Offering a 401(k) retirement plan can be one of the most challenging, yet rewarding, decisions an employer can make. Most generally do so to attract and retain new talent. In addition, offering a plan can also add to the benefits for owners and existing employees to save money for retirement.
However, the vast majority of employers are dangerously unaware of the risks and responsibilities associated with serving as their company’s 401(k) plan sponsor. Many company executives incorrectly believe that their 401(k) service provider, the broker, is the 401(k) plan sponsor and that all associated responsibilities reside with them. Nothing could be further from the truth.
What normally happens once the company has made the decision to offer a retirement plan as a benefit is to call an investment advisor that oftentimes the owners may know. Alternatively they may call their payroll company as most now offer 401(k) platforms as part of their software platforms (i.e. Paychex and ADP). The discussion centers on their investment platforms and how easy it is to set up their plan.
But that is only half the story.
The other half of the story which rarely gets covered properly are all the costs associated with the plan and the responsibilities that you, the business owner, have to your employees as defined by the US Department of Labor (DOL). Plan costs can be very high and your responsibilities are complicated, time consuming and riddled with risk.
401(k) plan fees – are you paying too much?
Let’s take a look at costs. I receive many phone calls from small business owners asking me to consult on their plans. What I find in the field is nothing short of alarming.
Few, if any, small companies understand the fee structure of their plan. Although investment providers are now obligated to disclose the fees being charged for the plan, the way it normally is done is very confusing. You get a ten page document loaded with fine print and a bunch of numbers with asterisks next to them that take a considerable amount of time for even the financially astute to make understand. The problem lies in the fact that most business owners are very good at their business or profession but not financially well versed as it relates to discerning this type of financial information.
It is bad enough not to be able to figure out what you are being charged in fees but what’s worse, is that the amount of fees buried in these smaller sized plans are often quite large. For example, I just performed an analysis for a small company in Massachusetts and was able to help them reduce the fees they were being charged to their plan by about 45%. Unfortunately, this situation is not the exception to the rule. In fact, it’s becoming the norm. In fairness, investment companies do need to charge more for smaller 401(k) plans than they do for larger plans because they do not make as much money. But there needs to be a level of reasonableness to costs.
What are the risks associated with being a fiduciary?
Now that you understand the costs associated with smaller 401(k) plans, the next challenge, which potentially is even more of a concern, is that you are being held to a level of a fiduciary to your plan. Most business owners have probably never heard of the term fiduciary, but the term has a very specific meaning to those who are responsible for making financial decisions for others. The DOL says that fiduciaries of a 401(k) plan must:
- Make decisions for the beneficiaries of that plan (employees)
- Do so solely in the best interest of the employees
- Carry out this duty as if they are a prudent expert
Those who willfully or unknowingly fall short of this standard can be held personally liable for such shortcomings.
The big question then becomes who is a fiduciary?
Contrary to popular belief, the fiduciary is generally not the investment provider or the investment advisor. So guess who is left? YOU, the business owner.
What can a business owner do?
The Department of Labor has a lot of information on their website about Meeting Your Fiduciary Responsibilities which can help you understand your responsibilities.
My advice is that you need to put together a written process for each of the following:
- Investment platform selection
- Fee structure to make sure you are only paying reasonable costs
- Investment professional selection
- Investment selection, retention and removal
- Employee education
If after reviewing your responsibilities you feel you are not able to administer your 401(k) plan as a prudent expert then you should seriously consider doing what the DOL says you should in this instance – hire someone who is. There are people available who can take over certain fiduciary responsibilities, often saving you enough money by reducing plan fees to pay for their services (and then some) while at the same time making the plan DOL compliant and increasing employee satisfaction.
Robert (Bob) Gustafson is a Certified Financial Planner® with over 20 years of experience in the securities industry. Bob spends over 100 hours per year in advanced financial education, studying the many facets of the financial industry, including securities, insurance, taxes and other areas that affect your financial portfolio. Find out more at Triton Financial’s website.