was using a home contractor that was too expensive, that was my fault for not benchmarking their fees.
Fee disclosures are there for a reason and it does the plan sponsor no good if they’re tossed or forgotten.
Getting Fiduciary Liability Insurance
It’s amazing how many plan sponsors and plan providers don’t know about fiduciary liability insurance. Many confuse it with an ERISA bond.
An ERISA bond must be put in place by the plan sponsor to protect the participants from the theft of plan assets by fiduciaries. It offers absolutely no protection to plan fiduciaries who might be sued over the plan which may involve personal liability on a part of a fiduciary.
Fiduciary liability insurance is a protection policy to defend plan fiduciaries from risk and that risk is litigation brought forth against the plan and its fiduciaries.
I once represented a union that sponsored a retirement plan and was sued in a class action over their high fees.
There were over $1 million in litigation expenses, even though my client won. When you get sued and win, you still lose thanks to the high cost of litigation. Thankfully, the union had fiduciary liability insurance, so the union was only responsible for the $100,000 deductible.
It’s imperative that any 401k-plan sponsor buy a fiduciary liability policy to protect plan fiduciaries from the headache and potential damages resulting from litigation.
Hiring an advisor or hiring an advisor that understands 401k plans
Yes, Virginia, there are 401k plans that don’t have a financial advisor on their plan.
I know that firsthand. The law firm I used to work for didn’t have one for 10 years before I joined and told them it was a good idea.
A financial advisor isn’t about selecting mutual funds. The true role of a financial advisor is to minimize a plan’s sponsor liability by helping manage the fiduciary process.
That means developing an investment policy statement (IPS), selecting and replacing investments based on that IPS, frequent visits with the plan fiduciaries to review the fiduciary process, and educating plan participants so that they can make sound investment decisions.
It’s not only important for the plan sponsor to hire an investment advisor, but it’s also important that they hire an investment advisor that is well experienced with 401k plans.
There are a lot of good financial advisors out there that are an ill fit to handle 401k plans because they have no knowledge of how to handle these plans. A good 401k financial advisor isn’t someone who simply dabbles in 401k plans.
Plan sponsors need someone with some knowledge about the fiduciary process, the need to hire quality third-party administrators (TPAs) and an advisor who understands that picking mutual funds for the 401k plan is just a small portion of what it takes.
Understanding what the TPA does
I always think that if 401k plan sponsors would understand the role of the TPA and their part in keeping plan sponsors out of trouble, they would be a little more careful in who they select.
TPAs are responsible for compliance testing, plan accounting, reconciliation of trades, tax reporting, and other important plan functions.
When something goes wrong with a 401k plan, most of the time it’s the TPA’s fault because of the nature of their role.
Unfortunately, most 401k plan sponsors and many of their financial advisors only see a TPA as a pricing point, so they pick a TPA based just on whether they fit the price they pegged for them.
It’s important for plan sponsors to understand that a good TPA will make fewer compliance errors and afford better utilization of employer contributions through plan design.
People don’t pick doctors based on price, and neither should plan sponsors when selecting TPAs.
Asking employees about the 401k plan
Too many plan sponsors forget that a 401k plan is an employee benefit.
Like health insurance and the holiday party, a 401k plan is an employee benefit that was implemented in order to recruit and retain employees.
Yet most employers/plan sponsors don’t bother to talk to their employees about the 401k plan after they’ve established it.
Constant communication with employees about their experiences with the 401k plan is a great tool to determine whether changes to the plan and changes to the plan providers should be made.
An employer can be a great plan sponsor by talking to plan participants and getting their input, whether they are happy or critical of the plan.
I think giving plan participants either an input or outlet to air their opinions about the plan can go a long way in improving participant satisfaction, as well as increasing participation. Ignoring plan participants and their needs aren’t going to improve the 401k plan.
Ary Rosenbaum is an author and ERISA/retirement plan attorney for his firm, The Rosenbaum Law Firm P.C.
He is also the host of That 401(k) Conference, a fun and informative retirement plan conference taking place at Dodger Stadium in Los Angeles on Friday, February 22, 2019, from 9:00 am to 2:00 pm. Special guest: Steve Garvey.
Rosenbaum’s latest book, humbly titled “The Greatest 401(k) Book Sequel Ever,” is available in Kindle and paperback at Amazon.com.