Business Owners: Did You Know You Are a Fiduciary?
Employer-sponsored retirement plans — such as 401(k)s or 403(b)s — are one of the primary sources of retirement savings for Americans. If you are an employer who has set up such a plan, you are doing your employees a great service, but you might not be aware of the responsibilities that come with your role as a plan sponsor.
As an employer offering a retirement plan, you are considered to be a fiduciary. Anyone involved in the decision-making process for a plan could (and probably will) become a fiduciary, which legally obligates them to act in the best interest of plan participants. Although they may outsource certain aspects of the plan’s management, employers always retain the fiduciary responsibility to monitor the plan service providers and ensure they are reasonable and appropriate for the plan. Failure to meet fiduciary obligations may result in personal and professional liability for each plan fiduciary.
While a discussion of fiduciary responsibility could be a book in and of itself, you should at least understand how to select and monitor your plan service providers to reduce your potential liability as an employer.
Don’t Make the “Set It and Forget It” Mistake with Your Employees’ 401(k)s
If you’ve set up a 401(k) or a 403(b) for your employees, you might think you can “set it and forget it”, but as the plan grows, you can expect its associated fees to increase as well. This is because many plan fees are tied to the market value of the plan’s assets. The larger the account balance, the larger the fee (in dollars and cents) charged to it.
If you aren’t monitoring the plan’s service providers to ensure the fees you’re paying are competitive, your employees can suffer a significant long-term impact on their account balances. After all, excessive fees hinder account growth, directly impacting an employee’s “paycheck” in retirement.
While fees are a vital part of a plan review, it is important to keep in mind that cheaper isn’t always better. The fees simply need to be reasonable for the services provided.
A provider review and fee evaluation can be a daunting task given the confusing nature of vendor compensation structures and disclosures. Without proper training and guidance, it can be nearly impossible to accurately evaluate plan vendors.
Reviewing Your Plan
The key to a proper plan review is documentation.
Documentation should prove a process was followed and explain how decisions were made. Effective documentation reduces liability exposure for plan fiduciaries and can lead to improvements on the existing plan.
The first step in reviewing your company’s existing retirement plan is to re-evaluate the objectives for the plan by answering two questions:
1. Have your goals shifted?
Your initial goal may have been to offer a plan without breaking the company budget. Now that you’ve done so, your new goal might be to keep employees happy and reward their hard work. This may involve offering an employer contribution, providing access to financial advice, or offering more flexibility in plan rules.
Common employer goals include the following:
- Recruiting new talent
- Retaining existing employees
- Helping employees prepare for retirement
- Rewarding employees
- Tying employee bonuses to company profitability
- Maximizing contributions for owners/key executives
- Saving on taxes
2. What changes would your employees like to see?
Your employees know what’s working and what’s not. You can also propose your own changes and gauge their responses.