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Top 5 Challenges Too Many 401k Plan Sponsors Aren’t Aware of

Top 5 Challenges Too Many 401k Plan Sponsors Aren’t Aware of
December 04
00:03 2018

Do you know what your biggest challenge is? Or do you only think you know what your biggest challenge is? It’s perfectly understandable that busy 401k plan sponsors often don’t have the time to devote as much attention to their retirement as they’d like to. After all, they have a business to run, and that business probably isn’t corporate retirement plans.

Smart plan sponsors have learned to rely on the experience of others whose business is corporate retirement plans. We polled service providers from across the country and asked them what they thought were the top challenges too many 401k plan sponsors aren’t aware of. Here are the top 5:

#1: Understanding the Extent of Legal Liability
That this challenges scores so high may surprise many. After all, the media, the industry, and regulators have bombarded the airwaves, print, and the internet with non-stop “fiduciary” coverage. But remember, most 401k plan sponsors stay focused on their business, not their employee benefits package. Alas, the eye cannot be on two balls at once. “It is fundamental, but the biggest challenge that I see plan sponsors facing that they are not aware of is recognizing that they are responsible for ensuring legal compliance and fulfilling their fiduciary duties,” says John C. Hughes, a benefits/ERISA attorney at Hawley Troxell in Boise, Idaho. “The buck stops with the plan sponsor, not the third-party administrator, consultant, and/or record-keeper.”

In a way, paying too close attention might drive plan sponsors crazy. The regulatory arena has been quite volatile of late. This constant state of flux can bewilder even long-time professionals. Imagine what plan sponsors might be thinking. “Probably the biggest challenge that sponsors face these days is keeping up with regulations, compliance, as well as innovations in the markets for retirement assets,” says Gary Rudow, Managing Director/Investments at Stifel, in New York City.

“All the small changes in the law that have happened recently,” says Joshua Sutin of Chamberlain Hrdlicka in San Antonio, Texas, “including: hardship distribution regulations, disability claims procedures, disaster relief distributions, fringe benefit law changes from tax reform that impact the definition of compensation, and new regulations on forfeitures being used to offset QMAC/QNECs. Every plan sponsor is potentially a fiduciary. Therefore, plan sponsors have plan administration or fiduciary duties that they may be unintentionally violating by not being aware of all the small changes happening in the law. This can lead to potential liability that can be severe.”

Why might 401k plan sponsors so unaware of the many of the new regulations and compliance issues surrounding their plans? “Many are either receiving bad information or not enough information to make educated decisions,” says Brian Menickella, Managing Partner at The Beacon Group of Companies based in King of Prussia, Pennsylvania.

Perhaps another cause could be plans that are still operated before the new emphasis on fiduciary compliance. They may continue to relay on legacy providers. “If the advisor doesn’t specialize in retirement plans, they could be leaving that plan sponsor open to liability they never knew they had,” says Matthew J. Haywood, Retirement Plan Advisor at Krilogy Financial, LLC. in Saint Louis, Missouri.

#2: Must Proactively Decide Plan Hardship Provisions
We’ve seen this appear more frequently in recent news stories. While the general awareness of hardship provisions has grown, plan sponsors might still not be fully mindful of the specifics. “A number of plan sponsors are still unaware that they may have to make a decision about their 401k plan’s hardship provisions (or else their recordkeeper will typically interpret a non-response as a decision to adopt the recordkeeper’s default hardship plan design provisions),” says Benjamin L. Grosz, a benefits and tax attorney at Ivins, Phillips & Barker in Washington, DC. “Other plan sponsors seem to be unaware that a plan amendment will be needed – even if they do default or elect into their recordkeeper’s default hardship plan design provisions.”

#3: Bad Fees vs. Good Fees
I may hard to believe, but for all the consideration paid to fees, some plan sponsors appear to have simply missed that memo. “Many plan sponsors are unaware of the high fees that may be associated with some of the funds in their plan’s lineup.,” says Elizabeth Kelly, a Senior Vice President at United Income in Washington DC.

Even when plan sponsors do know enough to look at fees, there’s a question as to which fees to look at. “One of the top challenges for plan sponsors is participant education around employee fees and investment options,” says Roger Lee, CEO and Co-founder, Human Interest in San Francisco, California. “Many employees have an understanding of the basics of a 401k, but there are misunderstandings when it comes to the details of how a plan works, particularly around the built-in pricing. Seven in ten 401k plan holders aren’t aware they pay fees to their plan administrator and six in ten aren’t aware of how much they pay in fees. There is a lot of lost retirement money due to a lack of understanding who exactly is paying for a 401k, which fees are or aren’t reasonable, and how the fees compound over time. Since fees are typically taken directly out of the plan holder’s savings account, it’s not always easy to identify how much is being charged, and how this amount will continue to increase over time.”

#4: The Link Between Employee Financial Fitness and Company Profitability
The key to success here starts with a sound education policy. “Plan sponsors may not be aware that they can actually improve their participants results and outcomes by offering targeted financial advice and education to every one of their employees on a cost neutral basis,” says Charlie Epstein, Founder and CEO, Epstein Financial Services and The 401k Coach in East Longmeadow, Massachusetts. “By doing so, their employees will experience greater financial security, reduced financial anxiety and be far more productive and focused, which makes the company more profitable.”

It’s really like playing a video game. As employees learn the background story and become more familiar with the moves, they can “keep score” of their successes. It’s this “keeping score” part that create a self-motivating behavioral pattern. “When employees are educated about their 401k investments and the many associated fees,” says Lee, “they gain an understanding of how their investments are working for their futures, boosting their confidence and participation in the plan.”

This education applies to the plan sponsors themselves, as there’s a temptation to give other benefits a greater priority than the retirement plan. “While plan sponsors thoroughly understand that the 401k plan competes with healthcare and other benefits for budget dollars, it’s not as understood that there’s a direct correlation between retirement unreadiness and increased benefits costs associated with an aging workforce,” says Taylor Hammons, Vice President and Head of Retirement Plans at Kestra Financial in Austin, Texas. “So, even though plan sponsors considered health care to be the most important benefit for the company – even before retirement benefits, they are just now beginning to understand the deferred costs associated with employees who delay retirement due to lack of preparation. This unintended consequence is prompting plan sponsors to rethink how they allocate their budget dollars to obtain the best result for that expenditure.”

#5: Don’t Know What They Don’t Know
Finally, when it comes to the greatest challenge plan sponsors don’t know they’re facing, it that they don’t know they’re facing it. Greg Trost, President & Founder of Trost Financial in Los Angeles, California, calls this a “lack of understanding.” Others might call this “playing defense.” It’s safer to assume you don’t know everything – and spend your resources accordingly – than it is to assume you know everything only to be blindsided by a costly surprise.

This is a challenge that isn’t limited to 401k plan sponsors. Expecting the unexpected and properly preparing yourself remains a successfully strategy in nearly all endeavors.

Christopher Carosa is a keynote speaker, journalist, and the author of  401(k) Fiduciary Solutions,  Hey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on TwitterFacebook, and LinkedIn.

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.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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