A Broken 401(k) May Cost You Dearly
One of the most popular employee retirement benefits is the 401k account, but why do companies offer 401ks to their employees? After conversations with hundreds of business owners and corporate executives, the reasons are very similar. They are:
1. To Help Build Retirement Assets for -
- Key Employees
- All Employees
2. Tax Benefits to the Corporation/Employee
3. Hire & Retain Employees
4. Seems like the “Right Thing” to do
Even our best intentions can have negative impacts. Perhaps the same could be said about many of today’s 401k plans. Employers offer benefit packages with the best of intentions, yet, there’s a good chance you may be administering or participating in a retirement plan not in compliance with new revisions to the Employee Retirement Income Security Act (ERISA).
Here's an alarming statistic - the Department of Labor is increasing the number of audits and penalties. The result is millions in collective fines and lost profits. In fact, in fiscal year 2017, Employee Benefits Security Administration (EBSA) recovered $1.1 billion in these fines and penalties. Total recoveries rose 42%, from $777.5 million in 2016 to $1.1 billion in 2017. When the government’s rules are not met, substantial fines can accrue. Recent averages, as reported by the DOL, were $600,000 per plan—an increase of almost $150K in the past 4 years alone.
Published: May 18, 2015
U.S. Supreme Court
The U.S. Supreme Court broadened the responsibility of defined contribution plans, saying they have a “continuing duty to monitor trust investments and remove imprudent ones” even though federal law sets a six-year time limit for lawsuits alleging breaches of fiduciary duty.
The court ruled unanimously in favor of the plaintiff in the case of Tibble et al. vs. Edison International et al., in which; Edison 401(k) participants accused the plan and its executives of breaching their fiduciary duties by choosing certain retail-priced investments over less-expensive institutionally priced versions of the same investments.
As a specialist in this area, I’ve noticed a dangerous trend taking place when I consider the overall health of company 401k Plans. Simply put, most business owners and executives are oblivious or unaware of the fiduciary responsibilities that they are bound to, both legally and financially. There are over 30 individual responsibilities a plan sponsor is tasked with and must be able to document and evidence these functions have been completed.
One of these tasks is to have your 401k professionally benchmarked at least every three years to reveal any hidden fees, expenses, and liabilities within it. This is especially important for small plans, (defined as plans with less than 100 participants) as these size plans tend to have higher fees than larger plans.
You may be thinking, “but everything is going great with my plan. My employees are making money and are happy. What could go wrong?” Keep in mind, we have been experiencing one of the longest bull, or up, markets in recent history. But all markets go through cycles. Up and down. It’s during these down times that various remedies are considered to recover their losses. If recent Supreme court rulings are any indication (Tibble vs. Edison International May 2015, Tussey vs. ABB 2012, Larue vs. DeWolff 2008), the employer may be the chosen target to recoup 401K losses.
Here’s the good news: Existing law provides for relief. However, this relief needs to be structured correctly. Companies who delegate their fiduciary duties appropriately free themselves from the potential legal land mines that are inherent in 401k plans. If done correctly, the plan sponsor, can…
• Continue to provide added retirement benefits for employees.
• Maintain control of their 401k.
• Rid themselves of the legal headaches and administrative hassles of 401k sponsorship.
• Avoid conflicts of interest.
• Demonstrate Care, Skill, Prudence, and Diligence.
• Only pay reasonable fees to the service providers.
The benefits of delegating your fiduciary duties to a third party are many. Although this is not all inclusive, here are some examples:
• Benchmarking your plan.
• Documenting that you are monitoring your funds against your Investment Policy Statement.
• Protecting the personal assets of Plan Trustees and Investment Committee members.
• Handling all the vast duties required of the plan fiduciary.
Business owners and executives have enough on their plates and shouldn’t have to deal with the management of the 30+ fiduciary duties of a 401k plan sponsor. The key is DELEGATION. Assign your fiduciary duties to a third party.
Ramiro Marmolejo is a CERTIFIED FINANCIAL PLANNER™ and Chartered Financial Consultant® with over 20 years of experience. and specializes in 401k implementation and administration. He is based in San Antonio, Texas, and serves clients in Texas and throughout the country.