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Fiduciary: The One Best Practice 401k Plan Sponsors Can No Longer Ignore
by Christopher Carosa July 09, 2024
Plan sponsors sometimes get a little too complacent. Now is the time to revisit 401k best practices. At the head of this list, especially considering the latest Department of Labor initiatives is a concept often underestimated by 401k plan sponsors.
“A plan sponsor’s paramount responsibility is to ensure the effectiveness and compliance of their 401k plan,” says Richard Bavetz, investment advisor at Carington Financial in Westlake Village, California. “In light of evolving regulatory landscapes, technological advancements, and participant needs, revisiting best practices can help safeguard the interests of both sponsors and participants.”
This can often be a challenge.
“No matter how much an employer responsible for a retirement plan outsources, know that you must oversee everything,” says Peter Gulia of Fiduciary Guidance Counsel in Philadelphia, Pennsylvania. “You might not check every item of a recordkeeper’s or third-party administrator’s work, but you have to check enough that they see you watching. And on some of each kind of thing the service provider does. Is it a hard work chore? Yes. And many employers practically can’t do it. If the employer wants its people to spend their time on the employer’s business, use someone outside. But it must be someone who is truly independent of all the plan’s other service providers. Or if the plan isn’t big enough to charge the expense against participants’ account, the employer might spend less evaluating pooled employer plans.”
It’s too easy for plan sponsors to get lost in the weeds when dealing with plan minutia. Yes, “the buck stops here” reality can overwhelm many. Delegation is the key. It’s also the Achilles Heel. This is where the magic word emerges.
“With the 2024 release of the Department of Labor’s updated rules regarding investment advice fiduciaries, there has been renewed scrutiny on investment advice services for retirement plan investors and the fiduciary status of the advisors,” says Michelle Capezza, Of Counsel at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. in New York City. “Plan sponsors of employer-provided retirement plans should review their plan participant investment-related services and service provider agreements to determine if there are any desired or required changes to the services, the service agreements or related participant disclosures in order to confirm the fiduciary nature of any of these services or to ensure that they do not rise to services that are fiduciary in nature and remain more informative or educational if that is desired.”
There it is. “Fiduciary.” Some feel the DOL’s latest attempt to adopt a Fiduciary Rule has staying power. Others think, especially with the Supreme Court’s recent Chevron ruling, it will never get off the ground. But why should plan sponsors take the risk? There’s certainly less risk in using third-party fiduciaries to provide services to the plan. But finding the right one can be tricky.
Terrence Morgan, president of Ok401k in Oklahoma City, Oklahoma, believes 401k plan sponsors can best service themselves and their employees when they “Hire a local 401k fiduciary advisor who is committed to: 1) helping the employer increase participation; 2) motivating the employee to increase their deferrals; and (3) providing participants with local real advice in person at the plan enrollment and education meetings each year. Too many employers hire Registered Representatives who are not fiduciaries and typically these fake 401k advisors offload the above-mentioned 3 services to another fiduciary that is long distance or online.”
Plan sponsors cannot take fiduciary responsibility and plan governance lightly. It represents their core role.
“Plan sponsors are obligated to put the interests of their plan participants ahead of their own,” says Bavetz. “It is their fiduciary duty. This involves making prudent decisions about plan investments, ensuring fees are reasonable, and managing the plan in alignment with its goals. Regularly reviewing plan investments is essential. Sponsors should conduct periodic evaluations to assess the performance and suitability of investment options, benchmarking them against industry standards. This practice helps in maintaining a diversified and well-performing investment portfolio. Additionally, providing ongoing fiduciary training to committee members and HR personnel is critical. Such training ensures that all fiduciaries are well-versed in their responsibilities, thereby enhancing the standard of plan governance and reducing the risk of fiduciary breaches. Another crucial aspect is thorough documentation. Keeping detailed records of all decisions made by the fiduciary committee, along with the rationale behind these decisions, can protect sponsors in case of audits or legal scrutiny.”
Now more than ever, the need for proper vetting of service providers should not be underestimated.
“It is hard for some plan sponsors to imagine that their retirement plan providers do not have their best interest at heart in their recommendations,” says Jeff Coons, chief risk officer at High Probability Advisors in Pittsford, New York. “‘Trust but verify’ should be the mantra of plan sponsors when it comes to fiduciary responsibilities. In the case of investment menu and fund recommendations, that means making sure the providers (especially investment advisors) have accepted fiduciary responsibility for their recommendations in writing. With the focus on the new Fiduciary Rule, now is a great time to make the fiduciary status of advisors and providers clear by asking the question and getting the answer in writing.”
So, if you’re a 401k plan sponsor looking for a list of best practices, it’s best to start at the top of any list: how you select your service providers. Recognize the fact that there are no short cuts and there is definitely no free lunch.
“The focus on fiduciary responsibility and plan governance is reaching critical mass due to increasing regulatory scrutiny and legal challenges faced by 401k plan sponsors,” says Bavetz. “The Department of Labor (DOL) has intensified its oversight of retirement plans, emphasizing the need for prudent management and transparency. Recent lawsuits have highlighted the importance of monitoring investment options and fees to protect against fiduciary breaches. Litigation is likely to increase over time, and by enhancing governance practices, sponsors can mitigate legal risks and ensure compliance with evolving regulations, ultimately safeguarding participants’ interests and trust.
A common adage used among fiduciaries: ‘If you think compliance is expensive, try non-compliance.’”
Christopher Carosa is an award-winning online news producer and journalist. His work can be found in Forbes Magazine, Fiduciary News, and USA Today among others. A dynamic speaker, he’s the author of 401(k) Fiduciary Solutions, Hey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books.