Creating or revamping your company’s retirement package can be a daunting task—and one that should not be taken lightly. With so many moving parts and a variety of fiduciary liability factors to consider, many businesses don’t know where to begin. Below are three steps you can take to properly construct a package that helps you retain talent and put your employees on track for retirement while protecting the business fiduciarily.
1) Hire a fiduciary advisor who is an expert in the 401k/defined contribution space
When we work with prospective 401k clients, we often come across existing plans that are being overcharged—and have been for years—with little service from the advisor/broker of record. The fact is, the company owner and/or CFO may be unaware that their advisor may not be acting as a fiduciary, and therefore may not have their best interest in mind. For that reason, a critical first step is to choose an advisor who can act in what is called a 3(38) fiduciary capacity. In other words, one who will be your company’s quarterback.
Additionally, most owners, CFOs and/or HR directors don’t have time to properly analyze the many nuances of the 401k market—from recordkeeper platforms to fund menus to technology and more. That is why your advisor should also be an expert in the field—someone who can guide you through the process of selecting a recordkeeper and administrator, and help to construct a fund menu.
Ideally, your advisor will also educate your employees to ensure they have a visible path to retirement by both guiding them on how to properly save and helping them invest with the correct allocation to fit their specific needs. They should also offer easy access retirement planning technology that helps employees plan for the future.
2) Select a 401k recordkeeper and administrator
As mentioned above, your advisor will play a key role in helping you to select the right recordkeeper and administrator for your plan. But there’s a bit more to it than that. Here’s what you need to know:
The recordkeeper: The most important factor to consider here is cost. In the current ERISA/fiduciary environment, most of the big 401k players (Principal, Empower, Voya, Mass Mutual, etc.) all have similar functioning websites and totally open-architecture fund platforms. Partnering with an advisor who can help select a recordkeeper that is competitively priced in your specific plan demographic is imperative. Also, be aware that the use of proprietary funds, stable value and guaranteed accounts can artificially alter plan pricing and create conflicts of interest. This ultimately poses a fiduciary liability to the trustees of the company. Many times costs are hidden in some of these products. The recordkeeper will be able to track those details and more.
The administrator (sometimes called the TPA): Simply put, your plan’s administrator is the firm that does the actuarial work, sends out the necessary notices and fills out the 5500 form. Look for one that provides administrative fiduciary protection, or 3(16) coverage, to further protect against fiduciary liability. It is a common best practice to combine 3(38) and 3(16) coverages to offset the liability on both the investment and the administrative side. Your advisor should ensure a reasonable administrative pricing structure and conduct periodic reviews.
3) Offer a comprehensive fund menu
Many times (more often than we’d like to believe) the fund menus that are being offered to employees at a prospective company are either insanely expensive, offer limited categories or have severely problematic conflicts of interest. The fund options provided by large wirehouse brokerage firms are typically prepackaged menus, which likely means the proper due diligence has not been done and the menus are not being monitored from a fiduciary perspective.
Another common fund menu we see is the fully passive, index fund version being offered by advisors with extremely high fees. Done to artificially lower the plan’s cost and offset the high advisory fees charged to the employees, a fund menu like this is typically a red flag that indicates the advisor does not have expert knowledge in the 401k space and is trying to hide the fact he or she is not competitively priced.
An advisor who acts as a fiduciary should provide a fund menu that has no proprietary options and offers a mix of both active and passive funds, with quarterly fiduciary benchmarking reports to justify each option. This fund menu should also contain a broad array of categories to ensure employees can invest in any particular asset class or sector of their choosing.
The steps outlined here are foundational to building a retirement package that serves the best interest of your employees, while protecting you in the process. If you have any questions or would like more information, we are happy to provide a consultation.
Key Client Fiduciary Advisors, LLC ((“KCFA”) is an SEC-registered investment adviser located in Fairfield, New Jersey. This blog post is limited to the dissemination of general information pertaining to KCFA’s investment advisory services. The information in this blog post should not be construed as personalized individual advice. A copy of our KCFA’s written disclosure statement as set forth on Form ADV, discussing KCFA’s business operations, services and fees is available upon written request.