Is Your Company’s 401(k) Plan a Thoroughbred or an Also Ran?
By Eric M. Elkins
January 25, 2012
Now’s the Time to Put This Retirement Workhorse Back in the Winner’s Circle
The 401(k), once a star of employee benefits plans, has been overlooked in the past few years as many companies stopped matching contributions to employees’ plans in an effort to cut costs in a down economy. However, companies are beginning to reinstate matching contributions. The reason is that 401(k) plans remain a solid employee recruitment and retention tool. Matching contributions encourage employees to save for retirement and enjoy the tax benefits.
If your company is dusting off its 401(k) plan with the goal of making it a thoroughbred rather than an also ran, now is a good time to take a hard look at your plan and ask the following questions:
• Is the company’s 401(k) plan properly administered?
• What is the company’s 401(k) plan costing the company and employees?
• Do employees understand how to make investment decisions?
Let’s take a look at each.
Proper 401(k) Plan Administration
You might think that once your company’s 401(k) plan is set up, you’re done. The truth is that 401(k) plans require careful oversight to ensure compliance with the U.S. Department of Labor’s Employee Retirement Income Security Act (ERISA) and avoid a perfect storm of problems.
Among the basic responsibilities of 401(k) administration is establishing and maintaining a fiduciary checklist that ensures your company is:
• Acting solely in the interest of the 401(k) plan participants and their beneficiaries;
• Acting for the exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries, and defraying reasonable expenses of the plan;
• Carrying out duties with the care, skill, prudence, and diligence of a prudent person familiar with such matters;
• Following the plan documents; and
• Diversifying plan investments.
An investment policy statement (IPS) is another necessary responsibility of 401(k) administration. The IPS helps the plan sponsor select and monitor investment options to ensure the plan stays true to its stated goals. An attorney should always review an IPS before it is put in place. If you don’t have an IPS, your 401(k) plan provider can provide a template.
The key to sound plan administration is to have thorough, up-to-date documentation on your company’s 401(k) plan that is maintained by you or a third party administrator. If you don’t have good documentation, you may expose your company to the risk of an audit by the Department of Labor, ERISA violations or lawsuits by employees disgruntled with plan performance.
The Cost of Administering Your 401(k) Plan
The funny thing about 401(k) plans is that rarely do companies and their employees have a true handle on the cost of administration. One of the main reasons is that unlike health insurance benefits, companies don’t receive a monthly invoice. An AARP study released in March 2011* found that more than 80 percent of 401(k) plan participants were unaware of how much they were paying in fees associated with their company's retirement savings plan.
Underlying fund returns in 401(k) plans are normally reported as net returns, which means fees for managing 401(k) investments are subtracted from gains or added to losses before calculating the annual report. Other administrative fees are spread over plan participants, but are not explicitly listed on individual investment statements.
In an effort to ensure transparency of fees, the U.S. Department of Labor has issued new regulations that require all retirement plan service providers to disclose detailed information about plan fees and compensation to plan sponsors. The new rules apply to 401(k) plans and 403(b) plans covered by ERISA. If you are unsure about your plan’s fees, ask your administrator and share the information with employees.
Educating Employees on Their Investment Options
While 401(k) plans are a tremendous retirement savings tool, individuals who are not savvy investors can find their investment options confusing. Consequently, there is a tendency to pick large cap companies because of a recognizable brand name rather than their financial performance.
Often, novice investors will look at a company’s recent performance rather than historical performance. A single year does not reflect a company’s earning potential.
These tendencies underscore the importance of educating employees on their 401(k) investment options. Although it sounds simplistic, your workforce needs to know the basics—why’s it’s important to save and the tax advantages of making 401(k) contributions. They also need to understand what their risk tolerance is as this will influence where they direct their investments.
So What Next for Your 401(k)?
Most companies review their health plans and carriers every year to make sure they are getting the plan they want at a competitive price. Yet they rarely do this with their 401(k) plans. They usually stay with the same plan provider for years and rarely review their plan.
As a registered representative who advises companies on their benefits plans, including plan selection and administration, I encourage clients to treat 401(k) plans like health plans and hold regular reviews to ensure fees are in-line and fund performance is what it should be. Reviewing the fiduciary checklist should be part of the review process. Educating employees, particularly new employees, is important, too. Such benchmarking should be done every two years.
This approach will help make your company’s 401(k) plan a winning retirement vehicle for you and your employees.
Eric M. Elkins of KeenanSuggs BowersElkins assists companies with employee benefits selection and administration, including retirement plans such as 401(k)s. He is a registered representative of Lincoln Financial Securities Corporation. Eric Elkins does not offer fiduciary services.
Securities offered through registered representatives of Lincoln Financial Securities Corporation. Branch office Meridian Building, 1320 Main Street, Suite 700 Columbia, SC 29201 Telephone: 803-741-1001. KeenanSuggs Bowers Elkins, LLC and Lincoln Financial Securities Corporation are not affiliated.
* http://www.aarp.org/work/retirement-planning/info-02-2011/401k-fees-awareness-11.html
The 401(k), once a star of employee benefits plans, has been overlooked in the past few years as many companies stopped matching contributions to employees’ plans in an effort to cut costs in a down economy. However, companies are beginning to reinstate matching contributions. The reason is that 401(k) plans remain a solid employee recruitment and retention tool. Matching contributions encourage employees to save for retirement and enjoy the tax benefits.
If your company is dusting off its 401(k) plan with the goal of making it a thoroughbred rather than an also ran, now is a good time to take a hard look at your plan and ask the following questions:
• Is the company’s 401(k) plan properly administered?
• What is the company’s 401(k) plan costing the company and employees?
• Do employees understand how to make investment decisions?
Let’s take a look at each.
Proper 401(k) Plan Administration
You might think that once your company’s 401(k) plan is set up, you’re done. The truth is that 401(k) plans require careful oversight to ensure compliance with the U.S. Department of Labor’s Employee Retirement Income Security Act (ERISA) and avoid a perfect storm of problems.
Among the basic responsibilities of 401(k) administration is establishing and maintaining a fiduciary checklist that ensures your company is:
• Acting solely in the interest of the 401(k) plan participants and their beneficiaries;
• Acting for the exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries, and defraying reasonable expenses of the plan;
• Carrying out duties with the care, skill, prudence, and diligence of a prudent person familiar with such matters;
• Following the plan documents; and
• Diversifying plan investments.
An investment policy statement (IPS) is another necessary responsibility of 401(k) administration. The IPS helps the plan sponsor select and monitor investment options to ensure the plan stays true to its stated goals. An attorney should always review an IPS before it is put in place. If you don’t have an IPS, your 401(k) plan provider can provide a template.
The key to sound plan administration is to have thorough, up-to-date documentation on your company’s 401(k) plan that is maintained by you or a third party administrator. If you don’t have good documentation, you may expose your company to the risk of an audit by the Department of Labor, ERISA violations or lawsuits by employees disgruntled with plan performance.
The Cost of Administering Your 401(k) Plan
The funny thing about 401(k) plans is that rarely do companies and their employees have a true handle on the cost of administration. One of the main reasons is that unlike health insurance benefits, companies don’t receive a monthly invoice. An AARP study released in March 2011* found that more than 80 percent of 401(k) plan participants were unaware of how much they were paying in fees associated with their company's retirement savings plan.
Underlying fund returns in 401(k) plans are normally reported as net returns, which means fees for managing 401(k) investments are subtracted from gains or added to losses before calculating the annual report. Other administrative fees are spread over plan participants, but are not explicitly listed on individual investment statements.
In an effort to ensure transparency of fees, the U.S. Department of Labor has issued new regulations that require all retirement plan service providers to disclose detailed information about plan fees and compensation to plan sponsors. The new rules apply to 401(k) plans and 403(b) plans covered by ERISA. If you are unsure about your plan’s fees, ask your administrator and share the information with employees.
Educating Employees on Their Investment Options
While 401(k) plans are a tremendous retirement savings tool, individuals who are not savvy investors can find their investment options confusing. Consequently, there is a tendency to pick large cap companies because of a recognizable brand name rather than their financial performance.
Often, novice investors will look at a company’s recent performance rather than historical performance. A single year does not reflect a company’s earning potential.
These tendencies underscore the importance of educating employees on their 401(k) investment options. Although it sounds simplistic, your workforce needs to know the basics—why’s it’s important to save and the tax advantages of making 401(k) contributions. They also need to understand what their risk tolerance is as this will influence where they direct their investments.
So What Next for Your 401(k)?
Most companies review their health plans and carriers every year to make sure they are getting the plan they want at a competitive price. Yet they rarely do this with their 401(k) plans. They usually stay with the same plan provider for years and rarely review their plan.
As a registered representative who advises companies on their benefits plans, including plan selection and administration, I encourage clients to treat 401(k) plans like health plans and hold regular reviews to ensure fees are in-line and fund performance is what it should be. Reviewing the fiduciary checklist should be part of the review process. Educating employees, particularly new employees, is important, too. Such benchmarking should be done every two years.
This approach will help make your company’s 401(k) plan a winning retirement vehicle for you and your employees.
Eric M. Elkins of KeenanSuggs BowersElkins assists companies with employee benefits selection and administration, including retirement plans such as 401(k)s. He is a registered representative of Lincoln Financial Securities Corporation. Eric Elkins does not offer fiduciary services.
Securities offered through registered representatives of Lincoln Financial Securities Corporation. Branch office Meridian Building, 1320 Main Street, Suite 700 Columbia, SC 29201 Telephone: 803-741-1001. KeenanSuggs Bowers Elkins, LLC and Lincoln Financial Securities Corporation are not affiliated.
* http://www.aarp.org/work/retirement-planning/info-02-2011/401k-fees-awareness-11.html
