Offering a 401(k) can be a double-edged sword for business owners, at once attracting and keeping top talent while creating what is often an administrative nightmare for themselves. That doesn’t even take into account the heavy burden of being a fiduciary to a retirement plan.
Because of these complications, business owners will most often either forgo offering a plan despite the benefit to their company or turn to their trusted financial advisor for help. That creates another set of headaches, this time for the advisor. And it still doesn’t do much to make things easier for the business owner.
There is a painless way to design and build a 401(k) that gives the business owner and their company all the positives of a 401(k) and none of the headaches.
We’re talking about a FiduciaryShield 401(k), a groundbreaking approach to designing, creating and administering 401(k) plans for financial advisors to add to their menu of services and for plan sponsors who need direct help.
Working with us automatically puts these checks in place. In the meantime, whether you seek our help or want to go it alone, it’s important to avoid these five common mistakes in approach to being responsible as a fiduciary:
Failure to Evaluate Service Providers
Plan sponsors are required to act prudently and review the plan’s record keeper, Third Party Administrator (TPA), and other service providers. This review should include a comparison of the current costs and services to those of other potential providers. If your plan hasn’t been reviewed in a while, it’s not uncommon to find unreasonably high fees that could easily be resolved by switching to a provider with thinner margins.
Failure to Review Investment Options
Ideally, the investment options in a 401(k) plan should be reviewed on a quarterly basis. At a minimum, this review should occur annually. The purpose of the review is to confirm each of the following items:
- Investments meet the guidelines stated in the Investment Policy Statement
- Investment options are properly diversified
- Investment management fees are reasonable
- Appropriate investment share classes have been offered
There has been a rash of lawsuits focused on investment fees, choice of investment share class, and failure to prudently review and choose investment options. Having the right investment options available helps participants reach retirement goals and protects plan sponsors from litigation.
Failure to Remit Deposits in a Timely Manner
This is one of the easier problems to avoid. It is also one of the more common mistakes. If deposits are not remitted on time, the plan sponsor may have to undergo a voluntary correction program. Depending on the severity of the mistake, fines may be owed as well.
Failure to Follow Your Own Plan Document
401(k) sponsors have the flexibility to make plan-specific design decisions. Failing to follow these self-imposed choices has traditionally been a red flag that leads to failed audits.
Plan sponsors can minimize the likelihood of this mistake by ensuring that at least one employee is thoroughly versed in the plan specifics and ERISA guidelines. Companies that do not have a dedicated employee in place should strongly consider outsourcing administrative tasks to an outside plan fiduciary such as FiduciaryShield.
Failure to Document
Documentation is a critical element of 401(k) compliance. There are two primary areas where thorough documentation is necessary.
- Decision and Actions
The decisions made in the plan must be prudent and in the best interests of the plan participants. Without documentation as to why a change was made, there is no proof that this rule has been followed. This requirement is often hard for business owners to swallow, but is a necessary step nonetheless. - Monitoring of the Plan
As a fiduciary, you are required to monitor your 401(k) plan. You may be lucky enough to have a plan that works well without any necessary modifications, but this does not relieve you of your duties. You must still document that you are monitoring your plan and have performed evaluations on a regular basis.
Understanding Your Responsibility
As an ERISA plan consultant, FiduciaryShield has reviewed many plans. During the review, we routinely find these mistakes, and while many are simple to fix, others are costly to fix.
Most often, these mistakes arise from a plan sponsor’s lack of knowledge about how to correctly administer a 401(k) and keep up with the accompanying requirements. Other times, business owners are simply too busy running their businesses to dedicate time to the heavy administrative portion of their 401(k) plan.
Some plan sponsors are under the impression that their recordkeeper or TPA is handling these responsibilities for them. We consistently encounter business owners who mistakenly believe that the administration of their plan is “taken care of.” The misunderstanding that the recordkeeper or TPA is acting as a fiduciary to ensure these items are being handled is far too common.
Simple Steps for Avoiding Mistakes
Avoiding potentially costly 401(k) mistakes can be as easy as following these simple steps:
- Don’t assume that the work is being done by your recordkeeper or TPA. Most Recordkeepers and TPAs do NOT act as fiduciaries.
- Put a plan in place to regularly monitor and evaluate your 401(k) plan.
- Document your process and reasons for making changes.
- If you aren’t comfortable completing steps 2 and 3 on your own, consider outsourcing the work to a plan fiduciary.
That’s where FiduciaryShield comes into play. Our innovative services make it easy for financial advisors to offer retirement plan services and plan sponsors to off their employees a quality, well-run 401(k).
Contact us today for a complimentary review of your plan or to discuss how our services can help your business or financial advisory firm.