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Which Retirement Plan Fiduciary Most Drives 401k Plan Design

October 01
00:01 2014

(This is the second installment in a series of four articles.)

We’ve seen how poor plan design damages retirement readiness. Before addressing ways to improve plan design, we must first determine who, or perhaps more importantly, what drives 401k plan design? In the very early 516419_10274560_yoked_oxen_stock_xchng_royalty_free_300years, plan design was heavily influenced by the desire of plan sponsors to reduce fiduciary liability. During this period, ERISA lawyers dominated as they had earlier in the pension and profit sharing era. It was a time when plan design focused on safe harbors, 404(c), and a myriad of other fiduciary-centric features.

Once this template had been established and tested, plan sponsors felt less immediate angst over their personal fiduciary liability. It didn’t go away. Rather, the sense of urgency to address it faded with each successful DOL audit. Customized plan documents – and the high-priced attorneys that created them – gave way to off-the-shelf plan documents, more often than not offered by larger financial institutions. The combination of the rising market in the late 1980’s and the ascendency of “style boxes” led to a proliferation of specialty mutual funds. It didn’t take long for Modern Portfolio Theory-based investment thinking to rule the 401k roost. These decades saw purveyors of investment products govern the direction of plan design. This is when we saw the number of menu options skyrocket from three obviously distinct investments to a cornucopia of dozens “shades of grey” choices.

While this new found freedom brought choice to employees, it also brought responsibility. And when that responsibility introduces complex concepts that, in the past could have been fully delegated to professionals, those employees decided life might be easier just sitting on the bench. Naïve investment strategies and insufficient savings strategies put pressure on both retirement professionals (who grew increasingly frustrated by this apparent employee apathy) and policy makers (who were simply unaware things had gotten so bad). As we approached the new millennium, research from a new science – behavioral finance – shed light on the frailties of our assumptions about plan design. Plan sponsors realized it didn’t matter if the best investment options were available to investors if no one invested. In this third stage, fiduciary advisers took a more prominent role in plan design.

As this evolution makes plain, the roles and standing of different service providers constantly shifts. So, let’s return to our original question: “Who drives 401k plan design today?”

One way to answer this question is to identify “where the buck stops.” Robert C. Lawton, President of Lawton Retirement Plan Consultants in Milwaukee, Wisconsin says, “Plan sponsors are the final decision-makers. Nothing changes without their consent. But most plan sponsors are too busy running their businesses to stay abreast of the changes happening to retirement plans. Consultants, financial advisors and service providers will drive the presentation of new ideas. Adoption by plan sponsors will create actual change.”

Alan Hahn, a Partner in the Benefits & Compensation Group at Davis & Gilbert LLP in New York City, agrees. He says, “Plan attorneys and consultants can move plan design issues to the top of the agenda, but in the end it’s the plan sponsor that must make the crucial financial decisions, as they ultimately know how the plan fits into their overall total compensation philosophy.”

While the ultimate arbiter remains the plan sponsor, many accept the fact it is difficult for plan sponsors, even when they dedicated personnel, to keep abreast of the latest techniques and tactics when it comes to the regulatory and operational intricacies of retirement plans. The best relationships, then, exist when they are among equals. Richard Rausser, Senior Vice President of Client Services at Pentegra Retirement Services in White Plains, New York says, “Good providers know that successful plan design is a partnership between the sponsor, advisor and the retirement plan provider.”

Christopher Hobaica, co-founder and principal of HNP Capital LLC in Pittsford, New York echoes this sentiment. He says, “Plan design should be a partnership between the plan sponsor, service provider and consultant. The plan sponsor should be open and honest during the interview process. The service provider, who is generally more equipped to drive and improve plan design, should gain a clear understanding of the needs of the plan sponsor, so that he/she may put their best foot forward with plan design recommendations. The consultant (financial advisor) should be the translator and independent set of eyes to make sure that everyone is on the same page and has a clear understanding of what is being proposed.”

Of course, there remain many specific circumstances, especially when the corporate sponsor cannot afford to hire employees committed exclusively to running the plan, where plan design requires the service provider to take the lead. Robert M. Richter, vice president at SunGard’s Relius in Jacksonville, Florida says, “There’s no question that this must be driven by the service provider. A service provider is in the best position to assess the employer’s goals and then ensure the plan design best fits those goals.”

“The service provider and/or advisor bears initial responsibility to the plan sponsor and the participants,” says Ozeme J. Bonnette, a Financial Coach at Tri-Quest Investment Advisors in Fresno, California and Torrance, California. “Plan sponsors do not understand plans enough to be called ‘equipped’ to make improvements.”

The need for expert guidance is most acute among smaller employers. Nathaniel C. Propes, Chief Investment Strategist at Capital Management Advisors in Atlanta, Georgia says, “For small plans (less than 200 employees), the person in charge of the plan typically wears a number of hats. This does not allow them the time to learn about the new features and regulatory changes that occur. They rely on their trusted adviser to communicate these topics to them.”

Still, there is one factor that might overcome the lack of expertise in these companies, and that is the personal objectives of the owners. Andy Bush, Partner at Horizon Wealth Management in Baton Rouge, Louisiana says, “Most smaller businesses are driven by the plan sponsor and how much (dollar-wise) they are willing to commit to. If they have the resources to do so, they can get creative and offer a plan with few restrictions – usually they are the ones who will benefit most (the biggest driver in plan design).”

Finally, when it comes to the consequences of plan design, one certainty continues to dictate where the ultimate responsibility resides. “Usually when there are complaints from employees and it is brought to the attention of executives, it is often passed to HR to take on,” reminds Seth Deitchman, Financial Advisor at Morgan Stanley in Atlanta, Georgia.

Whoever takes the lead in designing the plan, it is clear that definitive steps can be taken to address the issues that rise out of poor plan design. We address these in our next installment of this series, “Steps the 401k Fiduciary Can Take to Avoid Poor Plan Design.”

Interested in learning more about important topics confronting 401k fiduciaries? Explore Mr. Carosa’s book 401(k) Fiduciary Solutions and discover how to solve those hidden traps that often pop up in 401k plans.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada. He will be speaking at CFDD ’14 on the subject of “Using Proven Psychological Techniques to Motivate Plan Sponsors & Participants to Implement Your Recommendations.” The session will feature a unique but highly effective presentation style and feature tools mentioned in his new book Hey! What’s My Number? – The One Thing Every Retirement Investor Wants and Needs to Know!

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


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