There are two huge mistakes that business owners commonly make when it comes to their company 401(k): they don’t understand the gravity and breadth of fiduciary responsibility, and they shoot themselves in the foot with high cost structures and poor investment options.
Once you see the hard numbers in front of you, streamlining costs is a no-brainer. While no 401(k) plan is free, making sure you get the most for your money is something most of us can get behind pretty easily.
But fiduciary responsibility is often a wake-up call – and not taking it seriously can have significant repercussions on your business and your life. As a fiduciary, you are responsible for ensuring that the decisions you make are in the best interest of your participants, that you carry out your duties prudently, in line with plan rules and objectives, through appropriate diversification while at a reasonable cost.
Here’s the thing: many plan sponsors (that is, business owners who establish a 401(k) for their companies) don’t realize that as a fiduciary they are personally liable for their plan. In other words, your personal assets are on the hook in the event of a lawsuit or regulatory action by the Department of Labor (DOL).
This intimidates a lot of business owners. Setting up and managing a 401(k) is hard enough. How are you supposed to manage these obligations and make all the right choices?
The solution: A “cafeteria” manager
The idea behind the fiduciary standard is that the plan should be designed to serve the end investor’s best interest. That means diversified investment options, reasonable fees, and a documented process for monitoring investment performance and selecting funds.
Think of it like a company cafeteria for investing: if your goal is to serve foods that are healthy and nutritionally balanced, you’ll want to offer a diversified menu of healthy options that meet a broad range of nutritional needs. You’ll want to make sure your vendors are delivering what they say they’re delivering, and that you’re not over-paying for a brand name rather than quality – all while making sure everything meets FDA approval.
To do all that, you need a process in place to manage operations – someone to decide what foods to include on the menu, where to buy them, and how to make sure that you’re serving the best options in each food group. Not to mention monitoring quality, price, and performance over time!
Now imagine that you’re legally liable for all of it: the structure of the menu, the cost of the bananas, and the nutritional record of your vendors. It’s enough to make you want to give up, right?
You might NOT be getting what you think you are!
401(k)s are an important benefit for a lot of companies. It’s not worth giving yours up.
If you already have a plan, consider getting an independent review of your current processes and costs to make sure you’re protecting yourself and doing right by your employees. If you are just starting the process, think about working with a professional who can help you set up a robust plan structure – someone who can help you with some of the key elements of the plan. Setting up a plan requires expertise in a number of areas. If you lack that experience, you will need to hire someone with the professional knowledge to carry out those functions.
Most importantly: don’t just get anyone – this is where it can pay to have the right professional help. A worthwhile partner can shoulder the burden and help make sure that your fiduciary obligations are being fulfilled. He or she will essentially act as the “cafeteria manager” of your retirement plan, helping put the right systems in place to keep things running smoothly.
I personally believe in seeking out a partner who is:
- An Investment Advisor Representative. These advisors work under an SEC fiduciary standard with a duty to act solely in the best interest of their clients when offering investment advice.
- Able to implement and oversee your plan’s processes and procedures. Specifically, look for expertise designing a diversified investment lineup, benchmarking and monitoring performance, and benchmarking and monitoring costs.
- Eager to work with you and your team. That means a financial advisor who is ready to take calls, meet with your employees, and help you structure your plan to make the most of it.
Why are these issues so important?
First, you’re already operating under a fiduciary standard by having a retirement plan. Thus, it can be very helpful to get advice from someone who is also obligated to work in your participants’ best interest.
Take this example: a fiduciary has an obligation to act solely in the interest of the plan participants, paying only reasonable plan expenses. If there are five mutual funds that are trying to accomplish the same goal, an investment fiduciary will go the extra mile in making sure that the one he or she recommends is the one that best balances plan objectives with reasonable cost.
If the recommended fund isn’t the cheapest, and it doesn’t necessarily have to be, an investment fiduciary should be able to demonstrate the rationale or process behind making that decision. Equally important, this person will be able to properly document that process for your plan’s records.
In other words, the documented rationale and logic or process always has to be there, and it always has to be clearly demonstrated. An advisor who takes that responsibility can help you offer the best “healthy” choices in your plan.
Moving ahead
Good planning and a strong system of oversight are critical to making the most of your company’s 401(k). Build your plan to reduce liability, systematize oversight, and reduce costs, and you’ll find that your 401(k) can go from being a headache to being one of the major benefits that you offer your employees – and yourself.
Written by Bradford Pine with Anna B. Wroblewska