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The 5 Biggest Worries of 401k Plan Sponsors and What To Do About Them

The 5 Biggest Worries of 401k Plan Sponsors and What To Do About Them
November 12
00:03 2019

With markets seeming to break new highs every week, unemployment at historic lows, and the economy humming along just fine, it might seem odd that 401k plan sponsors continue to have worries about their role in the retirement savings plan universe. But they do.

Some of these worries are baked into the cake. Some rise to become a hot topic. What ever the case, there are ways to alleviate these worries. Here are the five biggest worries of 401k plan sponsors and what they might do to relieve that anxiety.

#5: Our Plan Isn’t Competitive
Let’s not forget the original purpose for offering a 401k plan. It’s an employee benefit. Company’s dangle benefit packages in front of prospective employees for one reason: to hire them and keep them. A retirement savings plan has become a standard benefit, with the 401k plan long ago replacing the pension plan as the preferred vehicle.

“In this day in age, competition for high-quality employees is crucial,” says Matt Ruttenberg, Business Development Officer with Life, Inc. Retirement Services in Columbus, Ohio. “Plan sponsors are trying to stay ahead of the pack when it comes to standing out to their ideal employee. This is often approached with being creative with their benefits package.”

Just as the original 401k plan “was not your grandfather’s pension plan,” so too today’s 401k plans “are not your father’s 401k plans.” Ruttenberg says, “Whether it’s building an aggressive matching and vesting program, ‘outside the box’ health program, or even offering a student loan debt payoff program. The modern-day employee wants more than the standard benefits package.”

#4: It Takes Too Much Time
When 401k plans first arrived, they appeared to answer the plan sponsor’s dream of delegating more of the responsibility to the employee. For example, once the employer determined which separate and distinct investment options the plan would offer (at least three of them), the burden of selecting the investment fell on the shoulders of the employee.

Alas, as 401k assets grew, so did the burden of administering the plan. This administration takes time. Larger companies could afford to hire dedicated staff for this purpose. Other companies, well, the proverbial buck stopped at the president’s desk.

“With smaller plans, we hear complaints about the time it takes to administer them,” says Doug Kinsey, Partner and Chief Investment Officer at Artifex Financial Group in Columbus, Ohio.

While the burden persists, the industry has developed ways to ease the pressure at least somewhat. Over the past 10 years, Kinsey has seen “many improvements in technology and tools to make the process easy and that will really help plan sponsors reduce their costs while improving the overall participant experience. It’s always surprising to us that more small businesses haven’t taken steps to upgrade their programs to something more state-of-the-art, given the ease of converting today.”

#3: Employees Aren’t Saving Enough
Does this count as a worry or simply a frustration? Perhaps both. But this was an old (and is a continuing) worry. In fact, the 2006 Pension Protection Act allowed 401k plans to shift from “opt-in” to “opt-out” precisely for this reason. “Sponsors report that the biggest risk to participants is that they don’t save enough because of lack of participation and low savings rates,” says Ross Bremen, Partner, NEPC, Massachusetts. “A recent study of ours suggests that if sponsors could require one thing of all DC plans, it would be auto enrollment of all employees.”

But it may take more than auto-enrollment to boost employee savings rates. “Many plan sponsors are focused on a few issues, but the primary one we continue to hear is whether their employees are saving enough,” says Katie Hockenmaier, Defined Contribution Segment Leader-West Market for Mercer, in San Francisco, California. “For plan sponsors who are able to do so, we see continued adoption of auto-features to help bolster savings, as well as more plan sponsors considering whether there is a role for additional advice and guidance for their participants, such as managed accounts, with the goal of helping participants to take a holistic look at their savings opportunities.”

Indeed, as a reflection of this movement, the concept of “saving” has morphed into “financial wellness.” “Plan sponsors are concerned about financial wellness, the overall retirement picture, and whether or not employees are on the right track,” says Greg Patterson, CEO of The Advisory Group of San Francisco in San Francisco, California. “They want to make sure employees are utilizing and appreciating the benefits and resources that are provided to them, even when they know some key tools and advice for Wellness are not sufficiently available yet to help them. This can be especially concerning if they are working with conflicted/product selling companies who have a larger retail army: they are the ones that are willing to interact more directly with plan participants. This is a concern, both for the financial well-being of participants, and from a fiduciary standpoint of whether or not those parties and their ‘education’ have been sufficiently vetted by the fiduciaries. Fiduciary advisers need to create or leverage technology solutions that help educate plan participants at a more personalized level to help them gain a deeper understanding of saving for retirement.”

The fear of this potential conflict leads directly to the fourth worry…

#2: What Am I Missing When It Comes to Doing My Fiduciary Duty?
Compliance is hard. It’s harder if you’ve got an unrelated day job. Yet, that is precisely the situation most plan sponsors find themselves in. “From our conversations with plan sponsors, the threat of a compliance breaches and the accompanying regulatory liability associated with those breaches is what keeps them up at night,” says Kyle P. Webber, Managing Partner at Quartz Partners Investment Management in Troy, New York. “In our experience most plan sponsors lose sleep over Form 5500 filings and meeting safe harbor requirements. Meeting safe harbor requirements and submitting Form 5500’s accurately and on time is a pretty automated process with a low probability error with most 401k providers.”

It’s not just the filings, though. The underlying structure of the plan requires fiduciary oversight. “The biggest worry I hear from plan sponsors is that they are unsure how to manage a plan according to fiduciary standards,” says Kinsey. I hear this most from prospective customers who have plans in place that may hold an array of confusing assets, with higher fees, and very little guidance for employees to help them select the right mix of investments to accomplish their goals.”





For smaller company plan sponsors especially, the key to alleviating this stress point is to find the right professional to delegate these duties to. Of course, some delegation decisions may actually make matters worse.  Jimmy Masters, Vice President – Investments at The Alcaraz Fisher Justis Wealth Management Group of Wells Fargo Advisors in Virginia, Virginia, has “had a number of plan sponsors asking about their fiduciary duties: not understanding them, not understanding who is a fiduciary, and how do they protect themselves. Fiduciary training for the investment committee or board has been discussed/offered. They aren’t confident they’re doing the right thing with plan costs, paying enough attention to evaluating and monitoring funds. What can be done? It comes down to the plan advisor informing and educating. In most of these cases the advisor shows up to assist with enrollment but does little else. Most of these plan service providers on plans we encounter don’t have credentials, are one-off brokers with little plan experience, and are simply not equipped to have these higher-level discussions. It is incumbent upon the service provider to lead these discussions and provide the resources to protect the plan sponsor.”

#1: The “L” Word
Picking the right service provider becomes critical should the plan sponsor face a lawsuit. We’ve seen plenty of examples where plan sponsors thought the service provider could be held accountable for any fiduciary issue when, in fact, they are not fiduciaries. “Breach of fiduciary lawsuits for ERISA retirement plans are hitting new heights,” says David S. Thomas Jr. CEO and Senior Investment Management Consultant at Equitas Capital Advisors, LLC in New Orleans, Louisiana. “Plan sponsors are not covering their fiduciary responsibility and in many cases their service providers generally are not fiduciaries to the Plan.”

It is true, however, that it is possible for plan sponsors to select a service provider can could take on this duty. “They are concerned about being a fiduciary and what documentation they need to show they are fulfilling their responsibilities,” says Deborah Castellani, Sr. Fiduciary Strategist at Akros Fiduciary Management in Austin, Texas. “They are looking for service providers that are knowledgeable about ERISA to help with this issue. With social media, lawsuits, regulations and terms such as ‘fiduciary’ are now being seen and read about by everyone not just the industry insiders. This is opening their eyes to their own responsibilities. Service providers becoming more knowledgeable about ERISA. Investment providers know SEC and FINRA, but ERISA is different. If the service provider doesn’t want to learn it, then team up with an ERISA consultant who can bring in this knowledge. Also have their plan sponsors go through a comprehensive fiduciary checklist every year to make sure they are doing their duties. It educates and documents what they are doing.”

We can look at the recent history of class action lawsuits to determine both the plan sponsor’s greatest vulnerability as well as how best to fill that hole. “When you look at the litigation landscape and where DOL EBSA hit plan sponsors with over $1 billion in penalties for FY 2018, the biggest non-compliance risks stem from excessive plan fees and the investment lineup issues,” says Webber. “Plan sponsors can control these risks by hiring a ERISA 3(38) plan advisor. Far too often plan sponsors hire an advisor only assuming 3(21) fiduciary liability which is merely a salesperson cloaked as a 401k advisor. A 3(38) advisor will control these risks through documentation, they’ll draft an Investment Policy Statement that dictates the types of investment choices along with the repeatable process used to select those investments. 3(38) advisors should also provide an annual benchmarking report versus plans of similar size and makeup.”

Fear is a natural response to the unknown, and 401k plan sponsors are generally experts in the field their firm specializes in, not in the retirement plan arena. Still, when you’re not an expert in an important job that you need done, what do you do?

Hire a pro with the right experience.

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.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


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