For years, the selection of a 401k provider for a company retirement plan has been a pain point for Business Owners, CFO’s, and Human Resource Professionals. The process can be long, sometimes taking 6 months to a year. There are also different strategies (internal committees, consultants, or just trusting your advisor to shop your plan) that plan sponsors have used, but due to the lack of time and resources, many employers have put off going back though the process! Many plans have not been shopped in 5, 10, 15, sometimes 20 years! This has lead to 3 major problems:
1.Is your current plan the right fit for your employees (are you doing what is in their best interest)?
2. The DOL maps out in their guide Meeting Your Fiduciary Responsibilities that the core duty of a plan sponsor is to make sure ‘plan participants are only paying reasonable expenses’ and ‘this process is documented and you have a basis for making these decisions’
3. The Supreme Court decision in Tibble vs Edison, determined that a plan sponsors fiduciary duty is a ‘continuing duty’. This means that even if the plan was suitable at the time of implementation, it is your duty to validate ‘continually’ that the plan is still suitable for plan participants. This ruling has lead to the numerous Excessive fee lawsuits against various plan sponsors.
Fintech Start-up BidMoni Inc. recognized the pain points of Plan Sponsors and set out to build a tool that not only simplified the process and time spent by Business Owners, CFO's and Human Resource Professionals, but also provides a record and ongoing monitoring of the providers inside your plan. These processes assist the Plan Sponsor in staying on top of their fiduciary duties. That was the foundation of their flagship product FiduciaryShield. The founders believed there should be a marketplace that allowed Plan Sponsors to easily shop their existing 401k plan (or like plan), by pricing the parts separately, while maintaining a level of privacy assisting in avoiding unwanted solicitation calls. "There are different parts of 401 k plans that have often made it difficult for Plan Sponsors to make an apples for apples comparison." Says Co- Founder Stephen Daigle. "Traditionally some companies bundled all of these services together" says Co-Founder Michael Steffan. "This makes it difficult to see what you (or your employees) are paying for. Often plans are paying for services that their employees aren't utilizing." FiduciaryShield provides a break down of the different fees and features of each part of a 401k plan, while identifying ‘red flags’ that have gotten other plan sponsors in trouble in the past. So what are the parts of a 401k?
1. Custodian (trustee)
The custodian is the holder of the plan assets. The custodian houses the assets contributed by the employees inside of the plan. Where the assets go is directed by the Recordkeeper. These services are often paired with the Recordkeeper, however, some Recordkeepers will provide you a choice of different custodial partners.
The 401k Recordkeeper is the bookkeeper over the plan. A few of their main tasks are tracking the money as it comes in and out, tracking the investments the participants want their money directed to, and generating statements. The Recordkeepers are typically the provider that you see on your statement or website when viewing your account. Recordkeepers often offer a variety of different resources designed to help plan participants reach their retirement goals (online enrollment, onsite enrollers, self directed brokerage portals etc.) These services can vary greatly from company to company, so it is good to evaluate all of the features available to you and your employees. Many Recordkeepers offer multiple platforms (Annuity, open architecture) so assistance through these choices might be beneficial. FiduciaryShield can help you determine what plan is right for your employees.
These duties can often overlap with the Recordkeeper. It is common to see Recordkeepers offer a “bundled” service in which they provide both the Recordkeeper and Administration services. If this is not the case, a TPA (third party administrator) is often brought in to perform these tasks for the Plan Sponsor. The TPA assists with many of the compliance functions as required by the IRS and the DOL. These include annual 5500 filings, discrimination testing, and loan processing to remain in line with the plan document. Some TPA’s will go as far as to act as the 3(16) administrator that controls the day to day operations of the plan, assisting the employer with off setting administrative liability.
Many people assume that by selecting a Recordkeeper, you receive an investment lineup that they monitor. In light of the recent lawsuits, we see that this is rarely the case. If you steer towards an open architecture style 401k platform, this will leave you with roughly 25,000+ mutual fund/ etf options to design your plan. If this is a task you wish to take on yourself (not recommended) you will need to have an Investment Policy Statement on file and keep records of your evaluation process and monitoring. The other option is to outsource these responsibilities to a third party investment advisor (recommended). There are two different options that you can select:
3(21)- The third party will provide a list of suitable investments that you can select from. You are responsible to make changes if the fund is removed from the recommended list.
3(38) - The third party selects the funds on behalf of your plan and make changes to the fund lineup when they identify a more suitable option.
A financial advisor can be included in the fees of the plan, but some plan sponsors do not utilize an advisor. If using an advisor, you need to know what tasks they are performing to assist with a plan. These can include 3(21)/ 3(38) services, group education, one-on-one employee meetings, employee account management, etc. The level of service should set a reasonable compensation for the advisor. If you have not seen your advisor in 2 years, or if they are not providing any of these services, it might be time to look for a new advisor. It is also beneficial to make sure you have a contract with your advisor stating how many days they will be available to perform these services. This will help with verifying the fee being paid is reasonable. It's also good to know the structure of the firm your advisor works for, some Broker Dealers firms/ RIA’s have a very limited number of Recordkeeping 'partners'. Others have a more ‘independent model’ allowing them to accommodate more Recordkeeping partners and flexibility in plan offerings. This can have an effect on your ability to change parts of the plan in the future.
Remember, it is not only important to get your plan in good order, but you need a system in place to help your plan stay in good order. FiduciaryShield was created to assist employers through this process to help Plan Sponsors save time and money.