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 gets little proper coverage is 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 complex, 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 of 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 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 analyzed a plan 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.
Who is the Actual Fiduciary?
Most employers think their responsibility pretty much ends when the plan is set up. They assume that their only other responsibility is to get withholdings from the employees’ paychecks into their 401k accounts (which if you are using a payroll company like ADP or Paychex is done by them).
They also may think that the employees are completely responsible for the investment selection. And that the investment company is responsible for providing education and a good investment lineup.
Unfortunately, nothing could be further from the truth. An employer’s responsibility to the employees as it relates to the 401k plan is actually quite serious…and scary.
According to the Department of Labor, an employer’s responsibility rises to the level of what they refer to as a “fiduciary”. This term over the last 5 years has slowly crept its way into the lexicon of the employee benefits space. There is real confusion about its meaning and who is the actual fiduciary of a 401k plan.
In lay terms, a fiduciary is someone who is in charge of another person’s financial affairs and is held by law to act with the utmost good faith and carry out their duties in an expert fashion.
When it comes to determining who the 401k plan fiduciary is, look no further than the owner in most small companies. Larger companies may name a CFO or another higher-level person, but most often it’s the owner of the company. Rarely, if ever, is it the investment company or the investment advisor as most employers either think or are led to believe.
Your Fiduciary Responsibility
So now that you know that you, as the business owner, are the plan’s fiduciary, what are your duties? You need to make sure:
- That the fees in the plan are reasonable
- The investments offered cover a broad number of asset classes
- That your employees receive enough education to be able to make good decisions
With this better understanding of your obligations, remember that you have to carry out these obligations in a fiduciary capacity.
Think of it this way. If the Department of Labor audits your plan tomorrow, can you PROVE to them that you are managing your responsibilities?
The Department of Labor has a lot of information on their website about Meeting Your Fiduciary Responsibilities. These 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
But the best solution is to hire a fiduciary to run the plan for you. These experts are out there and often more than pay for themselves by negotiating lower fees with the investment providers. If you’re not an expert running your 401k plan, simply hire someone who is.
What’s the risk of not doing so?
You can be held personally responsible for the shortcomings of your plan.
The corporate veil does not protect you from your fiduciary responsibility.
We live in a litigious society, unfortunately. Individual employees may be quick to sue employers. There are certain types of lawyers who may actually fish for class action lawsuit potential from groups of disgruntled employees. This can happen in large and small companies alike.
Get Help from a Fiduciary who Understands the Process
My concern lies with smaller companies who may not have the financial wherewithal to defend themselves and may not be aware their general business liability policy could be completely insufficient.
- Getting insight and assistance with your 401k plan process
- Obtaining fiduciary responsibility insurance
- Understanding your responsibilities as fiduciary for a 401k plan
If after reviewing your responsibilities, you are not able to administer your 401(k) plan properly, then you should consider finding an expert who can administer the plan for you. There are people available who can take over certain fiduciary responsibilities. They can often save you enough money by reducing plan fees to pay for their services (and more). At the same time, they can ensure your plan is DOL compliant, increasing employee satisfaction.
Robert (Bob) Gustafson is a serial entrepreneur and has been involved in the financial services industry for more than 25 years. Bob started Triton Business Advisors after seeing a need for ethical consulting and advisory services for small business owners. Most of these owners didn’t have access to the type of resources they could trust. Triton Business Advisors offers the same type of services that larger management consulting firms offer targeted at the needs of the small business.
