If you are a 401(k) plan trustee or plan administrator, you may want to take a good, hard look at your company’s retirement plan. It very well may be creating a liability for the business.
In recent years, the Department of Labor (DOL) and ERISA have started cracking down on retirement plans, placing more burden on plan sponsors to act in the best interest of plan participants. The fact is, most private pensions are gone—and without being able to rely on Social Security, most Americans do not have enough saved for retirement. As a result, the entire qualified plan industry has become more scrutinized by regulators, hence the more stringent regulations.
According to recent industry surveys, 95% of all retirement plans under $20M in assets have not been reviewed in at least five years, and 40% of plan sponsors admit they have not made a single change to their plan since it was first put in place. If you fall into one or both of these categories, you’re exposing your business to potential lawsuits.
Let’s face it, most 401(k) plans (particularly those of small businesses) were traditionally put in place and left alone. Under the new regulations, this ‘set it and forget it’ mentality is not only ineffective, but dangerous. Today, the first obligation of a plan fiduciary is to manage their plan in the participants’ best interest. Failing to do so can create a major liability for plan sponsors and trustees.
So, what can be done to get your plan up to standard? Hire a fiduciary advisor. Notice I did not say “financial” advisor, but rather a “fiduciary” advisor—a critical distinction.
Let me explain.
When a business hires a non-fiduciary advisor to provide investment services, the owners and trustees generally assume the advisor is acting in the company’s best interest and, therefore, is liable for the advice provided. Incorrect! The reality is that most advisors aren’t taking on fiduciary responsibility. In fact, most firms won’t let their advisors act as a fiduciary. If you have a plan that has an added cost to the participants for sub-contracting the fiduciary responsibility, then you’ve likely got an advisor who’s not acting with your best interest in mind.
Frequently, we see plans paying companies like Morningstar, Ibbotson, or Wilshire for a “3(21)” fiduciary service—which is tacked on top of the high fees already being doled out to their advisor. Why would you pay an advisor who is not required to act in your best interest? There’s no clear benefit.Just the opposite, in fact.
A fiduciary advisor, on the other hand, will act on behalf of your company’s best interest. They’ll also create a formal due diligence process for reviewing these services.
Specifically, a fiduciary advisor can help you:
- Identify and move to a lower cost version of mutual funds, resulting in as much as a 20%-30% cost reduction in your plan
- Facilitate the price compression of record-keepers and advisory services, which can save participants up to 50%-60%.
- Eliminate the secondary fiduciary service, trimming costs by up to 5-10%
- Easily access financial planning services online, anytime.
- Educate employees on retirement planning
Perhaps even more importantly, when you hire a fiduciary advisor to handle your retirement plan, you are offsetting the fiduciary liability of overseeing the investment options, providing the employee education and ensuring you’re reviewing the plan pricing annually.
Let’s face it: chances are that your retirement plan isn’t great—but you can change that. At KCFA, we help rehabilitate all types of 401(k) plans. In almost all cases, we can help to reduce costs, improve mutual fund performance and provide more effective education and retirement planning tools for your employees. Feel free to reach out to us if you have not done a full review of your plan or feel that your plan is in need of an upgrade.