Having a 401(k) retirement plan for your employees is both a benefit and a risk. As a benefit, it can certainly help retain employees and minimize costs associated with turnover. But there is also risk involved if the plan is not managed properly. As we start the new year, it is a good time to review your 401(k) plan to ensure a healthy plan that prepares your employees for retirement. Here is a checklist to help you evaluate your retirement plan advisor or determine if it is time to add one to your plan.
1. Fiduciary Protection
Is your plan advisor a fiduciary? If so, do they put it in writing? If your advisor is not taking on fiduciary status, then the primary responsibility and liability for investment selection, monitoring and oversight falls on you, the plan sponsor. Consider hiring an advisor that will take on 3(38) fiduciary status as this provides added protection you need, and allows you to focus on running your business.
2. Interpreting 408(b)2 Notices
You should have received your 408(b)2 fee disclosure notices in 2012. One of the key functions an advisor performs is making sure that you understand all of the notices you received from your covered service providers, and helping you determine if those fees are reasonable for the services you receive.
3. Target Date Funds
Target date funds have undergone significant scrutiny since the market drop in 2008. It is crucial that you as the plan sponsor understand the methodology behind these investment vehicles. If your target date funds are managed by the same company that handles the recordkeeping, then a potential conflict of interest exists. Has your plan advisor walked you through the process of evaluating target date funds? If you have target date funds in your plan that don’t fit your employee population, your participants could be taking on unnecessary risk.
4. Advisor Fees
If you were asked how much your plan advisor charges to service your plan, would you be able to answer the question? Does your advisor charge a fee, or do they receive commissions? Your advisor should be able to share the fee schedule clearly, the structure or formula for how they are calculated, and explain all of the services they provide for those fees.
5. Retirement Ready Participants
If you have good investments and low fees in your 401(k) plan, but your employees are not prepared for retirement, then you don’t have a successful plan. Your plan advisor should meet with your employees, or be available to answer questions beyond the initial enrollment meeting. Many retirement plan participants have questions about investments and how their plan operates. It is crucial that your plan advisor provides some type of ongoing service to ensure that your employees get their questions answered. A 3(38) fiduciary advisor has the ability to meet with every participant, and help design a tailored strategy.
6. Conflicts of Interest
There are many potential conflicts of interest in a retirement plan. Does your investment menu have proprietary funds? Is the bank that handles your business loans also your 401(k) plan advisor? Does your payroll company double as the plan’s record keeper/TPA? These items may or may not be a conflict, but as a fiduciary, it is your duty to make sure any potential conflicts of interest are disclosed. Your plan advisor should assist with this process without any compensation conflicts of interest.
7. Revenue Streams
Many plan sponsors are unaware that their record keeper, TPA, or plan advisor makes any revenue beyond explicit, billable fees. Unfortunately, in the retirement plan industry, there are many ways for fees to be buried or hidden. Additional fees and commissions to your providers can be found in stable value funds, different share classes of mutual funds, finder’s or solicitor’s fees, TPA partnership programs and the list goes on. 408(b)2 was supposed to make this much clearer, but there is still much confusion over this topic. A plan advisor with your company’s and participants’ interest as their only priority, along with experience in the retirement plan industry, can help shed some light on this for you.
8. DOL Audit Ready
The Department of Labor has hired additional employees to audit benefit plans in the coming years. Seventy-five percent of the plans audited in 2011 received fines or penalties. Your plan advisor should have a solid understanding of what the DOL is looking for when they conduct an audit, and help you ensure your plan passes with flying colors.
9. Plan Design
Even though your plan advisor usually handles the investments, it is important they understand the fundamentals of plan design. A well- designed plan can improve participation and make sure that all employees and owners can contribute as much as they desire, up to the maximum allowed.
10. Low-Cost Funds
Regardless of whether a plan advisor believes in an active or passive investment strategy, they should be using the lowest-priced share class available for those funds. Many classes of mutual funds include all sorts of revenue sharing and commissions. It’s important to strip these out so you can see the true investment cost. This also allows you to make more of an apples-to-apples comparison when evaluating overall plan fees and investments.