How to Be an Informed Shopper for Your 401(k) Plan

Daniel V. Estenson CFP®, AIF® | Posted: June 15, 2018

Employers that offer work retirement plans to their employees, such as 401(k) or profit sharing plans, have certain responsibilities associated with the management of the plan – referred to as fiduciary responsibilities.

The Role of a "Plan Fiduciary"

At least one person at the company must be listed in the plan document as the plan fiduciary. Carrying out duties prudently is one of the fiduciary responsibilities, according to the Employee Retirement Income Security Act (ERISA). The plan fiduciary may be held personally liable if these responsibilities are not met. According to the Department of Labor website, the plan fiduciary is responsible for:

  • Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them
  • Carrying out their duties prudently
  • Following the plan documents (unless inconsistent with ERISA)
  • Diversifying investments
  • Paying only reasonable expenses

There are ways to limit certain portions of these fiduciary responsibilities. For example, giving participants qualifying control over their investment selection may limit a small portion of the fiduciary responsibilities; however, the plan fiduciary is still often responsible for selecting the investment menu.

Outside advisers and service providers can be hired by the employer, and some advisers are even willing to take on certain limited portions of the fiduciary responsibilities. The employer's plan fiduciary is then responsible to monitor the activities of the advisers and outside service providers.

What is Benchmarking?

Benchmarking a work retirement plan typically consists of comparing the plan to plans of similar size and to other plans in the same industry. Documenting the benchmarking process and understanding the fees associated can become a part of the proof that the plan fiduciary is making prudent choices.

Each year, you may have your adviser or current plan provider benchmark your plan to see if your plan is competitive and still in the best interest of participants. However, that may not be enough to fulfill your fiduciary responsibility. We recommend shopping around every two to three years by having an outside adviser or service provider benchmark your plan against others in the industry.

Why You Should Benchmark Your Plan Every 2-3 Years

Annual benchmarking for an employer-sponsored work retirement plan can help to uncover potential liabilities. It is important for the employer and their plan fiduciary to understand how the plan works, as they are responsible for the overall management of the plan.

The benchmarking report should review several things to verify the plan is meeting ERISA’s requirements as well as the needs of employees. The report may include, but is not limited to, the following analysis:

  • Review of the annual Form 5500 filing to identify if there are any operational or compliance issues
  • Review employee participation and utilization rates
  • Monitor investment menu diversification requirements, expenses, and performance
  • Monitor recordkeeping and administration fees and services

Three Things to Consider When Benchmarking Your Plan

If an annual benchmarking report shows the employer that there are issues in one or more areas, it may be time to make a change with the adviser, the investment menu, or service providers hired to operate the plan for the employer. If a plan has not been benchmarked in the last 2-3 years, it may also indicate that it is time to review the current adviser and service providers.

1.  Adviser or Consultant Selection

If an employer chooses to hire an outside adviser or consultant to assist with the investment menu and service provider selection process, it is important for the employer to interview these individuals and ask a series of questions. Questions we recommend asking advisers include:

  • Are they willing to take on a fiduciary or consultative role with your plan? (Examine what type of role is appropriate for you and the participants of your plan.)
  • What type of funds will be included in the investment menu?
  • What are the overall costs of the investments, i.e. expense ratios, 12b-1 fees, sub-transfer agent fees, if applicable, etc.?
  • If the funds have 12b-1 or sub-transfer agent fees, does the adviser, the record keeper, or the third party administrator retain these fees or are these fees used to offset other plan costs?
  • Will proprietary investments be used and/or are there investment restrictions?
  • Does the plan use the lowest cost share class of the fund selected, and if not, can the adviser justify why that share class is being used?

It is important to note that advisers may take on fiduciary responsibilities, whereas consultants may not. We recommend looking for an independent adviser who does not sell only proprietary products, and one who will take on certain limited fiduciary responsibilities. Your adviser then can help you explore service providers that meet your needs.

2. Service Provider Selection and Monitoring

A Request for Proposal is one process that can be used by employers to obtain bids from one or more work retirement plan service providers. The employer may also hire an adviser or consultant to do a service provider search. This helps the employer find service providers that may be able to provide an appropriate level of service at a reasonable cost.

The service provider selection process, if properly documented, may become part of meeting the plan’s fiduciary responsibilities. The employer should also be able to justify the service providers selected. It is important for the plan fiduciary to document the initial service provider selection as well as the ongoing service provider monitoring process. Service provider selection and monitoring can typically be accomplished by benchmarking on at least an annual basis.

3. Cost

The overall cost of the plan is an important factor, but it should not be the only factor considered. The quality of the services available, as well as how employee education is handled are also important factors to consider.

When looking at the overall costs, it is important to understand the costs for advisers, the costs for recordkeeping and administration, and the costs of the investment menu. In fact, there has been a recent increase in the amount of class-action lawsuits being brought to court regarding work retirement plans and costs associated with them.

According to 401kspecialist.com, a $140 million ERISA class-action lawsuit was recently filed against The Home Depot. The plan is one of the largest 401(k) plans in the country, with over $6 billion in assets. The suit alleges that The Home Depot selected multiple poorly-performing funds, allowed investment advisers to charge unreasonable fees, and turned a blind eye to a kickback scheme between the investment adviser and the plan’s record-keeper. The suit claims that The Home Depot failed to make prudent decisions with monitoring their investment menu and service providers.

This case illustrates how important it is to periodically review the costs associated with your plan.

How to Get Started

To have your plan benchmarked, most advisers or consultants typically need just a few pieces of information to allow them to compare your plan with others. This information includes your annual notice that lists fees and the funds in your plan (also known as the 408(b)2), the estimated size of your plan, and the number of active participants. Scheduling an appointment with an adviser or consultant, with these pieces of information in-hand, will get you started in the right direction.

Bernicke Wealth Management works with companies who sponsor work retirement plans for their employees, and provides complimentary benchmarking consultations for employers. If you'd like to schedule a meeting to benchmark your plan, contact Lindsey Hendrickson at 715-832-1173.

In Summary

The recent increased focus on fiduciary responsibilities and the class action lawsuits associated with employer sponsored work retirement plans highlight the importance of benchmarking your company’s work retirement plan. Working with an adviser or consultant to establish and document an annual plan benchmarking process can help you monitor the fiduciary responsibilities you have for your work retirement plan and its participants.

The benchmarking process can be used to substantiate that the plan fiduciary is making prudent decisions, as well as substantiate any changes made. A documented process that reviews the investment menu and service providers, and monitors the performance and fees charged, can be an integral piece of performing the employer’s fiduciary responsibilities.

About the author

Daniel V. Estenson CFP®, AIF®

Dan is a Wealth Manager who aims to help clients reach their lifelong goals through retirement income planning, tax minimization strategies, and wealth planning. Dan also helps develop college education funding strategies for our clients, in an effort to reduce the increasing costs of post-secondary education. He lives in Chippewa Falls with his wife, Nicole, and three children. In his free time, Dan enjoys traveling, the outdoors, and spending time with his family.

Certifications, Licenses, and Registrations

  • Registered Representative with Triad Advisors, LLC
  • CERTIFIED FINANCIAL PLANNER™ professional
  • Accident, Life, Health, and Variable Life/Variable Annuity Insurance Licenses
  • Accredited Investment Fiduciary®

Education and Training

  • Series 7, 66
  • Bachelor's Degree - Accounting; University of Wisconsin - Eau Claire
  • College for Financial Planning graduate

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