Retirement Plans

FAQs: Retirement Plan Guide

A 401K Plan provides a valuable employee benefit as well as a strong talent retention tool for your business. However, you as Employer/Plan Sponsor have fiduciary responsibilities to manage. You can outsource some of these duties. However, you’ll always retain fiduciary responsibility in selecting and monitoring providers. Understanding the ERISA mandates (see the page under the Business Owner menu) is the first step toward being compliant with fiduciary guidelines. This list of questions here will increase your awareness of vital 401k Plan management issues, so you can operate with confidence and in compliance.

See the Glossary of Key Terms below

Q: How do you know if you are in compliance with ERISA’s Mandates?

The Courts and the DOL have spoken very clearly: Employer/Plan Sponsors can’t rely solely on the experts you hire. The Tibble vs Edison Supreme Court case made it clear that you need to be able to question the experts methods and assumptions. You have a range of fiduciary responsibilities. Employers can outsource different functions, however, you need to have a process to select plan service providers and monitor plan activity. Plan costs must be “reasonable” – what are the “all-in” fees? How do you benchmark and rationalize fees and services?

Q: Do you fully understand your roles, responsibilities, and liabilities as Employer/Plan Sponsor?

You have multiple fiduciary responsibilities: administer, select, monitor, interpret, investment – each carry different risk levels. It’s not ALL or NONE. Investment related liability can create personal liability, and is the biggest expense in the Plan and logically creates the biggest potential for liability. Would you rather “transfer” or “share” this risk? A 3 (21) fiduciary “shares” investment risk with you; the ultimate authority and liability is with you. A 3 (38) fiduciary offers ERISA’s highest standard of care which “transfers” investment risk away from you to the investment professional. According to a Plan Sponsor Magazine survey, less than 20% of advisers offer employers this important protection. Why wouldn’t the investment professional be ready, willing, and able to take on this responsibility? 

Q: Do you think hiring a brand name provider ensures your liability is covered?

Big brands have name recognition, and they also have business models that may conflict with plan goals and increase your risk (see our white paper for a review of court cases). Clever marketing creates confusion and may leave you more exposed than you believe. “Fiduciary assistance” and ” “fiduciary warantee” are overused, underdefined terms, which may have little, if any, legal standing. Read and understand your advisory agreements fully. Don’t tolerate ambiguity. Ask your adviser if they will serve as a 3 (38) investment manger in writing. Be sure it’s clearly stated in writing!

Three Questions to Ask Your Plan Provider/Adviser
  1. Are you serving as a 3 (38) fiduciary? 
  2. Will you accept that status in writing with a clear written description of fees and services covered? 
  3. Which fiduciary duties do I, as Plan Sponsor, still retain? 

Q: What is your current adviser doing to educate you and your employees, limit your liability, and minimize your risk?

Advisers and plan providers with educational programs, open investment fund architecture, and transparent business models will simplify your duties, contain costs, and reduce your risk. Value is a function of services rendered, “all-in fees,” and helping you to remain compliant. Cheapest isn’t always the best option. However, you must understand the compensation structure, methods, and assumptions of the providers so can adequately gauge if your Plan participants are getting “reasonable” value.

Q: Do you have a process to determine reasonable value?

Do you have one in place? Is it a good process? How do you know? How do you monitor plan activity? A written Investment Policy Statement (IPS) governs plan roles and responsibilities and gives you a measurement tool to document all investment related plan activities. A good adviser will help you implement processe where needed and work through issues with you and the third-party-adminstrator so you can be confident you are operating the plan in compliance with DOL and IRS guideline.

Glossary of Key 401k & ERISA Related Terms:

  1. Employee Retirement Income Security Act of 1974 (ERISA): is a federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans.
  2. Department of Labor (DOL): administers and enforces workplace activities for about 10 million employers and 125 million workers. ERISA regulates employers who offer pension or welfare benefit plans for their employees. Title I of ERISA is administered by the Employee Benefits Security Administration (EBSA) and imposes a wide range of fiduciary, disclosure and reporting requirements on fiduciaries of pension and welfare benefit plans and on others having dealings with these plans.
  3. Fiduciary: in 401K Plan context, refers to the roles and the legal obligations to put plan participant interests first.
  4. Named Fiduciary: generally this refers to the Plan Sponsor/Employer who has overall responsibility for the Plan. Since many employers are not investment professionals, ERISA guidelines consider it prudent to select outside service providers.
  5. 3 (21) ERISA Adviser: a shared responsibility between you as Plan Sponsor/Employer and an investment service provider. The risk is “shared” but the ultimate authority, responsibility, and liability is with you as Plan Sponsor/Employer.
  6. 3 (38) ERISA Investment Manager: affords you as Plan Sponsor/Employer the highest standard of care under ERISA law; effectively transfers investment liability away from you as Plan Sponsor/Employer to the investment professional.
  7. Fees and Expenses: can be very complex; disclosure is not always as clean as it could be. Non-explicit fees like soft-dollars, sub-transfer agent fees, and 12b-1 fees, can be hard to detect. However, it’s your duty to monitor them.
  8. Indirect Fees vs. Direct Fees: fees fall into three general buckets: Plan Administration, Investment, and Individual Services. There is no standard format. Some providers “bundle”, some “unbundle”, some do a mixture of both. Fees can be paid from investment returns, the employer, or from plan assets. This complexity leads some Sponsors and participants to think the Plan is “free.” Not so. Hidden costs can be substantial, which is why the DOL has made fee disclosure mandatory since 2012. As you’ll see, “all-in” Plan costs can vary drastically and have very real consequences for long-term retirement goals.
  9. Revenue Sharing: is the practice of adding additional non-investment related fees to the expense ratio of a mutual fund. These additional fees are then paid out to various service providers – usually unrelated to the fund company managing the fund. Mutual fund returns are reported net of fees, so the money collected from investors and paid out to other parties is not explicitly reported to investors, it simply reduces the net investment return of the fund. Because investors don’t see the fees being deducted, the true cost of the fees charged is often overlooked when calculating the total cost of plan services.

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