The Department of Labor seeks to address deficiencies in 401(k) plans with new rules aimed at plan sponsors.
The defined contribution plan, known to many of us as a 401(k), has grown substantially over the past 30 years. The transition from traditional pensions (defined benefit plans) has greatly increased the responsibility of individual employees to save and invest for their own retirement. Employers, on the other hand, have benefited greatly from eliminating the considerable recordkeeping, actuarial analysis and uncertainty that comes with pension plans. But the experience has not been as unambiguously positive for participating employees. Consider that recent studies have uncovered the following:
The Department of Labor has responded by adopting new rules around fee disclosure and increasing the fiduciary responsibility of plan sponsors to their employees. Specifically, the following go into effect this year for participant-directed 401(k) and 403(b) plans:
As part of a plan sponsor’s ongoing fiduciary responsibility they are also required to demonstrate that fees paid are “reasonable” and that they have a process in place to evaluate service providers, including investment managers, and to fire them when necessary. Whereas larger companies typically employ in-house investment experts or independent investment advisors, sponsors of smaller plans often lack investment expertise and might have never seen these fees clearly disclosed themselves. For them, the prospect of explaining and possibly defending those fees to employees could seem daunting.
Further complicating matters for small businesses is the fact that historically there has been little competition for their retirement plans. Many smaller plans remain with the large insurance companies and brokerages that dominated the business 20 years ago and that often have the same high, hidden fee structure that drove the need for the new regulations in the first place. And under rules proposed by DOL, commissioned agents/advisors of these firms are deemed to be too conflicted to provide the kind of objective advice that plans sponsors need to meet their fiduciary obligations. But you probably don’t need a rule to tell you that someone getting paid to sell a product is not the best person to offer an assessment of that product’s value.
But help is available. A fee-only registered investment advisor is uniquely positioned to offer an objective assessment of your plan’s fees to help you meet your obligations under the new rules. Many advisors will even do this free of charge for the privilege of getting in front of you to pitch their other fiduciary services (for which they will charge a fee, usually paid for by plan participants rather than employers). As part of these services, a fee only advisor can review your investment lineup to ensure compliance with ERISA section 404(c) requirement to prudently select and monitor investment options. Some advisors will even be willing to sign up as “3(38)” fiduciaries to relieve you of this aspect of your fiduciary responsibility. To find a fee-only fiduciary advisor, check the Financial Advisor Directory here at BrightScope.com.
Whatever you do, don’t wait until the last minute to review your company’s plan. Taking a more proactive approach will not only help prevent a difficult situation it will demonstrate your commitment to your employees’ financial well-being.