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Are 401k Plan Sponsors Making the Fiduciary Grade?

January 25
00:47 2012

(The following is the second part of a three part series on benchmarking 401k plans.)

Remember those dreaded days after the end of the school term? That’s when you received your report card. Some looked forward to that time as the opportunity for confirmation of a job well done. Most, though, feared the awful sting of rebuke and Fiduciary_Report_Card_300criticism. The reality lay somewhere in between. On one hand, you learned what you did right. On the other hand, you learned what you needed to learn.

It makes sense for 401k plan sponsors to push aside any childhood neurosis and grade their plan on each of the Five Areas of Fiduciary Liability: 1) Regulatory Compliance – State and Federal; 2) Independence of Providers – Service Vendors Conflicts of Interest; 3) Integrated Investment Policy Statement; 4) Documented Investment Due Diligence; and, 5) Trustee and Participant Education. (See “Five Areas 401k Plan Sponsors Must Address to Reduce Fiduciary Liability,” FiduciaryNews.com, January 18, 2012). This “Fiduciary Report Card” approach helps provide a framework for the kind of self-assessment 401k plan sponsors need to undertake in order to continually improve their retirement plans.

Patrick C. Burke, Managing Principal of Burke Group, a retirement, actuarial and compensation consulting firm located in Rochester, New York feels this Fiduciary Report Card approach helps insure plan sponsors focus on “best in breed” service providers, one of the “Characteristics of Ideal Plan Structure” identified by Northern Trust in their October 2010 study. It enables plan sponsors to identify and remove bad apples before they spoil the basket. Burke says, “Bundled providers’, brokers’, and financial intermediaries’ operating models cannot be considered best in class due to their inherent and unsolvable conflict. This would include any RIA who participates in a revenue sharing or 12b-1 compensation package. They are primarily in the investment business which excludes their ability to be conflict free, a basic requirement of any plan sponsor that desires to achieve best in class status. These firms are the classic example of a fox in sheep’s clothing.”

Burke explains how he’s seen companies use an evaluation device like the Fiduciary Report Card. “The leading plan sponsors create a framework of comparable measurements that they review minimally twice per year,” he says. “The report is viewed as being as important as the plan document and its governmental filings.  Creating and maintaining a comprehensive fiduciary framework is where a provider can be of great value.”

Still, he’s concerned too few companies employ independent measurement systems. They instead rely too heavily on the kindness of their providers, who often only go through the motions. “Firms that are a source of comparative data is essential,” says Burke. “I have only seen a handful of effective solutions. Most go at this as an extension of the marketing department, which underserves the client and expose the client to more risk.”

Burke also brings up an important omission in the discussion of benchmarking 401k plans. The media, regulators and even 401k plan sponsors may place too much emphasis on fees and investment performance. While these criteria are important measurements, Burke feels it’s just as important to benchmark the less sexy data like “participation rates, average deferrals, average account balances, diversification, loans/hardship withdrawals, compliance, operational timing and execution and participant trading patterns” to name more than a few.

Indeed, it’s often a failure in these less talked about areas that can give plan sponsors gastric distress (a.k.a. “agita”) during a DOL audit. How much further below average does a plan have to go before it triggers a red flag with the DOL?  “Not much,” says Burke. “I have seen the DOL assess fines for clients that were remitting employee contributions in four days and they determined it should have been done in two. We have been approached by attorneys representing large groups of participants regarding operational deficiencies of plan sponsors.  When the average retiree has an account balance of $65K, which they do, somebody is going to pay.”

Still, Burke shares the majority’s concerns about fees. He points out “the DOL seems to be paying particular attention to fees, lately, and buddy deals.” Without the protection of the fiduciary standard, plans can find themselves, ironically, both victimized and punished at the same time. “The money being made by the providers has addicted many to dubious representations that are rationalized through slick marketing,” offers Burke. “This is best understood when you compare the cost of managing a pension plan is less than half of the average 401k plan costs.” Burke states “401k’s generate in excess of $66B of investment fees annually, $33B more than they should, do you believe the industry can kick its bad habits?  Doubtful.”

A Fiduciary Report Card can help identify these success gaps. The question, though, remains “what is the best way 401k plan sponsors can benchmark their plans?” Coincidentally, this is the title of the third and final installment of this series.

Part I: Benchmarking: The Key to a 401k Plan Sponsor’s Fiduciary Compliance Review
Part II: Are 401k Plan Sponsors Making the Fiduciary Grade?
Part III: The Best Way 401k Plan Sponsors can Benchmark Their Plans

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About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA

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