By Aaron Osten, Vice President, First Business Trust & Investments
From its humble beginnings more than 40 years ago in the United States Revenue Act of 1978, the 401(k) has become a staple retirement savings plan for many Americans.
Offering a retirement plan to your staff helps attract and retain quality employees and demonstrates your commitment to their financial health. According to a 2018 survey conducted by the Employee Benefits Research Institute, those with a defined contribution (DC) plan are far more likely to be confident in their ability to live comfortably in retirement – four out of five are very or somewhat satisfied with the plan and the investment options available to them. Eight in ten believe income from their DC plan will be a significant source of income in retirement.
Our team regularly works with businesses operating with retirement plans that were set up many years ago, often by an entirely different leadership team, and sometimes by providers who only dabble in retirement plans. Since it can be a stagnant part of your business, it’s a common tendency to assume that your company’s retirement plan is operating as originally intended and with the same efficiency and cost. However, that’s rarely the case. These are some of the most common errors, examples, and ways to fix them.
- Conflicts of interest. Some retirement plan providers offer proprietary funds, and while the cost structure might be appealing at first glance, are you really offering the best funds to your employees? On some platforms, proprietary funds might reduce all-in costs, but the provider is making up those fees from the internal expense ratios. Does the cost savings make up for the potential return on nonproprietary funds? Furthermore, offering proprietary funds might conflict with your Investment Policy Statement and/or your Fee Policy Statement.
- Example: A large insurance provider set up a company’s 401(k) plan, and among the fund mix are proprietary funds owned by the insurance company. This 401(k) provider – the insurance company – is being paid twice. Once on the external expense ratio of the fund and once because it’s also their platform, which is a conflict of interest.
- Prevention: Don’t let the overall cost structure impede you from offering a better fund choice for your employees. It’s in your best interest to have a conflict-free evaluation for recommendation, review, and replacement of the funds in your plan. Work with dedicated retirement plan experts who provide third-party fee benchmarking data, value transparency, and thus a long-term relationship with your business.
- Bearing all the responsibility. Non-discretionary investment advisors will show you problem funds but won’t take action without the plan sponsor sign-off to direct the change. Work with experts who not only identify the fund but take discretion over its replacement. They are being paid as the investment experts — don’t let them pass off the responsibility to the plan sponsor. Review your fiduciary responsibility. As the retirement plan grows, the employer from a fiduciary standpoint is assuming more responsibility than they should be. If they hire a professional plan expert to monitor and provide advice, that provider should elevate their fiduciary responsibility.
- Prevention: Work with a provider offering 3(38) services or is a discretionary trustee. These providers stand by their investment process by sharing in the fiduciary responsibility with you.
- Delayed payroll remittance. If payroll isn’t processed in a timely manner, there’s a cascading effect. Each payroll includes 401(k) contributions and matches, so delayed payroll potentially means that gains or losses in the account aren’t exactly what they should be. If the employer doesn’t make timely employee elective deferral deposits, the failure may constitute both an operational mistake, causing plan disqualification (if the plan specifies a date by which the employer must deposit elective deferrals) and a prohibited transaction.
- Prevention: Some payroll providers offer 180 and/or 360 integration with certain 401(k) providers. Automation helps prevent errors as long as the information is inputted correctly.
- Adoption Agreement concerns. The Adoption Agreement is the foundation of a 401(k) plan and outlines how the plan will act. Plan sponsors often interpret the Adoption Agreement incorrectly. Sometimes the disconnect between the Adoption Agreement and the execution of it is caused by a change in personnel either internally or within the service provider’s business. Whatever the reason, these errors cause critical liability issues, and plan sponsors can be held responsible for them.
- Prevention: The Mandatory Restatement period, which is required for pre-approved, qualified plans, is a perfect opportunity to revisit your Adoption Agreement, among other items. Ask your 401(k) provider to verify that you’re operating according to your plan. You can also invite a third party to review your plan to make sure everything is working correctly and as originally intended. We see too many businesses not taking this chance to thoroughly review the plan properly at this time to make sure it’s correct, is competitive for current market standards, and a good fit for the company and employees. Companies have many priorities, and retirement plans often fall down the list. As a result, companies often pay the restatement fee and move on.
Protecting the interests of your business and your employees is equally as important as offering a plan optimized for them. In a tight labor market, you need every competitive advantage you can leverage to attract high-performing talent. It’s essential to work with experts you trust to represent your best interests.
These are just few of the most common issues with 401(k) plans. Business owners and CFOs often invite us to investigate their existing retirement plans because our dedicated team works with local businesses on their retirement plans all day, every day, and we know what works, and what doesn’t. Let us put our experience to work for you. We offer a complimentary review of your company’s retirement plan benefits. Your plan could be just the right one for you, or if it’s not, let’s fix it to increase the opportunity to gain from it.