When I was dating my wife, she asked about my credit score. I never checked it, but I paid all my bills in full and on time, and so I said it was good.
Of course, when I got a copy of my report, it wasn’t good because an old account opened with my mother had a $17,000 balance, of which I was not aware.
My wife was upset and thought I made an affirmative statement without really knowing the truth.
401k plan sponsors do it all the time; they tell providers and advisors that their plan is okay without having any background information to make such a statement, and it’s a problem.
The bookkeeper (or some other employee) says the plan is okay
Prospective plan providers actively solicit plan sponsors because they want more clients—it’s how they grow. Most plan sponsors don’t want to discuss retirement plans because they’re busy and 401ks are not exactly an exciting topic, despite the responsibility and potential liability.
An owner isn’t always the go-to person for the retirement plan; it might be the human resources director and/or the bookkeeper.
Unless these employees have some retirement plan administration experience, simply saying that the plan is in compliance is insufficient. It’s a stock answer—like when I tell my wife I’m listening but I’m not.
I’m not suggesting the employee is lying—they’re just not necessarily a retirement plan expert.
The plan provider says the plan is okay
Most plan providers are, in fact, very good. Yet bad providers who make compliance mistakes aren’t necessarily going to alert the sponsor to that fact.
As a result, sponsors might not know until it’s too late, meaning an audit has been initiated. The retirement plan providers might have performed the shoddy work, but the plan sponsor is on the liability hook (unless they hire independent ERISA fiduciaries).
One particular business used a TPA for 25 years. They were supposed to be given valuation reports, something they didn’t realize. It would have come in handy when the Department of Labor mistakenly thought the owner was embezzling money.
Plan sponsors, therefore, can’t afford to simply take someone’s word that the plan is in good standing, they need an actual presentation of evidence in case an error is detected.
The plan provider benchmarked the fees
Plan costs are an important issue, one that’s only increased since the implementation of fee disclosure regulations in 2012.
Plan sponsors have a fiduciary duty to pay reasonable plan expenses. The only way to know if they’re reasonable to benchmark against other plan providers. They can certainly have their retirement plan providers benchmark their fees, as long as they use an impartial benchmarking service and provide the actual data to the plan sponsor.
Benchmarking fees by taking the plan provider’s word that their fees are reasonable, or using some biased metric, undermines the plan sponsor’s fiduciary responsibility. Unbiased services like Brightscope, fi360, Fiduciary Benchmarks and others exist.
The Plan is audited
Sponsors may claim a 401k plan is in good standing because auditors didn’t raise red flags (a requirement for Form 5500 for plans with more than 100 participants). It’s like saying I’m healthy because I went to the dentist. A dentist only checks the mouth; there’s a whole lot more than my mouth that can kill me.
Retirement plan sponsors think an audit is a checkup and review of the plan’s operation, but it really isn’t. The purpose of a 401k audit is to render an opinion on the financial health of the plan to pay out benefits.
During the audit, procedures are performed to ensure that the 401k plan is in compliance with both government regulations and requirements specified in the plan documents. It’s a look at the plan, but it’s a cursory look. Many plan errors will still not be discovered, and many auditors don’t take the reasonableness of plan fees into consideration.
While a 401k audit is required for larger plans, it’s a tool to vet the financial health of the plan, but not the overall health.
Only an independent consultant and/or ERISA attorney can fully opine on whether a plan is healthy overall.
The fact is most plan errors that threaten the qualification of a 401k plan are only discovered when there is a change of plan providers or there is an audit performed by with the Internal Revenue Service or the Department of Labor.
The plan provider who caused an error isn’t likely the one to discover it or disclose it. Like with benchmarking, it’s advisable that a 401k plan sponsor hire an independent consultant or an independent ERISA attorney like yours truly.
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Rosenbaum’s latest book, humbly titled “The Greatest 401(k) Book Sequel Ever,” is available in Kindle and paperback at Amazon.com.