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In a February 18 webinar, Dean Piccirillo, director of the HBKS Wealth Advisors Retirement Plan Unit, offered strategies employers can use to improve employee participation in their sponsored retirement plans, enhance plan investment performance, reduce plan fees, and comply with the Employee Retirement Income Security Act (ERISA) and other retirement plan regulations.
Piccirillo opened by noting that the “Top 10 Opportunities” were designed to help ensure plan participants will be successful in planning for their retirement, and plan sponsors could execute their responsibilities as plan fiduciaries with authority. As fiduciaries, he pointed out, plan sponsors are held to the highest standard of care, personally liable for managing the plan in accordance with the governing regulations.
- Consider an open architecture platform. Engage a recordkeeping solution that provides access to most publicly traded mutual funds. The recordkeeper gives you and your participants access to the investment marketplace as well as provides online access to plan level reporting, maintains the plan website, and generates quarterly statements. Where appropriate, no-load and institutionally priced funds should be available. Avoid packaged platforms built by product providers. Restricted access, in particular a lot of the funds with the same brand name, is a warning sign of a pay-to-play solution where fund companies pay to be on the plan investment menu. As fiduciary, you want a wide selection of investment options in order to develop a best-in-class menu for your participants.
- Examine plan fees. Fees for investment management, recordkeeping, administrative services, and other plan services impact performance and ultimately a participant’s ability to be successful in retirement. Regulators require fees to be “reasonable,” though they do not provide a definition of reasonable. Much of the litigation against employers related to their retirement plans is over excessive fees. Use a benchmarking study based on plan assets or number of participants to determine if your fees are reasonable. Aim for your fees to be in the 50 percentile or below in your benchmark study.
- Monitor your plan investment options.You are obligated as a sponsor to monitor the investments in your plan and ensure they are “good,” though there is no regulatory definition of good. You need to use a prudent, defensible process as documented in an investment policy statement to select and monitor the investment options you make available to your participants. You must be sure you are offering securities based on the investment policy of the funds and should compare your performance to a peer group of funds over one, three, and five years. You want your funds to rank in the top half in each type of investment, the fund manager to have at least a three-year track record, the fund to have at least $75 million in assets, and to have no funds in the top quartile of expense ratios.
- Track timeliness of participant deferrals and deposits. When you withhold money from a participant’s paycheck you have to get that money into the 401k expediently. Your regulators will request your payroll records to see when money was withheld, then when it was deposited and invested. Delays could trigger a Department of Labor investigation. Ensure that your payroll provider and plan recordkeeper are working together.
- Review your plan design periodically. Challenge your plan provider to review its design as to how it is meeting your objectives. Consider opportunities that will allow participants to maximize their contributions. As your company and employee base change, you might want to modify your retirement plan to accommodate your changing environment. You might want to increase your profit sharing contribution allocations.
- Consider pairing your 401(k) plan with a cash balance retirement plan to accelerate tax-advantaged contributions. A cash balance plan has characteristics of both defined contribution and defined benefit plans and can provide substantial tax savings. These types of plans can be used to increase contributions for older employees or more highly compensated employees. It is another way to maximize contributions to the most valuable people in your business.
- Consider outsourcing fiduciary liability. Challenge your investment consultants and advisors on the fiduciary responsibility they are accepting. They could be willing to act as a fiduciary on a non-discretionary basis or with discretion. On a non-discretionary basis, they share responsibility with you as co-fiduciaries. By accepting that role and acknowledging it, they go a long way toward addressing your responsibilities. As a discretionary investment manager, under ERISA 338, they can manage the plan on your behalf, including choosing the investments. By delegating authority to them for investment-related decisions, they become liable for those decisions. It is important to know in which capacity your advisor is acting. Some third party administrators take responsibility for all plan obligations, so you can relieve yourself of a material amount of fiduciary responsibility.
- Confirm that you have an adequate ERISA bond. The bond is designed to protect the people in your organization who handle retirement funds. ERISA generally requires that every fiduciary of an employee benefit plan who handles funds or other property be bonded. The purpose of the bond is to protect employee benefit plans from risk of loss due to fraud or dishonesty on the part of persons who handle plan funds. Generally, each person must be bonded in an amount equal to at least 10 percent of the amount of funds he or she handled the preceding year.
- Consider voluntary compliance with Regulation 404(c). You are responsible for your employees’ investment decisions if you haven’t voluntarily complied with Regulation 404(c)—including when employees make no investment choices. Compliance is voluntary, but if you do, you gain protection from liability from plan participants’ poor investment decisions. Complying includes having at least three diversified investment alternatives and providing certain disclosures, including letting plan participants know that you are complying with 404(c).
- Use a Qualified Default Investment Alternative (QDIA). A QDIA is used when participants haven’t made an active investment election. When money is contributed to the plan, it is automatically invested in the QDIA that was selected by the plan fiduciary. When a 401(k) plan has a QDIA that meets the Department of Labor’s rules, the plan fiduciary is not liable for the QDIA’s investment performance. Without a QDIA, the plan fiduciary is liable for investment losses when participants don’t actively direct their plan investments.
As a plan sponsor, you have fiduciary responsibilities. But you also have many options to enhance your retirement program, contribute to a successful retirement for your participants and yourself, and protect yourself from lawsuits and regulatory actions resulting from compliance violations. HBKS is here to help. For more information or to schedule a retirement plan review, call us at (239) 433-7533; or email me at dpiccirillo@hbkswealth.com.
