Straight Talk

Posted On: December 12 2015

Start with the Record Keeper

All too often a company’s 401(k) plan proves to be a burden rather than a benefit – for the plan participants as well as the plan sponsor. The easy solution? Hire a one-stop-shopping plan from a reputable national firm, and let them deal with the headaches. They certainly have plenty to choose from: $4.19 trillion in 401(k) assets generating some $52 billion in fees proved to be a particularly rich pot-of-gold at the end of the retirement rainbow.

And once John Hancock or Merrill Lynch or Paychecks got their hands on your 401(k) plan they were in no hurry to let it go. For all intents and purposes, a one-stop-shopping plan became a last-stop-shopping plan. Their strategy was very simple: Inertia was the first line of defense, and those few that moved beyond that were hit with inconvenience. It’s hard to move a plan. Very hard, and what with all the time, paperwork and energy required to get it done…well, to hell with it.

We think making that change deserves a second look. Moreover, the Department of Labor’s 2012 Final Rule to Improve Transparency of Fees and Expenses to Workers in 401(k)-Type Retirement Plans provides all the incentive you need to get past the inertia and inconvenience.

Plan sponsors are well aware of that Final Rule, or, from their vantage point, added burden. In addition to everything else, they now have to file Form 5500 and Form 408(b) 2 disclosing all fees charged to the plan and, “provided to each participant or beneficiary certain plan-related information and certain investment-related information.” This included:

Plan-Related Information

  • General Plan Information
  • Administrative Expenses Information
  • Individual Expenses Information
  • Statements of Actual Charges or Deductions

Investment-Related Information

  • Performance Data
  • Benchmark Information
  • Fee and Expense Information
  • Internet Web Site Address
  • Glossary

But there was another element to that Final Rule that many plan sponsors may have overlooked. Here’s what the DOL said in their February 2012 Fact Sheet: “The final rule provides that the investment of plan assets is a fiduciary act governed by the fiduciary standards in ERISA section 404(a)(1)(A), which require plan fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries.” How does that effect you as the plan sponsor? The Department of Labor states that a plan fiduciary’s responsibilities include:

  • Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;
  • Carrying out their duties prudently;
  • Following the plan documents (unless inconsistent with ERISA);
  • Diversifying plan investments; and
  • Paying only reasonable plan expenses.

Let’s have a closer look at that last responsibility: what are “reasonable plan expenses?” The Department of Labor offers guidance and added a new requirement for plan sponsors to help them make that determination. Guidance: Now that you have all of the fees and performance, both absolute and relative to the applicable benchmark, you have the tools to conduct a cost/benefit review of the investment choices available to plan participants. Your board or the trustees should review this information at least once a year and keep a record of the evaluation process and decisions made on the basis of that evaluation. Requirement: That at a minimum of once every three years the plan sponsor or trustee issue a formal Request for Proposal for 401(k) plan services. This ensures that the board or trustees have made every effort to secure plan services at a reasonable expense through a documented competitive process.

Sent out an RFP recently? Evaluated the performance and cost of those mutual funds relative to alternative investments and documented the process in the board minutes?

Still suffering from inertia or balking at the inconvenience? Lisa Barton, a partner with Morgan, Lewis & Bockius, told attendees of the “Washington Update” portion of the Plan Sponsor National Conference in Chicago in April that, “The Department of Labor has increased full-scope audits of retirement plans. Now it’s not a question of if you get audited, but when.”

Shoulda-Coulda-Woulda rules apply here the same way they apply everywhere else. So where to begin? We recommend that the first step is to “unbundle” the One/Last-Stop Shopping plan and give yourself the flexibility to make tactical and strategic changes in your 401(k) plan when necessary. Issue those Request for Proposals, evaluate the responses, select the right service providers for you plan and keep a written record of the process. We can help; we’ve done them before.

Start with the Record Keeper. The Record Keeper is the “information hub” at the center of your 401(k) operations. There are objective standards to judge them on the basis of functionality, reliability and convenience. Once you narrow your choices down to the final round, the only question is price.

Grounding your plan with a solid Record Keeper opens up the universe of investments, investment advisors & all related service providers ensuring that you have the freedom and flexibility to meet all of your responsibilities as the plan fiduciary.

But I don’t know, don’t want to know and don’t have time to evaluate all those investment choices and service providers.

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