401K's provide your employees the opportunity to have sufficient money available upon retirement, so they can enjoy a comfortable lifestyle. As the employer offering this valuable benefit, have you given any thought as to how the plan you intend to provide should be structured? There is significant variability between competing plans in cost to the employer, service to the employee, transparency, flexibility, etc.; all of which must be carefully weighed before choosing what best suits your goals. It can be daunting and time consuming to sort through the choices available and then select a plan that truly satisfies you and your employees needs. Oftentimes, the choice made is not optimal, yet because the process was so painful, the plan chosen is kept anyways. In many cases, that plan stays in place for years.
The following are some of the red flags to look for in your current plan or your plan moving forward:
- Annuity Plan Platform
The Annuity plan platform is usually a pre-packaged plan. The plan often offers a set fund list along with pre-packaged plan agreement terms that require few decisions to be made by the plan sponsor. One of the drawbacks to this plan type is that it has been historically difficult to identify administration fees. That presents a challenge for the Fiduciary, as one of their main duties under the law is to insure plan fees are reasonable. Another drawback is that many of the funds within the plan are not easily traceable, as they lack a "ticker symbol". This makes it difficult to individually track and monitor those plan funds. In the long term, an annuity plan platform makes it difficult to change one plan feature, without having to change everything.
Better Alternative-
Open Architecture Platform
This plan provides a platform that allows more customization. Open architecture structure allows access to a universal selection of funds. This may entail slightly more work, but this sort of structure allows for a more transparent view of fees. Although we believe this structure to be more beneficial in light of fiduciary requirements, be aware! Not all platforms claiming to be “open architecture” are created equal.
- Proprietary Fund Requirements
It is easy to be drawn into a lower fee by offering certain proprietary funds recommended by your Recordkeeping firm. Although some of these funds may be suitable at the time, if you need to change those options in the future, it can bring about more issues. If you replace those proprietary funds, how will it affect the pricing of the rest of the plan?
Better Alternative-
No Proprietary Requirements:
It is smart to receive pricing on your plan without any proprietary requirements. Most providers will then offer a discount if the proprietary offerings are utilized. This will provide a record of the discount that will be removed if funds are changed in the future.
- Revenue Sharing Funds
We believe this to be the number one red flag in a plan that needs to be evaluated. Are the funds in your plan currently paying a revenue share back to one of the service providers? In other words, are you providing the lowest available share price in your plan? With thousands of mutual funds/ etfs to sort through, you need to make sure you are offering the most cost effective share price to your employees.
Ex: Fund Share Class X has an expense ratio of 0.75%; the fund pays 0.25% to the record-keeper.
Better Alternative-
No Revenue Sharing.
Ex: Fund Share Class Y has an expense ratio of 0.5%; the fund pays 0% to the record-keeper.
It is obvious which one is better for your employees. The service provider fees should be transparent and not rely on indirect "sharing".
- You Select Investment Lineup
If you do not know who is selecting the investment lineup, it is probably you. You are responsible for this action on an ongoing basis. If your company has not specifically outsourced it thru a third party 3(21) or 3(38) agreement, then it is your responsibility. If this is the case, you need an investment policy statement on file as well as a system to regularly monitor and replace poor investments (and make sure to record the process of monitoring and/or replacing).
Better Alternative-
Ousource through Third Party Investment Advisor.
Unless you are experienced in this field and feel that you can meet the DOL definition of prudence, this is your best choice.
3(21)- will provide you a list of funds to select from, but you will be required to make changes to the plan if the funds are removed from the list.
3(38)- the third party manager selects your fund line up and continues to monitor and make changes on your behalf.
- Guaranteed Interest Option With Trade Restrictions
Your plan will generally offer an investment option for “conservative investors”. As we cannot recommend the best way to go, we can recommend what features to look out for. It is easy to be drawn to a very high yielding rate, but are there stipulations to your employees moving money out of the account? These stipulations can often limit participants to move only 20% a year out of the fund into other investments, and we have seen some as high as 10 year restrictions! You also need to be aware of potential plan level restrictions if you decide to change this fund in the future. Many funds require a systematic payment, or they are subject to an MVA (market value adjustment). These will reduce the value of your employees accounts when the fund is liquidated.
Better Alternative-
Conservative Option With No Restrictions
No one wants to have the talk with an employee about why their money is stuck in a fund or why their balance dropped when the plan was changed, so stick with a liquid conservative option.
- Conflict of Interest
Did you make your decision based on what was in the best interest of the employees? You are representing your employees, so you cannot make a decision based on a benefit to you that is not also an available benefit to them. Whether you are helping a family member or you are connected to an association, your obligation is to the employees, period. A number of service providers offer to sponsor associations, conferences or scholarships-which are all positive-as long as that does not influence your judgment when deciding on the best plan for your employees.
Better Alternative-
Avoid Conflicts
Remember, even if there is no malintent, it can still be perceived as improper. If a service provider is attempting to push you to violate your Fiduciary duty, it may be best to go with another provider.
- Absent Advisor
Advisors are very common in plans, but you need to know what the advisor fee is paying for. Are they selecting the investments, meeting with employees, providing group education to the employees, or actively managing employee portfolios? Advisors can do all of these, some of these or none of these. It is important to know that the advisor servicing your plan is either earning his/her keep, or being under compensated for all they are doing for your employees.
Better Alternative-
Advisor Contract
Get a written description of what your advisor should be providing. This will allow you both to understand the expectations of the other. You will also be able to hold them accountable for the services that they agreed to offer. If they are not performing as expected, it may be time to consider a new advisor.
- Knowing Fiduciary Responsibilities as Defined by the DOL.
As written in the DOL 'Meeting your Fiduciary Responsibilities', these are the basic requirements of a Fiduciary:
- Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;
B. Carrying out their duties prudently*
- Following the plan documents (unless inconsistent with ERISA);
- Diversifying plan investments; and
E. Paying only reasonable plan expenses
*The duty to act prudently is one of a fiduciary’s central responsibilities under ERISA. It requires expertise in a variety of areas, such as investments. Lacking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.
Fiduciary breach suits have focused much more on establishing a process and sticking to the guidelines, as opposed to the results. Watch out for new 401k providers offering “cost saving platforms”. That is not to say these solutions are not viable, but remember, the process is what is important. You need to be sure to compare multiple offers that are providing the same features. "Their ad said they were better" or "they said they are cheaper" does not count as a process. Lastly, providing full disclosure to all of your employees is often the best policy. Everyone needs a little accountability!
Better Alternative-
It is best to bid out your plan at least every 3 years (or as major changes occur) and conduct an ongoing monitoring of the plan between these periods to make sure the services provided are carried out and the employees are happy. You should also benchmark your plan fees (compare to other plans with similar demographics) annually to make sure that your employees are not overpaying. If you do not feel confident that you can perform these duties, then you need to find a service that can do them on your behalf.
Fiduciary Shield by BidMoni was created to assist plan sponsors in identifying these red flags while allowing a cost saving, more transparent plan to your employees. Access BidMoni.com today to allow industry leaders to compete for your plan.