7 Habits of Highly Effective 401k Plan Sponsors
So you’re resolute to improving your 401k habits as a plan sponsor? Great! This article is here to get you jump started.
Fiduciary Mindset. All decisions must be made with the best interest of the plan participants in mind with the exclusive purpose of providing benefits to them. It’s all about the participants at large, not just one person or one small group of people. Also, you need to know how to run the plan (as a competent person on the subject would) or hire third parties who know what they're doing (and can explain it to you).
Document Your Decisions. If you don’t document it, it didn’t happen. Did you decide to change out a fund, document why. If you’re making a plan design change, explain the process of coming to your conclusion. You should save these notes in a fiduciary file so when you’re audited, it’s very easy to point back to why you made changes to the plan. Too many plan sponsors make changes on a whim, but you should actually have a process for running your plan vs addressing it as you feel is needed.
Remit Contributions ASAP. This is the one that can bite plan sponsors hard on the correction. First, mistakes happen! The DOL and IRS provide ways to make corrections to your plan voluntarily so that you can make things right. Plan sponsors get in trouble when they a) ignore the issue or b) neglect to have an established process of reviewing their document and sending in contributions. Sweeping the issue under the rug is just asking for trouble. The company is on the hook for lost earnings between when funds should have made it into the plan and when you actually deposit them. I’ve seen plan sponsors who failed this over multiple years and the costs can add up significantly, especially in a bull market. Generally, if your plan has less than 120 participants, you have a safe harbor rule to get contributions in by the 7th business day after the pay date. Generally, plans with more than 120 need to get them in as soon as administratively feasible (which may be within a few business days).
Review The Plan Documents. You need to know the parameters of your plan. Do not operate by the summary plan description as that is not the legal plan document. Do not operate off local knowledge where the person before you told you how it’s done. When in doubt, call your 401(k) provider or TPA (or advisor) to get a copy of the documents and ask for help reviewing. If you're operating differently than what’s in the plan doc, you have a problem that is in need of correcting. If you want to change your plan, create an amendment and begin the new method of operating after the effective date.
Review The Investments. Just because they were “good” when you originally chose them, doesn’t mean they are “good” now. This needs to be routine! Compare apples to apples on investments. If you’re not sure what to do (and most people aren’t because understanding investments isn’t their day job), then you should seek out a professional, who is also a fiduciary. Having an investment policy statement can help make this much easier.
Annual Education Meetings. Unfortunately, we don’t come out of high school knowing what a stock, bond, or mutual fund is. We also typically aren’t taught about taxes and paying them now vs later. Or, the risks of investing too conservatively and not making it to a successful retirement, or too risky as you approach retirement. Your participants need help. Make it a priority for them to get at least an hour per year of this at a minimum. More would be better, but this is a start.
Understand Your Fees - THIS IS SO IMPORTANT! If you think I’m exaggerating, just Google “401k fee lawsuits”. There have been some recent developments that have cleared the way for more of these to come in the future and you can easily avoid this with a skilled advisor in your corner. There is no such thing as a free 401(k) plan, advisor, auditor, TPA, etc. You have investment cost, potential money going back to the 401(k) provider out of that investment cost, and potential 12b-1 fees from those investments that pay an advisor a commission for your plan. Then you may have a per participant dollar charge, a base fee, or an asset base fee (i.e. 0.30% per year assessed quarterly), TPA fees, audit fees, advisor fees. There is no free lunch. Ask for copies of what’s called a 408b(2) fee disclosure from all providers to understand your fees. It still may be confusing, so hopefully you have a transparent advisor who can assist with this process.
If you read all of this and the wind is out of your sails, don’t give up! This is just a start to running a plan as one should. There are many rules and facets that, again, an advisor who specializes in this area can really add some value, and time back to your day.
We are happy to possibly be that advisor for you! Feel free to schedule a call with us today to learn more about our services.