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5 Critical Topics to Teach 401k Plan Sponsors: Fiduciary Education Curriculum (Part I)

5 Critical Topics to Teach 401k Plan Sponsors: Fiduciary Education Curriculum (Part I)
May 07
00:03 2019

Much has been written concerning employee education regarding their company retirement savings plan. This is good as many participants are either too busy to take the time to absorb important financial concepts and strategies. Worse, in some cases workers simply don’t have access to the proper educational resources and tools. A good plan sponsor, being a good fiduciary, seeks to supply plan participants with the education necessary for them to develop and implement a plan to retire in comfort.

But who teaches the 401k plan sponsor? And what should they be taught?

FiduciaryNews.com interviewed financial pros across America to get their ideas on this subject. Over the next several weeks, we’ll present a series of topics that should be covered in any 401k Plan Sponsor fiduciary education curriculum.

We’ll begin this week with an overview of 5 critical topics. These are fundamental in nature. As a result, in order for 401k plan sponsors to fully inculcate themselves with the more complex topics we’ll discuss later (i.e., the topics every always talks about), they my first have a firm grasp on these 5 critical topics. Without that complete understanding, the likelihood of a major fax paus increases.

Don’t increase the likelihood of a major faux-pas. Get your arms around these five critical topics.

Critical Topic #1: Understanding Their Own Fiduciary Liability
This is perhaps the most overlooked aspect of being a plan sponsor. It can also be one of the most damaging. “In 2017, the Department of Labor levied over $1.1 billion in fines on plan sponsors for compliance breaches, many for seemingly immaterial breaches,” says Kyle P. Webber, Principal & Managing Partner at Quartz Partners Investment Management in Troy, New York.

The good news, though, is that even if they tend to ignore their liability, plan sponsors do have recourse. “While plans are often considered a secondary benefit in attracting and keeping employee talent, they expose plan sponsors to an exorbitant amount of liability,” says Webber. “Much of this liability can be mitigated by ensuring that plan service providers themselves assume fiduciary responsibility prescribed in in ERISA.

Critical Topic #2: Identifying the Roles and Responsibilities of Key Persons
Oftentimes, a company doesn’t rely on a single executive to monitor the plan, but a group of executives. The most prominent example of this is the investment committee. They need fiduciary training, too. “Committee members need to understand what it means to be on the investment committee,” says Jairo Gomez, Director of Retirement Plans for Allworth Financial headquartered in Sacramento, California. “An auditor will want to know who the decision makers of a plan are. Committee members will stay more focused if they understand the legal and possible financial liability of being on the investment committee.”

What can happen if key people don’t know their roles and responsibilities. Gomez says, “For example, if an auditor were to send a notification to who’s in charge of the plan and the committee were to forward this to their record keeper.”

Critical Topic #3: Having a Comprehensive Knowledge of the Plan Design and its Provisions
It’s important to understand the plan design as well as the provisions within the plan. “ERISA requires that the fiduciaries must oversee the creation of plan documents; ensure that the plan is operated strictly according to those documents and satisfy all the legal and regulatory rules issued by the relevant agencies, including the DOL, IRS, PBGC, and SEC,” says Aaron Wassenaar, Director of Retirement Services at Action Point Retirement Group in Wayland, Michigan. “For example, most recordkeepers now offer ‘bundled’ services where they are acting as recordkeeper, third party administrator, custodian, and in many cases advisor. This service model can create a false sense of security where the plan sponsor uploads a payroll file every couple of weeks and forgets about everything else. It’s imperative that the plan sponsor understand the provisions in the plan (eligibility, vesting, loans, etc.) and ensure all the items are being administered correctly.”

“…A VITAL REFERENCE TOOL

FOR YEARS TO COME.”

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Topic #4: A Thorough Mastery of 404(c) Compliance
Regulations permit plan sponsors certain “safe harbors,” provided they comply with certain specific rules. “Under the Employee Retirement Income Security Act of 1974 (ERISA), section 404(c) relieves plan fiduciaries from liability for losses resulting from participants’ direction of their investments if certain criteria are met by the plan sponsor,” says Webber. “To meet 404(c) requirements the participants must be provided with certain disclosures along with the ability to direct their investment allocations among a diversified menu investment menu.”

Of course, for every upside associated with being in compliance, there’s a downside for being out of compliance. Webber says, “If a plan sponsors fails to meet 404(c) compliance requirements the plan sponsor and plan fiduciaries (personally) may be held financially liable for any investment losses incurred by participant, even if the participant selected their investment allocation. Investment performance is one of the most unpredictable variables in the administration of a retirement plan, especially when the participants have investment discretion. Consider the liability that a plan sponsor and plan fiduciaries might be exposed during periods of extreme market volatility, like the financial crisis of 2008 or even the 4th quarter of this past year where the S&P 500 fell by over 20%.”

Topic #5: Document Retention
Despite the fear of the unknown when it comes to investment performance, 401k plan sponsors will find regulators pay more attention to the process rather than the fickle results. But only if there’s strong evidence the plan sponsor strictly followed that process. How does a plan sponsor produce this evidence? By documentation.

“A paper trail of the committee’s thoughts and actions is critical to the success and reduction of liability that a committee can implement,” says Jairo Gomez, Director of Retirement Plans for Allworth Financial headquartered in Sacramento, California. “A proper document retention program can clearly articulate to an auditor or government agency why a path was taken to either change or not change something within the plan.”

What’s an example of where this might be a problem? Gomez offers this: “A plan moves from a provider to another provider that lowers administrative costs, but uses proprietary funds that have higher expense ratios. There were no meeting minutes to explain why the choice was made to change.”

There you have it. These five critical topics will help 401k plan sponsors successful frame and implement the more complex areas we will be discussing next week.

Christopher Carosa is a keynote speaker, journalist, and the author of  401(k) Fiduciary SolutionsHey! 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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