Human Resources and Benefits

The Win-Win 401(k) Plan Design

401k

Mitigate Fiduciary Responsibility and Focus on Participant Outcomes

ERISA mandates are not intuitive, and ignorance is not an acceptable defense.

Employers offer a workforce retirement plan to be competitive in acquiring talented employees and to offer a valuable employee benefit. However, when owners and executives offer a workplace retirement plan, such as a 401k, they also take on the highest law known to man. This law, called ERISA, holds the owners and executives who serve on a committee to an expert standard for all things related to the retirement plan, such as investment management and plan administration, and they are held personally liable for the results. Most employers will engage vendors, such as Empower, to provide platforms for recordkeeping, administration, and investments. They may also engage an advisor to provide oversight for some plan aspects, generally limited to investment selection and monitoring. However, these parties take on no fiduciary liability and thus do not limit any exposure the owner and executives have in this role.

Because the owner and executives have never received any official training in the role as a committee member, they are not versed in the processes and documentation nor the mandates of decision-making on behalf of the plan participants. This leads to decision-making based on what they believe is appropriate, the golden rule, and many times they are biased toward their own best interests or the organization’s best interests as opposed to the participants’ best interests. ERISA mandates are not intuitive, and ignorance is not an acceptable defense.

There are participants who have not been able to properly save and invest for their retirement over the past 30 years due to mismanagement. This has led to two popular scenarios:

  1. Participants plan to never retire, which results in an aging workforce that raises a company’s payroll, insurance, and benefits costs, and lowers productivity, morale, and technical expertise.
  2. Sue your employer. Toward the end of 2016, the first class action lawsuits for small employers were filed. These are plans with $9M and $25M in plan assets and a little over 100 employees. The blueprint for these lawsuits has been established by multinational conglomerates with all the resources to fight off such lawsuits and the professional expertise to prevent them in the first place. Small employers have had neither, until now.

The combination of specialist vendors that are willing to take on Plan Administration (Level 1 3(16) Plan Administrator) and Investment Management (discretionary 3(38) Investment Manager) removes the burden of governance and prudent process from the owner and executive committee, as well as the liability. These service providers act in a fiduciary capacity, in writing, as they are comfortable with ERISA and the required processes and documentation. This may protect plan sponsors from DOL fines and participant class action lawsuits.

Now the committee’s time is freed up and they can focus their efforts on areas they control (business-related plan decisions) and that have impact on the business. With the expertise of a specialist vendor, sponsors receive the necessary information to have the critical conversations to make decisions that will prepare participants for retirement. This is done through plan design optimization (get employees in the plan, saving an adequate amount and investing appropriately, and making sure once the money is in the plan, it does not leak out via plan loans). In addition, participants will have access to tools that go beyond helping people save for retirement to helping them succeed financially. This prepares participants for retirement at a normal retirement age. The end result is prepared participants and protected plan sponsors.

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Tom Muldoon is the Director of Retirement Services for L.R. Webber Associates Inc., a member firm of Pensionmark Financial Group. He is a Certified Financial Education Instructor (CFEI) and an Accredited Investment Fiduciary (AIF). He has over 17 years of experience in the industry and provides consultation services in investment analysis, vendor selection, fee analysis, portfolio design, plan design, and sponsor and participant education.