3 common mistakes plan sponsors make and how to avoid them
Retirement plan sponsors are under more pressure than ever, and sometimes that can lead to trouble.
Kermit the Frog may have lamented the travails of being green, but then he never tried his hand at being a retirement plan sponsor. Between Employee Retirement Income Security Act (ERISA) requirements, threats of lawsuits and employee expectations in a hot economy, plan sponsors are under more pressure than ever to deliver retirement plans that perform well and increase retirement security.
Because of that difficult job, mistakes are commonplace.
“Plan sponsors have a lot on their plates and many aren’t aware what the [Department of Labor] or ERISA standards are,” says Mitch Hughes, a consultant to institutional clients with Beacon Pointe, a registered investment advisor in Newport Beach, Calif. “Because of that they get themselves in trouble.”
We spoke with a handful of retirement plan consultants about mistakes they see plan sponsors making and how to avoid them.
1. Not having a process
The DOL, which oversees 401(k)s and other retirement plans, doesn’t expect every plan sponsor or retirement plan committee to be investing geniuses and pick only winning funds. But that doesn’t mean they can take a hands-off approach to their investment picks. Plan sponsors are required to develop a process for how they manage the fund.
“At the end of the day, it’s all about the process,” says Hughes.
Yet many plan sponsors fail to create an investment policy statement in the first place. Other times, they might have an IPS that’s so outdated that the people who created it are long gone from the company. Still other times, plan sponsors fail to follow the IPS, says Michael Kane, managing director of Plan Sponsor Consultants, a division of Hub International.
In particular, says Kane, plan sponsors don’t have a well-articulated process of how to replace funds.
“Most investment policy statements say they will fire a fund if it fails for four consecutive quarters or four of the past six quarters, but I’ve seen flunking investments in plans that have been around for three years or more,” says Kane.
2. Forgetting to benchmark fees
Fees are far and away the biggest category for 401(k) litigation. That’s due to the many layers of fees built into the retirement plan system, from administrative fees, investment fees, revenue sharing and consulting fees.
Retirement plan consultants say plan sponsors could keep themselves out of a lot of trouble by routinely benchmarking their fees and putting out their plans for a request for proposal (RFP).
Kane recommends that plan sponsors use a tool such as Fiduciary Decisions, which collects data on over 100,000 plans in order to compare the fees of similarly sized plans. “The only way you’ll know if your fees and expenses are out of line is by benchmarking them,” Kane insists.
Reducing fees doesn’t have to take a big effort, advisors say.
“There’s only one thing a plan sponsor has to do to get a fee reduction: Just ask,” says Lawrence Kavanaugh, CEO of Northeast Retirement Plan Advisors. “I’ve never had a recordkeeper turn me down.”
A surging market is the best time to request a fee reduction, Kavanaugh says. With no additional effort, investment managers are earning more in profits because of their asset-based fee models.
Plan sponsors have more power than they might realize: “A plan can move to institutional share classes at about $2.5 million in assets,” says Hughes.
3. Trying to DIY
Most small companies aren’t able to hire dedicated professionals to handle benefits, let alone the retirement plan. That job often falls on an operations manager who is juggling dozens of other roles.
Plan sponsors may not realize the fiduciary role they are required to take on. Or they may be struggling to meet their fiduciary responsibility.
“They’re responsible for their employees’ financial assets,” says Hughes. “They need to understand what the regulatory agencies are looking for so they can protect themselves and their employees.”
That’s why plan sponsors increasingly turn to retirement plan advisors to take that burden off their plates. According to Fidelity’s 2020 Retirement Plan Sponsor Attitudes Study, 92% of plans work with an advisor.
By doing that, plan sponsors can relieve themselves of the burden of managing their plans as long as they understand the different advisor relationships:
- A 3(21) investment advisor is responsible for picking the funds within a plan, but does not take on the duties of a fiduciary, which stays with the plan sponsor.
- A 3(38) investment manager, meanwhile, can take on the fiduciary responsibility of running the plan.
But even with a 3(38) advisor, plan sponsors still have some responsibility. They must find a competent advisor who will manage the plan well for employees.
“[Plan sponsors] still have a responsibility to check the credentials and the status as a fiduciary of their advisor,” says Kavanaugh.
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