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Refreshing Insights

Every retirement plan has fees – that’s a given. For employers that offer 401(k) packages as part of their employee benefits, it’s their fiduciary responsibility to keep those fees in check. 

Regulators from the Department of Labor (DOL) are increasing the number of audits for businesses of all sizes, and it’s been relatively easy for them to find compliance violations. In 2017, the DOL conducted more than 1,700 investigations and found that a staggering 63.5% required corrective actions or fines, and more than 100 indictments were issued for crimes related to employee benefit plans.

It’s critical for employers to remain good stewards of their employees’ money and to be prudent about third-party fees, but managing plans can be complex. Use these tips and best practices when striving to improve processes and benchmarking fees to help ensure compliance. 

Proper 401(k) Documentation

In the event an audit takes place, how will you prove to regulators that you’ve fulfilled your fiduciary responsibilities? It all comes down to having documented processes based on facts.

Employers are required to act in the best interests of their employees by offering a range of investment options, each with varying cost levels. Active funds, for example are typically more expensive than passive index funds. But cheaper isn’t always better, so make sure you consider the overall benefits to your company and its workers.

Your plan needs to have an investment policy statement which guides the plan’s investment decisions. Once the investment policy statement (IPS) is in place, you can choose a list of investment options that are fee friendly and follow the IPS. As a sponsor you need to document this process, in addition to the following as they pertain to fees: 

  • What’s the overall cost?
  • What does the record keeper charge?
  • What does the advisor charge?
  • What do individual investment companies charge?

When looking at litigation where employers have had to pay fines or pay employees back for mishandled fees, it’s almost always because of the lack of documentation and process. As an employer, you don’t have to have the lowest fees; you only have to ensure you’re “acting with loyalty and prudence” and that the fees are justified. 

Benchmarking Best Practices 

The only way to know if your plan fees are reasonable is to objectively compare them with industry averages and what other 401(k) providers charge. This type of benchmarking can be difficult because publicly-available industry averages are not readily available.

Traditionally, an advisor provides an annual review of fees and plan performance. The data that’s provided, however, is often produced by the record keeper or investment company that issues the fees. This practice has inherent flaws because the company issuing fees will naturally say they’re in line.

Make sure your plan is reviewed annually and that benchmarking is performed independently. This way you can feel confident there aren’t any conflicts of interest. Keep that benchmarking documentation on file to prove you’ve done your due diligence in the event of an audit. 

An Approach to Benchmarking 401(k) Plans

An independent review will compare your plan with other like plans to show where you land and make recommendations as needed. If your fees appear to be high, there may be valid reasons that should be documented. Perhaps you have high turnover or low balances, or the record keeper provides additional services such as a 24/7 help desk, translators for non-English-speaking employees or robust educational programs. Some of these factors are important to employees and consequently result in higher costs.

It’s not always a good thing to have the lowest fees either — low fees can indicate a lack of quality services or a very limited passive investment lineup. On that note, your advisor should bid out your plan to several different providers every three years to ensure the investment company you use puts its best foot forward.  Good advisors can help you compare apples to apples, and they also can negotiate on an employer’s behalf during this process to ensure you don’t end up changing plans as a result. Done correctly, utilizing an independent advisor with buying power will ensure everyone remains competitive and honest.

As an independent advisor, we work for the plan sponsor, not the investment companies. McClone is dedicated to managing risks for employers while working with them to offer  their valued employees the best benefit packages possible within means. Not only will we conduct independent reviews, help establish processes and benchmark your plans; we also provide your plan administrators with a secure, online portal to make managing it all simple.

If you’d like to discuss your existing benefits package to see how it measures up and talk through how to manage overall business risk, reach out today.

This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice.  You should consult your attorney or tax advisor for guidance on your specific situation.  In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.

Securities offered through LPL Financial, member FINRA/SIPC.

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A collection of articles from the McClone team with the helpful knowledge and insights to ensure your organization is well protected.