At FiduciaryShield, we want every financial advisor who oversees 401(k) plans for their clients as well as each plan sponsor who manages their own plan to offer the best possible product. We mean whether they choose to work with us or not.
That’s why we offer these important tips to help financial advisors and plan sponsors navigate what can be a very complicated space. As always, we want you to know we’re here for you if you ever want expert help.
The most important initial step to take when evaluating the state of a 401(k) is to look for areas that are the biggest concerns for a plan sponsor or other plan administrator.
The following seven major issues are ones that plague plan sponsors. If you are unaware of these areas of concern, perhaps you should be.
1. Participant Hardship Withdrawals
When a plan participant requests a hardship withdrawal from their 401(k), it can create an awkward situation for everyone involved. The participant often doesn’t understand why they can’t have immediate access to their own money, and in many cases, the employer might agree with them. Why should they risk losing their home or face some other financial crisis when they have sufficient funds to cover their needs sitting in a retirement account?
The flip side of this is the desire to protect employees from themselves. Even a small withdrawal now can have a major impact on their ability to retire comfortably in the future.
One thing everyone seems to agree on is that the ability to make withdrawals should be limited to some extent. The Bipartisan Budget Act of2018 (“Budget Act”) introduced new legislation that went into effect on January 1, 2019. Since the proposed regulations weren’t released until mid-November, many plan sponsors were required to make these decisions without sufficient clarification. The specific impact of these law changes is yet to be seen.
2. Compliance Requirements
Everyone knows there are plenty of compliance requirements involved in maintaining a 401(k) plan. But most business owners are too busy running their businesses to give it the attention it deserves.
That’s why most plan sponsors turn this responsibility over to third parties, but it’s important to understand that doing so does not relieve you of your ultimate responsibility. If the professional you hire makes a mistake, the plan sponsor is still liable for that mistake.
So if you’re relying on your custodian to handle your compliance issues, you’re likely not as protected as you may think. Many of these vendors do not take a proactive approach to ongoing compliance.
It’s important to understand this to save yourself headaches now and in the future by ensuring that your third-party is as concerned about compliance as you are. It’s also important to note, at this point, that choosing a third-party is itself the act of a fiduciary. That’s why it’s so important to carefully vet the service provider and the value they bring.
3. Business Sustainability
Let’s face it, if you can’t turn a profit in your business, there’s no need for a 401(k) plan because eventually there will be no salaries and no jobs. As a business owner, your number one priority is to keep your business going.
This means you need to make money, attract qualified employees, and remain competitive. In a tight labor market where wages continue to rise, this is a challenge, which is why offering benefits such as a solid 401(k) plan are so important.
Having a basic plan with a company contribution in place is no longer sufficient. The best plans now focus on providing quality financial education to employees. Additionally, a financially educated employee is more motivated and productive, creating a win for the business and the employee.
4. Low Employee Participation Rates
If you offer a plan but very few of your employees are participating, what good does it really do? Auto-enrollment can significantly improve participation rates; however, according to a survey by Vanguard, only15 percent of small businesses have adopted this practice. Plans that do take advantage of auto-enrollment typically see participation rates over 80percent, while those that don’t hover somewhere around 58 percent.
It’s clear that auto-enrollment can make a big difference, but it’s not enough. You can improve your participation rates even further by working with a professional to provide quality employee education and ensure the enrollment process is easy. Increasing the employer contribution and allowing for immediate eligibility are also effective tactics for encouraging employees to enroll in the plan.
5. Insufficient Savings Rates
According to a recent survey by Bankrate, 65 percent of Americans aren’t saving enough for their retirement. Even worse, 20 percent aren’t saving anything at all! Employers who are concerned about their employees’ low savings rates can help by working with a third party to move away from the standard “quarterly enrollment meeting” and instead provide interactive education opportunities designed to encourage greater savings.
6. 401(k) Plan Costs
One major concern that should be on the minds of plan sponsors and the financial advisors who counsel them is 401(k) plan costs. From administrative expenses to internal fund costs, recordkeeping expenses, and other expenses embedded in the plan, it’s the plan sponsor’s responsibility to know exactly how much is being paid, to whom, and why.
If you’re not 100 percent clear on this, now is the time to find out. Failing to do so can land you in legal hot water, which leads to our final and possibly most important concern.
7. Fiduciary Liability
The term “fiduciary liability” refers to the overall personal level of risk a plan sponsor takes on when offering a company 401(k) plan. While it’s certainly no fun, the discomfort created by this liability does exactly what it’s supposed to do. It makes the plan sponsor more concerned about the appropriateness of their plan than they would be otherwise.
By giving YOU personal liability, the DOL has ensured that your best interests and those of your employees are one and the same. You don’t want to take the chance of being sued by your employees or face serious fines, so you do everything in your power to make sure things are done right. At the end of the day, that’s a good thing.
Best Practices for Addressing Plan Sponsor Concerns
Now that you’re aware of the most important plan sponsor concerns, you’re probably wondering what to do about them.
FiduciaryShield provides a unique and innovative service that addresses all of these issues and much more. To the greatest extent possible, you as a plan sponsor or a financial advisor who wants to add these services to your products menu, FiduciaryShield is set it and forget it.
Contact us today to learn how FiduciaryShield can help you offer valuable 401(k) services without the administrative headaches that often accompany them.