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The Meat and Potatoes Topics of 401k Plan Sponsor Training: Fiduciary Education Curriculum (Part II)

The Meat and Potatoes Topics of 401k Plan Sponsor Training: Fiduciary Education Curriculum (Part II)
May 14
00:04 2019

Last time we took a look at the fundamental topics all 401k plan sponsors need to be intimately familiar with before they can move onto to the more challenging (and popular) topics (see, “5 Critical Topics to Teach 401k Plan Sponsors: Fiduciary Education Curriculum (Part I),”, May 7, 2019). These five topics underscore everything plan sponsors need to know about their fiduciary obligation. They are interwoven through everything else in the fiduciary education curriculum. The represent at once both the most powerful shield of protection and the most damaging threat of vulnerability. That’s why it’s critical 401k plan sponsors know them on an intuitive level. They’re prerequisite to all other topics.

Let’s talk about two of those “other” topics now. These two topics may be described as the “meat and potatoes” of our syllabus. They each receive the lion’s share of media attention for one reason: they represent the easiest entry point for regulators and trial attorneys searching to discover a fiduciary liability.

If we liken the “5 Critical Topics” to the skeleton and sinew of a plan sponsor’s fiduciary obligation, the “meat and potatoes” topics can be described as its soft underbelly. It is within the routines of these topics that plan sponsors live most dangerously. What are these next two topics and why is it important plan sponsors to dig deep into them rather than simply “read the headlines”?

Topic #6: Investment Selection & Monitoring
Admit it, this is everyone’s most favorite and least favorite topic. Everyone likes it because everyone likes to talk “high finance.” This is the “high finance” topic. One gets to engage in such lofty matters as geopolitics, macroeconomics, and investment theory. This is why this topic is everyone’s most favorite.

On the flip side, once you’ve done all the fun stuff, you must do the mundane stuff. Over and over again. Without any slip-ups. It’s boring. It’s tiresome. It’s also the reason why, through Topic #5 (Document Retention), you learned how process (or “due diligence”) is so critical to reducing fiduciary liability. If you didn’t learn this basic lesson, you risk skipping the monitoring part of investment selection. That’s a risk plan sponsors ought not to take.

The process is key within this topic. It relies on trust law traditions dating back to the eighteenth century. These traditions have the plan sponsors back – but only if they’re diligently followed.

“One of the core principles of ERISA is the ‘prudent person’ rule,” says Aaron Wassenaar, Director of Retirement Services at Action Point Retirement Group in Wayland, Michigan. “Fiduciaries have a duty to act with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would act, including ensuring investments remain prudent investments. Fiduciaries must follow the ‘prudent expert’ rule—acting as an experienced or knowledgeable expert might. The fiduciaries must set overall objectives and investment strategies for the plan, select appropriate investments in light of these goals and strategies, monitor investment performance on an ongoing basis, and add or remove investments when warranted over time.”

Plan sponsors do have some latitude here in hiring third party experts to perform these tasks. It’s important, however, that they keep themselves up to date on how this delegation impacts their liability. Wassenaar says, “Plan sponsors might encounter a problem in relying on the recordkeeper or advisor as the ‘expert’ when it comes to the investment menu and not understanding why certain investments are selected, offered, or removed, and, in some cases, not removed. 3(21) and 3(38) advisory services have been marketed to plan sponsors as a way to ‘offload’ their responsibilities when it comes investments. Recent case law has determined that this isn’t true. 3(21) & 3(38) advisors can share in the liability, but the plan sponsors still have a fiduciary responsibility to understand the reasoning & processes surrounding the investments.”

A subset of this topic includes employee education. Since it’s not reasonable to assume that all plan participants fully understand the nature and relevance of their investment choice, the plan sponsor must determine how best to educate them on these matters.

“Plan Sponsor are duty bound to provide an education to participants to help them understand the problems they will face in old age if they do not save,” says Dr. Guy Baker, founder of Wealth Teams Alliance in Irvine, California. “Most participants fear loss. They would rather save in a bank than put their money into an investment fund. Fiduciaries need to educate participants about the risk of waiting and the risk of being too conservative. Finally, when a plan offers a wide range of funds, the choices are overwhelming and can cause many participants to elect the default investment option. This is likely to be inconsistent with their retirement goals, their risk tolerance, and their ability to comprehend their investment options. Fiduciaries have to address their short comings.”

Without the benefit of fiduciary training in this area, plan sponsors and any relevant executive committee might be harming their employees. “The investment committee might encounter a problem if it isn’t adequately trained in the topic,” says Dr. Baker. “The Plan committee needs to understand the disservice they are subjecting participants to by not educating them about the basics of home economics. Giving participants a portfolio of funds and expecting them to understand the benefits of a diversified portfolio and how to accomplish their goals borders on irresponsible. Participants need access to coaching and education. Many employers are reluctant to provide this because it will take away from the work day.”






Topic #7: Understanding Plan Fees and Costs
If 401k plan sponsors see “Plan Investments” as the carrot, then they’d probably see “Plan Fees” as the stick. Thanks to “process,” plan sponsors rarely get into trouble for offering investments that lose money. On the other hand, they’ll find themselves in litigation if they make the wrong fee choice.

Why? Because paying higher fees is both measurable and detrimental to plan participants. “Every dollar paid in plan fees is one less dollar going to the benefit of the employee or plan sponsor,” says Kyle P. Webber, Principal & Managing Partner at Quartz Partners Investment Management in Troy, New York. “If participants assume plan fees, which at the very least they do with the investment options (e.g.., mutual funds) this creates a liability where a disgruntled employee can go after the plan sponsor.”

Educating plan sponsors on the need for ongoing fee benchmarking helps mitigate this liability (but only if the plan sponsors carry out what they’re taught). “Plan fee benchmarking is often one of the most overlooked items on a retirement plan once it is established,” says Webber. “The Department of Labor expects plan sponsors review plan expenses no less than annually to ensure the fees the plan or participants is paying to service providers (e.g., record keeper, third party administrator, investment options, custody, advisor) are reasonable when comparing versus plans of similar size and makeup.”

Both individuals and committees assigned with the relevant plan sponsor oversight roles must familiarize themselves to all costs incurred by the plan. This includes understanding how to read relevant disclosure documents. “Plans sponsors and investment committees should be educated on the wide range of potential fees that can be associated with a plan, and the myriad of ways fees can be hidden deep within the disclosures,” says Joshua Escalante Troesh, Founder of Purposeful Strategic Partners in Alta Loma, California. “I have seen plans by national name-brand providers where the total all-in fees are upwards of 5% of the assets. These fees often include advisory fees, administrative fees, commissions, sales charges, and high expenses on proprietary funds, among others.”

Here’s and area under this topic that is often overlooked. “The challenge for plan sponsors is not only to understand the direct plan costs—but also to understand the less visible, indirect costs,” says Wassenaar. “These costs come in different forms such as revenue sharing, 12b-1 fees, etc. are sometimes very hard to identify. ERISA requires plan sponsors to ensure that plan assets are used exclusively for paying plan benefits or defraying reasonable administrative expenses. ERISA also requires that plan sponsors determine whether all fees are reasonable for the services being provided. Example of where plan sponsors might encounter a problem: Some plan sponsors have been given the impression that since there are no ‘direct costs’ than the plan must not pay any fees. Others believe that their plan is ‘cheap’ because the direct costs are low but, the plan expenses are high due to the indirect costs.”

How would a plan sponsor navigate through the treacherous labyrinth of fees? “Sponsors can get a good idea on assessing plan fees by requesting the plans 408(b)(2) fee disclosure from any of the plans service providers,” says Webber. All plans are required to have 408(b)(2) fee disclosure which lists all plan fees. To size up how a plans fees compare, the Investment Company Institute publishes an annual defined contribution study which provides plan expenses based on plan size. These reports can be found at”

There’s one more important point every plan sponsor needs to know about fees. The DOL specifically stated it did not expect plan sponsors to always choose the lowest cost service provider. They wanted plan sponsors to look at the combination of both fees and service value. As a result, plan sponsors should not only benchmark the quantitative aspect of fees, but also the qualitative aspect of the service.

“This goes hand in hand with knowing what your responsibilities are,” says Jairo Gomez, Director of Retirement Plans for Allworth Financial headquartered in Sacramento, California. “How do you know if your providers are doing a good job and charging you a reasonable fee if you don’t know what everyone is supposed to be doing and how much they are charging you for doing it? As an example, a committee may assume their advisor has the fiduciary liability for investment performance when that is not the case, or perhaps they assume that notices are being provided by their third-party administrator when that was not the case.”

Meat and potatoes make a hearty meal. But the cuisine is only as good as the chef who prepares it. We’ll tackle that topic in our next installment.

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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