When it comes to your 401(k) plan do you know what to do? With the Affordable Care Act regulations getting all the attention, you may not have heard that 401(k) plan sponsors are now facing significantly increased risks. Developments have come up from regulators and participant litigation that now require employers offering 401(k) plans to understand the new climate and take an active oversight approach to their plans.
If you asked most businesses that sponsor a 401(k) plan whether they are obeying their fiduciary duties, they would likely respond in the affirmative. They have a brokerage firm, bank or insurance company that provides a list of options to invest in that include bonds, hybrid options, stock-based investments, as well as a stable value or guaranteed account that pays a stated rate of interest. (For related reading, see: The Hidden Fees in 401(k)s.)
Typically, plan sponsors will meet with their investment advisor a couple of times a year to go over the list of offerings and employees select from the options. So the plan sponsor thinks they are honoring their responsibilities, while they may not be. For each plan sponsor, one or more individuals are named fiduciaries and have a fiduciary duty to the participants of the plan (with the exception of simple IRAs, individual retirement accounts or simplified employee pension plans). Examples of plan fiduciaries include the trustee, the advisor of investments, all people involved in administration of the plan and those who select the committee officials.
The Department of Labor says that fiduciaries are people who manage an employee benefit and assets. Employers hire outside professionals, third-party service providers or assign an internal committee. Even if these services are hired to manage the plan, the employer still technically has fiduciary responsibilities.
Consider a company with a handful of employees that offers a 401(k) plan with $2 million in assets placed in different mutual funds. The third-party administrator bills them $2,000 annually, which the employer thinks is a good deal. But the administrator will also be getting 25 basis points of compensation from the mutual fund company, which equals $5,000 so the total cost is $7,000 in the end. The mutual fund company may also pay compensation to the advisor or broker for another 25 basis points. These schemes typically occur in bundled 401(k) arrangements. Therefore, plans sponsors must have a process for reviewing and understanding total plan costs.
Settlement costs and defending lawsuits can be very expensive for a plan sponsor. As plan participants keep track and become aware of their related plan expenses, thanks to additional ERISA regulations, they are more aware of what they are spending and how it effects their account balances.
Registered investment advisors and 401(k) planners are seeing trends of charging sliding scale fees that go down as assets go up. They are also selecting from institutional funds that do not pay remuneration to an investment advisor or record keeper. This promotes transparency and ease of total paid fees by removing fund subsidies. Ask your independent financial planner to find out more today. (For more, see: 401(k) Risks Advisors Should Know About.)