With over 20 years of experience in the 401(k) industry, we’ve seen a lot of new ideas and innovations. The one that seems to be constantly evolving and improving is the delivery of participant education.

In the 90’s, if participants were provided a website where they could view their balance and make a fund change, you were doing well. As time progressed, so did the functionality of the record keeper websites. Now online loans and enrollment, financial modeling and forecasting, one-click rebalancing, and improved personal rate of return information have become standard for most vendors today.

As the industry’s knowledge of behavioral finance increases, technology adapts right along with it. This has allowed vendors to create websites that are tailored to participants who are much more willing to do things online than generations past. This would include the development of smartphone apps and social media.

But does the increased functionality of a vendor’s website correlate to better participation rates and higher deferral rates? The jury seems to still be out on that one, but there are some encouraging signs. When participants do actually visit a vendor’s website or use the mobile app and it’s easy-to-navigate and implement instructions, engagement is high. The problem is getting people to actually visit the website or use the app. This has been the struggle since the beginning of the industry — getting participants to actively engage.

If you surveyed most 401(k) record keepers, you would find that the percentage of participants who actually visit the website and click beyond the first page is fairly low — likely between 20% and 30% and in some cases lower. This has nothing to do with the power or functionality of the website and everything to do with participant inertia. A large percentage of participants will simply not engage regardless of how amazing a website’s functionality is.

In our experience, the best way to engage with the majority of participants is face-to-face. If you can meet with them in a group or one-on-one setting and encourage them to make a decision—either the decision to enroll, to raise their deferral percentage or properly allocate their investments—the effectiveness of the 401(k) plan goes up. For most employees, once you meet with them in person and get them to respond in a positive manner, that inertia can work in their favor.

The continuing evolution of technology is a good thing. And as more participants become familiar with the vendor’s technology, perhaps we will see higher utilization of these tools. However, it’s still hard to replace the effectiveness of human interaction.

Are the 401(k) or retirement plan benefits you offer to your employees appreciated? Maybe more importantly, do your employees fully understand the benefits you offer? In many cases, the answer to the first question is largely dependent on the answer to the second. How can they fully appreciate the benefits you offer if they don’t truly understand them?

Educating your employees about their benefits, specifically retirement benefits, is critical if you have any hope of creating a workforce that is Retirement Ready. So who is responsible for leading these education efforts? Well, that all depends upon the service providers you work with. Some 401(k) plan advisors only interface with the plan committee and leave all of the participant education to the record keeper or TPA. Other advisors are more hands-on and provide in person enrollment and education sessions themselves. There isn’t a right or wrong way to approach it, but if you rely on the record keeper or TPA to educate your employees, you need to make sure you are aware of what they can and cannot do for your employees.

Generally, a record keeper or TPA will not be able to provide investment advice. They will provide general information about the plan provisions and the investment platform as well as some basic investment information. As the plan sponsor, you need to make sure that the message they are communicating about the benefits you offer is adequately covered.

If you want your employees to have access to investment advice, then you will either need to engage a fee-based advisor that can deliver those services, or incorporate some type of add-on advice solution offered by many record keepers. Keep in mind that these add-on services are usually somewhat cookie-cutter and often come with an additional cost.

Ultimately, if you want to make sure your employees are getting the right message, you need to interview your current service providers and document what they will and will not provide. The outcome of that discussion may necessitate switching record keepers or hiring a specialist, fee-based advisor that can best support your plan’s needs.

The active versus passive investment philosophy debate has been going on for decades. Certainly there are merits to both strategies, but rather than argue the pros and cons for each side let’s instead focus on how low-cost funds can be used regardless of which strategy is employed.

Too often when we look at a prospective client’s 401(k) fund menu, we see a list of expensive funds loaded with 12(b)-1 fees and other forms of revenue sharing. Or, in the case of an insurance platform group annuity product, we see expensive sub account investments with additional layers of cost. This can be indicative of several things. The plan might have an advisor who cannot work on a fee basis, and therefore must collect commissions through the use of 12(b)-1 fees. It might also mean that the plan fund menu has not been reviewed in a number of years. Either way, one thing is for sure — those high cost funds can be preventing your employees from saving enough for retirement. Studies have shown that even a .50% reduction in investment costs can add tens of thousands of dollars to your employees’ account balance over time.

Again, this is not an argument for or against an active or passive investment philosophy. It is certainly possible to design an entire menu of actively managed funds that are relatively inexpensive, and outperform the index net of fees, by using the institutional share class. Most of the time, 12(b)-1 fees and other revenue-sharing are stripped out. Unfortunately, many plan sponsors are unaware that other share classes of these funds even exist.

Not only do these higher fees have an impact on your employees’ ability to save for retirement, but when your advisor is paid through commissions instead of fees, it can impact their ability to deliver unbiased, conflict-free advice to your participants. In addition, it can hinder their ability to act in a fiduciary capacity. One of a plan fiduciary’s primary responsibilities is to understand all of the fees associated with their company’s 401(k) plan, including investment costs. It is crucial to have an independent, unbiased analysis performed on your plans’ investments so that you can ensure you are meeting your fiduciary obligations. And by lowering the cost of the plan’s investments you can provide your employees with a much better vehicle for saving for retirement.

So, regardless of whether your plan employs an active or passive investment philosophy — or a combination of both — it is crucial to make sure that the plan is using the lowest cost share class available.

Most 401(k) Plan sponsors expect their advisor to be an investment expert. That’s why they hire them, right?

Oftentimes, though, sponsors turn to generalist advisors (advisors that do not specialize in 401(k) plans) who pitch their investment skills as the reason you should hire them. The decision to off-load some of the liability for selecting and monitoring plan investments is a prudent one, and can certainly improve your plan outcomes, but when it comes to engaging with an advisor to work with your retirement plan, is a one-trick pony the best solution?

While investments are a crucial component of your company’s 401(k) plan, the best investments in the world may not be able to overcome a poorly designed plan. Admittedly, plan design is generally the responsibility of the record keeper or Third Party Administrator (TPA), but a specialist advisor can be invaluable in helping you choose the best design options that fit you and your employees best.

During the interview process with a potential client, we like to find out exactly what the client hopes to accomplish with their 401(k) plan. Some of the areas we discuss are:

• Are your goals for the 401(k) plan the same now as they were when you set it up?
• Are the company’s owners/key people able to defer as much income as they want?
• Are there issues with failed discrimination tests or refunds to highly compensated employees (HCEs)?
• Is the plan’s participation rate where you want it to be?
• Should you include loans in your plan?
• What percentage of your employees are truly Retirement Ready?

The answers to these questions will help determine if there are any design changes that should be made in order to accomplish your goals for the plan. A quality, specialist advisor should be able to intelligently present multiple design options in order to make sure your 401(k) plan is as successful as it can be.

No one likes to go through an audit. The process is tedious and a significant interference to both your life and your business operations.

Yet, whether it’s a personal tax audit or a Department of Labor (DOL) audit on your company’s 401(k) plan, there is one key to lessening the impact of the audit process — preparation.

One of the primary functions a qualified 401(k) plan advisor should perform is making sure each client is prepared for an audit when the time comes. And, like being called for jury duty, you should expect your time to eventually come.

In fiscal year 2013, over 70% of the 3,677 401(k) plans audited by the DOL were found to have some kind of a violation that lead to a fine. Not only were there fines levied, but a number of officers or directors from these companies were indicted for fiduciary breaches. Many of these violations are easily preventable if you surround yourself with qualified experts who provide sound advice.

One of the primary triggers for a DOL audit is an employee complaint. Therefore, one of the most basic things you can do to prevent an audit is to make sure you respond to employee requests about the plan in an expedient manner. The second most common trigger for an audit is an issue or error found on the Form 5500. Working with a quality record keeper or TPA (third-party administrator) is extremely helpful to prevent these kinds of mistakes.

Generally, if your plan is going to be audited by the DOL, they will be looking for some very specific things that tell them whether or not you and your plan committee are fulfilling your fiduciary obligations. Some of these items may include:

• Operation of your plan in accordance with the plan document
• Submitting payroll contributions in a timely manner
• Compliance with 408(b)(2) fee disclosure regulations
• Avoidance of prohibited transactions
• Following the terms of the plan’s Investment Policy Statement (IPS)
• Keeping detailed minutes of plan committee meetings
• Following the plan’s definition of compensation
• Ensuring that no eligible employees are being excluded

All of the above issues are easily fixed and controlled. And, ideally, you want to make sure you are doing each of them correctly before an audit is called. A specialist advisor who is experienced working with 401(k) plans can help identify red flags that might trigger an audit or lead to a fine or fiduciary breach. The cost of non-compliance is high, and hiring a 3(38) Fiduciary can help ensure you and your plan stay on the DOL’s good side.

A competent advisor should be able to provide their plan sponsor clients with a detailed explanation of all revenue that is earned by their record keeper or service provider. Though this might seem obvious, especially in light of the 408(b)2 fee disclosure regulations enacted in 2012, there are various types of fees and revenue streams that often go unnoticed by employers. One of the more prominent is revenue derived from Stable Value Funds.

Many 401(k) plans today have stable value funds as an investment option, especially if your service provider is an insurance company. What many plan sponsors don’t understand is the structure of these stable value funds and the revenue they provide to the insurance company. Typically, stable value funds are categorized as either General Account Products or Separate Account Products.

The more common yet least transparent are general account products, which are stable value funds (or, guaranteed investment contracts) that invest their assets in the general operating account of the issuing insurance company. These are sometimes also referred to as “spread products” and operate similarly to a bank CD.

When you invest in a CD, you generally don’t pay any explicit fees. You give the bank your money, and they pay you a return on those assets. For instance, if the bank is paying you 1% on your CD, what do you think they make on that money? The easy answer is, “more than 1%.” So, even though they don’t charge explicit fees, they are making money on your money by lending it out or otherwise investing it.

General account stable value funds function very much the same way. The money that participants invest into that stable value fund through their company’s 401(k) plan is then used by the issuing insurance company to make other investments. And, even though the stable value fund may have an explicit expense ratio, the insurance company makes substantially more on those assets than the stated expense. They will then credit the participants with a stated return below what they make on the assets. This is called the “spread.” Many insurance company general accounts earn 5% or more, and for the most part, they are not required to disclose that profit or revenue.

This practice is neither illegal nor unethical. In fact, it is one of the primary ways that insurance companies make their revenue. However, most plan sponsors are completely unaware of the amount of revenue these funds generate for the insurance company. If that insurance company is also your record keeper/TPA, do they have a vested interest in making sure that their stable value fund is part of your plan’s investment menu? Of course they do. And, some providers will even require the use of their stable value fund in the fund menu.

This is when a potential conflict of interest can emerge.

Imagine if your company’s 401(k) plan has $40 million in total assets, and 25% of those assets are in the stable value fund. That means $10 million of your investment is generating upwards of $500,000 in revenue for the insurance company. Some insurance companies will even dial up and down the stated yield on the stable value fund on a plan-by-plan basis depending on the profitability of the plan.

And since the recordkeeping and administration of 401(k) plans has become such a low-margin business, the use of these stable value funds has proliferated.

Certainly there are times when such funds can be a valuable option within your 401(k) plan menu, but as a plan fiduciary, you should absolutely be aware of the revenue created by these funds for your record keeper. If there are any doubts, seek input from a competent advisor with experience in the 401(k) industry for guidance when it comes to the selection and monitoring of these types of investments.

If you are a business owner or executive who has decision-making authority over an employee benefit plan, then you are considered a ‘fiduciary’ under the Employee Retirement Income and Security Act of 1974 (ERISA). However, ERISA does not require a fiduciary to carry Fiduciary Liability Insurance. So, the question looms – should you have such insurance?

As a fiduciary, your personal assets are at risk in the event of a fiduciary breach, and you can be subject to fines, penalties and/or lawsuits. Thus, the straightforward answer is — yes, it is certainly prudent to protect yourself from such an occurrence.

Many business owners, however, mistakenly think that a fidelity bond (which is required by ERISA) will cover them in the event of a breach or lawsuit. Unfortunately, that is not the case. A fidelity bond protects the plan assets due to theft or dishonesty; it does not protect the fiduciary.

The minimum amount of coverage required for an ERISA fidelity bond per fiduciary is 10% of plan assets, with a minimum bond of $1,000. The maximum bond amount is $500,000, unless there is company stock in the plan, in which case the maximum is $1 million.

In contrast, Fiduciary Liability Insurance covers the individual fiduciaries in the event of a lawsuit or breach. Such policies can cover paying for your defense or any judgments, fines and penalties.

Fiduciaries should also be aware that lawsuits may be brought against them by a number of parties:  plan participants, participants’ estates, the Department of Labor (DOL), or the Pension Benefit Guaranty Corporation (PBGC).

And the reasons for such a lawsuit are even more varied:

• Lack of diversified investments
• Imprudent investment options
• Improper handling of plan assets
• Lack of oversight of service providers
• Negligence in administration of the plan
• Conflicts of interest relating to the investments
• Failure to follow the plan document

According to Towers Perrin¹, the average defense cost for this type of breach is $365,000, and the cases are resolved for the plaintiffs 69% of the time. If you are covered with D&O (Directors and Officers) insurance, you should check the provisions to see if claims relating to an ERISA plan are excluded.

Maintaining a qualified employee benefit plan carries with it a significant amount of responsibility. And with that responsibility there is potential liability. Don’t leave yourself uncovered. If you are unsure what your responsibilities are, or if you are unsure if you have exposure or not, speak with a qualified fiduciary advisor that can guide you through these discussions.

¹Towers Perrin Tillinghast Survey

An Investment Policy Statement (IPS) is a critical piece of documentation for your company’s 401(k) plan. Although not required under the Employee Retirement Income Security Act (ERISA), it is strongly recommended that each employer operating a 401(k) plan have an IPS in place.

A well-written IPS can protect plan fiduciaries by providing explicit guidelines to follow for operating the plan. Think of it as a strategic business plan for your 401(k) that guides the plan fiduciaries through their process of selecting and monitoring investments, as well as defining fiduciary roles and responsibilities. This would include:

• Initial selection criteria—risk, return, style analysis, correlation, etc.
• Identification of asset classes to be used in the plan
• Performance benchmarks
• Process for removal/replacement of investments
• Identification of fiduciary roles and committee members
• Objectives of the plan
• Evaluation of plan fees and revenue sharing

Many employers we talk with either do not have an IPS, or they have one that is terribly out-of-date and not reflective of the current state of the plan.

One of the most recent high-profile court cases involving 401(k) plans, Tussey vs. ABB Inc., demonstrated just how important it is to follow the plan’s IPS. This case generally revolved around plan fees and revenue sharing.

The plan’s IPS stated, among other things, that…

• Revenue sharing would be used to offset plan fees
• A fund’s 3- and 5-year performance should be judged to determine if the fund was to be replaced, and
• That the plan would select share classes with the lowest cost to the participant

The court found that the criteria stated above were not followed and, as a result, ABB was ordered to pay a substantial fine — over $13 million. Several appeals have been filed regarding this case, but the potential for penalty is apparent.

The ABB 401(k) plan is a sizeable one, with over $1 billion in assets. You would think a plan of this size would have a very sophisticated plan committee and enough oversight to avoid these types of breaches. So, it should come as no surprise that many of the smaller companies we talk to generally have no idea how the investments in their 401(k) menu were initially selected.

This is one area of plan oversight and governance that you do not want to leave to chance. If you don’t have an IPS, or the one you have is not current, or not being followed, it would be well worth your time to discuss the matter with a competent third party expert or investment advisor. Outsourcing this function to a 3(38) fiduciary can benefit the plan committee and the plan participants.

As a plan fiduciary under ERISA (Employee Retirement Income Security Act), you have certain obligations you must uphold. One of those is to avoid conflicts of interest with regards to the 401(k) plan.

On the Department of Labor (DOL) website, it is stated this way: “(plan fiduciaries) may not engage in transactions on behalf of the plan that benefit parties related to the plan, such as other fiduciaries, services providers or the plan sponsor.”

So, what are some of these conflicts of interests the DOL is warning against?

Imagine you work with a bank to handle all of your commercial lending. And suppose that same bank approaches you and says something like, “We sure got you a sweet deal on that loan. Great interest rate, too. I really had to go to bat for you to get that rate. You know, we could take care of your 401(k) plan also. It would really help ensure that you maintain preferred status.”

Or, if the company that handles your payroll tells you they can drop their fees on the payroll services if you let them handle your 401(k) plan? Perhaps the record keeper you use strongly encourages you to use their own name-brand funds or Target Date portfolios because it will lower your fees. Does your 401(k) plan broker/advisor receive different amounts of commissions based on the funds/investments they recommend?

If you apply the test used by the DOL above, and any of these situations benefit other parties — like the bank, the payroll company, the record keeper or the broker — then there is a potential conflict of interest.

Don’t get me wrong — working with your bank or your payroll provider is not by itself a conflict of interest. It’s how that process is handled that requires monitoring. Making a decision about the plan assets or choosing a service provider should be handled on a stand-alone basis. Evaluating plan fees and investments should be conducted independently of any kind of business relationship. After you do your due-diligence, you may find that your bank or payroll provider provides the best service at a reasonable fee. If so, proceed as you like, but be sure to document the research in your fiduciary file.

As for proprietary funds, I encourage you to read this article on our website to better understand how to navigate those investments — Does Your 401k Plan Contain Proprietary Investments?

In the end, successfully preventing conflicts of interest is directly related to how seriously you regard your role as a plan fiduciary. Engaging with quality service providers that specialize in the 401(k) industry can help ensure that these, or any other conflicts, are avoided.

There are many reasons companies implement a 401(k) plan:

• To benefit the owners
• To attract and retain high-caliber employees
• Because it’s the right thing to do

All are valid justifications, but the most important reason is to make sure your employees are prepared for a successful retirement. If that is not your motivation, you may need to re-think your priorities. Ensuring that your employees are retirement ready certainly benefits the individual employees, but can also have a significant and positive impact on the company, as well. Here’s how.

When your employees come to work each day, many bring with them lots of baggage. Perhaps an employee has family issues, or someone cut them off in traffic on the way to work, or they are just not having a good day. These can all have a negative effect on productivity. But one of the most distracting issues for employees is financial stress. Unfortunately, many people still live paycheck-to-paycheck. They may be behind on their bills, or struggling to make the mortgage payment. Add to that the uncertainty of whether they will ever be able to retire or not, and you have very distracted and stressed employees. According to a 2013 study conducted by the Employee Benefit Research Institute (EBRI), 6 out of 10 baby boomers feel unprepared for retirement.

These issues can significantly diminish morale and productivity, which, in turn, affects the bottom line. Additionally, if your employees are not adequately prepared for retirement, they tend to work longer resulting in an older employee population that yields dramatically increased healthcare costs.

Annual healthcare costs for a 65-year-old worker can be twice those of an employee between 45 and 54 years of age¹. And if older workers are not retiring, it can create a lack of advancement opportunities for the younger population.

So, how do you avoid these issues and make sure your employees are Retirement Ready?

Most importantly you need to make sure that your current advisor is helping you address this need. Unfortunately, many advisors just work with the plan committee and farm everything else out to the record keeper. Most record keepers have great online tools and targeted marketing campaigns to assist with this, but you have to have an advisor that is committed to helping you and your employees bridge the Retirement Readiness gap. Working with a 3(38) Fiduciary is the best way to rest assured that your advisor is providing personalized advice to each employee.

You may not be able to control the traffic jams your employees encounter on the way to the office, but you can absolutely take steps to help them retire with dignity.

1. ”What Employers Lose in the Shift from Defined Benefit to Defined Contribution Plans…And how to get it back”  Prudential Retirement, 2011