How to Spot a Fake 401k Fiduciary Advisor or Provider

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If you are like most executives that oversee their company 401(k), you have never received formal education on the responsibilities and personal liabilities. When the Department of Labor (DOL) wins a lawsuit for breaching a responsibility, they remove the fiduciary and replace them with an independent fiduciary. Apparently, the DOL knows that there are providers in the world who know the laws well enough to take on this liability.

“Employers that sponsor retirement plans have a fiduciary duty to monitor plan assets and ensure they are handled appropriately and protected,” said Assistant Secretary of Labor for Employee Benefits Security Phyllis C. Borzi. “Contracting with an outside firm to manage those assets does not absolve them of their legal responsibilities. 1

Many fiduciaries suffer from the peril Nobel Laureate Daniel Kahneman calls “herding”. In this case, they rely too much on the well-known brand that everyone is picking. This is most often at the expense of having familiarized themselves with ERISA.

SPONSOR: I picked 401ks a good provider (typically a brand name) who runs the retirement plan.

ENVISION: Do they have a specialty in 401k plans?

SPONSOR: They work for household brand name financial firm and they handle my personal money.

ENVISION: Do they share or take on any of your fiduciary responsibility to your employees?

SPONSOR: ?

Do they take on any of your fiduciary responsibility?

In many things in our lives we look for expert advice where the caregiver or provider must put out interest ahead of theirs aka fiduciary. The Employee Retirement Income Security Act (ERISA) allows for and recommends plan fiduciaries seek out “ERISA experts” to help them carry out their duties. The problem is that those that one might assume are experts aren’t- at least to the extent that their advice might not be conflict free. The DOL developed the fee disclosure legislation because many in the know were hiding and charging fees that weren’t helping employees retire. In fact, Government Accountability Office estimated that a one-percentage point difference in fees could reduce a worker’s retirement savings by 28 percent at the end of his or her career. 1

Before moving forward I recommend asking your providers-

  • Are you willing to be a fiduciary on our plan?

  • What kind will you be?

  • Can I see the contract?

  • What insurance do you have to back your claim?

What providers share in your personal fiduciary risk today?

ERISA mandates a Duty of Loyalty to your employees. If you offer them a plan that is supposed to help them, why not get them the help they need? Moreover, why take on risk for non-core business functions where the risk/reward is completely out of whack (Google 401k lawsuits)?

Ask your current providers if they are acting in your best interest (fiduciary) and have them show you the contract. If you are unsure of the contract language, have an attorney that specializes in ERISA read the contract. Please let us know what you find out. Need help? Email me at james.brewer@lpl.com.

1 EBSA News Release: [07/18/2012], Release Number: 12-1122-CHI

2 401(K) PLANS Increased Educational Outreach and Broader Oversight May Help Reduce Plan Fees

(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. (2) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI.

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Is there a devil in your 401k investment menu?

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Could your 401k QDIA actually be a liability?

If an investment advisor or broker recommended an investment with a 3 month track record for your employees would you take it? That is what many sponsors did when Qualified Default Investment Alternatives as the default choice for their employees. While Department of Labor regulations allow fiduciaries to protect themselves from liability (avoid fiduciary breach) when selecting investments, the devil is in the details. If you took it, be sure your investment policy or another process document allows for the decision. If not you may find yourself answering to a judge (Google “Scott Simon ABB” or check out Michael Barry’s Plan Advisory Services ABB vs. Tussey)

A QDIA Might Reduce (or Increase) Your Fiduciary Liability

The 2006 Pension Protection Act provided sponsors A Qualified Defualt Investment Alternative (QDIA. This is a default investment option chosen by a plan fiduciary for participants who fail to make an election regarding investment of their account balances. As a sponsor, you may be faced with investment choices based on:

  • Projected date of retirement that invests more conservatively over time
  • Strategic mix of stocks and bonds, based on one’s tolerance for market risk
  • Do-it-yourself

Research shows that employees generally that do it yourself fare far worse than those that use a professional to come up with their investment mix. The projected date of retirement approach has become the most popular choice when plan sponsors choose to use auto enrollment. However, if you pick the default choice from your provider (especially if it is their proprietary one) you may have gotten yourself into trouble. The DOL has clarified that you are held responsible for showing wisdom in how you select and monitor that and any other choice on your menu. Moreover, it might be harmful to your employees in that it fails to consider anything else about them.

DOL Clarifies The Detail to Reduce Your Fiduciary 401(k) Liability

Plan fiduciaries should document the selection and review process, including how you reached decisions about individual investment options. The Department of Labor, clarified your monitoring responsibilities in 2013 (Google “tips for fiduciaries February 2013”). I have highlighted a few below.

  • Establish a process for comparing and selecting investments.
  • Establish a process to review the investments and their fees and expenses.
  • Document the process.

72% of DOL investigations netted a total of $1.27 billion dollars.1

Bottom line, if you are working with a platform provider that allows only proprietary investments you will always be at risk. The risk is that if those investments do not pass prudent screens and you don’t change providers, you could be part of the 72% of DOL investigations that netted $1.27 billion dollars.

Are you working with a fiduciary advisor?

I recommend working with an ERISA 3 (21) investment advisor that focuses on retirement plans. As an ERISA 3 (21) investment advisor we have access to monitoring tools to help you assess your investments. I believe your employees are best served with a low-cost, globally diversified, strategic approach along with the guidance of a retirement advisor. This allows a tailored approach based on factors such as, how much retirement income does the participant need and how much can he/she save. Let us know your approach to monitoring or if you need a second look, email me, james.brewer@lpl.com.

1EBSA Achieves Over $1.2 Billion in Total Monetary Results in Fiscal Year 2012. EBSA Fact Sheet.

(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. (2) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI

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Stop: You May be Guilty of Excessive Plans Fees

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Marc I. Machiz, Director of the Philadelphia Region of the Department of Labor Employee Benefits Security Administration (DOL EBSA ) indicated plans to focus on fees during audits. Machiz stated that he expects the investigations will attempt to determine who is at fault for excessive fees and why the excessive fees were incurred. Machiz proffered six questions that the Philadelphia Region believes are important in relation to this project:

Excessive 401k Plan Fees- Who is at Fault

• What do the disclosures look like?

• What do the fiduciaries look at?

• Is there something that justifies the high fees?

• Is it the fault of the disclosures?

• Is it the fault of the service provider?

• Is it the fault of the named fiduciary plan sponsor?

DOL Investigation Excessive Fee Crackdown

Is this new? In 2011, I co-sponsored “Surviving a DOL 401k Audit” with the DOL EBSA and Andy Wang, Esq., of Wang Kobayashi Austin. DOL EBSA does educational outreaches. One of the participants, a CPA, whose firm does financial audits of plans said “That DOL lady scared the “expletive deleted” out of me. Since then the DOL fee disclosures have launched making it easier to do fee audits.

Ronald J. Triche, Esq., APM, ASPPA’s Assistant General Counsel and Director of Government Affairs for ASSPA wrote an article titled “Philadelphia Region of the EBSA to Focus on Fees in 401(k) Plan Audits”. He provides a DOL investigation checklist that I doubt many plan sponsors could quickly get their hands on. That may explain why DOL EBSA audits lead to damages 72.1% of the time in the 12 months running up to October 2012.

Assessing Your 401k and Determining if Your Fees are High

I maintain that the starting point for plan sponsors should be asking

  • Are the majority of your participants on track to retire?
  • Are your employee’s investment returns better than the S & P 500 over the last 5 to 10 years?

If you have evidence to support “yes” answers, you certainly must be doing something right, even if you don’t know what it is. In that case, you should find out what you are doing right, and make sure that you document the process moving forward.

If your answer is “no or I don’t know”, it likely is your fault. Then the next questions are:

  • Do you have high fees compared to other plans (you must independently benchmark to know)?
  • Are the services your providers deliver in line with the fees that they charge?
  • Are you using an investment share class that is no longer appropriate for the size of your plan?

Act Now or Your May Pay More Later

As an ERISA 3(21) investment advisor fiduciary, I stand ready to help with an independent assessment. You may choose to work with a non-fiduciary broker for your personal investments. However, as a fiduciary to an ERISA plan you are responsible for the money of your employees AND their beneficiaries. From a risk standpoint, when you are in charge of managing other people’s money, many endorse working with someone that shares in your fiduciary burden. A Google of 401k lawsuits will show many fiduciaries that likely wish they had.

(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. (2) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI

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Warning: Your 401k Plan May be a Lemon

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Yale Professor warns of Hidden Excessive Fees

Yale Law School professor has put many 401k industry providers have been in an uproar over the last few weeks. Professor Ayers sent letters to about 6,000 sponsors of 401(k) plans suggesting that they may have breached their fiduciary duties with respect to plan costs and investments.

Many of the letters state that the sponsor’s plan has been identified as a “potentially high-cost plan,” and all of the letters we have reviewed suggest that the sponsors consider improving their fund lineup and eliminating more expensive fund offerings. The letters refer to a study prepared by the professor and a colleague based on data compiled from the Forms 5500 Tax Filing. It has been my experience that plan sponsors were not aware that their filing can be found on the efast.dol.gov page on Department of Labor’s website. They also used BrightScope.com and independent evaluator of 401k plans. They make sense of the long form 5500 data and then compare plans to pier groups.

401k Excessive Fee Lawsuits and 401k Fiduciary Breaches

Attorneys at the law firm of Drinker Biddle say that “Given the current focus on plan expenses by the DOL and in class action litigation, plan sponsors who received such a letter have a right to be concerned. But even those who did not need to be aware of this issue and take appropriate action.”

Fiduciary Liability and Plan Monitoring

None of this should come as a surprise. A year ago, the Department of Labor required providers to offer details of their fees to plan sponsors aka 408(b) 2. Subsequently participants were also provided with disclosures. It does not appear from the clamor that these disclosures disrupted the consciousness of employers. I believe that it is due to the fact that few have ever received the education that the Center for Fiduciary Studies provides. If you don’t know what you don’t know what to do, it is easy to think that you are doing what you are supposed to do. It appears too many that means hiring a benefits firm or a w well known national investment provider to handle it. The Department of Labor specifically says on their website and in publications that the company and its responsible parties (fiduciaries) are responsible for monitoring their picks.

Hidden Fees and Excessive Fee Law Suits

Googling Hidden Fees and Excessive Fee Law Suits will show that there are several well-known firms that have fallen prey to that assumption. The Drinker Biddle attorneys reiterate what the DOL says in their conclusions “what should a plan sponsor do?”

First step, benchmark your plan. The following show examples of a third party provider benchmarking of investments and fees.

The second step, based on negative findings, negotiate for reduced costs (which could include less expensive fund share classes or credits to an expense recapture account) or expanded the services.

Let us know if you have recently benchmarked your plan and what you found. If you haven’t, contact us to assess your risk and need for benchmarking.

(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. (2) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI

Posted in 401k Fees, 401k Monitoring, 401k Review, Fee monitoring, Investment Monitoring, Investment selection | Tagged , , , | Leave a comment

3 Vital 401k plan risk factors to check your plan health

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Recently, a Yale Professor raised blood pressures when he sent a letter to 6000 plan sponsors asserting that their plans did not pass these questions. He also said that he had gotten his information from publicly available sources. These sources rate plans using the long form tax filing for your plan according to their proprietary methodology. Your plan tax filing can be found at efast.gov.dol. Fines from the Department of Labor and class action lawsuits have cost plans tens of millions of dollars. Sometimes the issue was a simple as the plan sponsor did not use the same due diligence in picking the 401k provider that they did for other vital company services,

Every time I go to the doctor the nurse always:

  1. Checks my blood pressure
  2. Checks my temperature
  3. Checks my heart rate

Then the nurses asks why are you here today? Even if it is a check-up and everything is fine, I get a bill. With a family history of high blood pressure, heart attacks and stroke, I am glad.

401k plan risk factors.

  1. Do you know how your employees’ investment returns compare to the S & P 500?
  2. Do you know how many are on track to replace 80% of their pre-retirement income?
  3. Do you know if the fees that you authorize them to pay are reasonable based on the services they receive?

Are you sharing your 401k plan risk?

I recommend starting with a simple diagnostic such as the three questions that I pose. As a fidicuary you may potentially face the scrutiny of the Department of Labor. They are the ones that created the plan fee disclosures that became law last year. Unfortunately, many plan sponsors expected that their plan providers handled it. Unfortunately, those providers in most cases are not fiduciaries to the plan. This left you the plan sponsor holding the bag that you may have been unaware of.

  1. Are you working with an advisor that is a fiduciary?
  2. Are any of your providers, taking on fiduciary liability?
  3. If so, have you had an attorney familiar with the legal standards for retirement plan review the documents and their insurance policy?

If you can’t answer all of the questions affirmatively, at minimum you should do what Fred Reish recommends. Doing a benchmarking or a Request for Proposal. I believe you will get more out of the benchmarking, especially if you use a firm like ours that has access to and can interpret third party data sources. The linked report will give you some idea of what a 401k plan risk MRI looks like.

As with most things, it is better to have a check-up and have a clean bill of health rather than be found in cardiac arrest because of a class action attorney or a Department of Labor auditor that could cost you millions!

Think you might benefit from a 401k plan risk check-up? Please email me at james.brewer@lpl.com to learn more.

(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. (2) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI

Posted in 401k Monitoring, 401k Review, 401k Risk, Fee monitoring, Fiduciary duties, Investment Monitoring | Tagged , , , | Leave a comment

How to Have a 401k Your Employees will Love and litigators will hate

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401k Savings or Retirement Income Security Act Plan?

The purpose of a 401k or 403b established in the Employee Retirement Income Security Act is retirement income security. The median retirement account balance for all working-age households is just $3,000, according to a research report from The National Institute for Retirement Security. For households near retirement, the median balance is just $12,000. About 80% of all households have saved a total smaller than their annual income for retirement.

Do you know how your employee’s are doing? If not, you could be facing a ticking time bomb of liability. Monitoring puts you in a better position to defend your decisions on investments, fees, etc. is in the best interest of your employees. Noted attorney Jason Roberts, CEO, Pension Resource Institute states that focusing on outcomes puts you in the lowest risk category as a responsible plan fiduciary.

The 401(k) Retirement Planning Evolution

You may be old enough to have heard of the three legged stool of retirement planning: social security, pensions and retirement savings. With pensions mainly a thing of the past and social security ailing, retirement savings has become the focus. A lesson learned from pensions is the use of actuaries. Traditional pensions use actuaries to determine how much the company should save and what rate of return to target. On an ongoing basis the actuaries continue to monitor the situation. At times they tell you if you need to add money based on market returns, etc. The focus is on income not on balances. Few 401k or 403b plans are based on these calculations. Envision a new approach with “401k actuary”.

Focus on retirement income (paycheck) not retirement investing

The new approach can involve three reinforcing modules- one-on-one retirement planning education, group retirement and financial education (not investment only), and targeted employee communications. We start with helping the employee figure out how to build a retirement paycheck. The financial planner shows them what combination of savings, time and investment rate of return will create the monthly retirement income they desire. Rather than focus on what should I invest in, we focus on the number one factor- SAVINGS (10% of nothing is 0.) As employees are not always rational robots, semi-annual or annual consultations can help them get in the game and stay the course.

This approach should be paired with an investment menu made up exclusively of model portfolios selected based on varying risk and return tradeoffs. This allows the rate of return target to be pared with a portfolio whose index benchmark has historically had returns within range of the target. To further reduce risk, you can use one of these portfolios to serve as Qualified Default Investment Alternatives. Better yet, you can hire an ERISA 3(38) investment manager to take on the risk.

Focused retirement and financial education curriculum

Professor Anamarie Lusardi found that as few as one-third of respondents in a sample of people over the age of 50 understand three basic concepts of financial planning: Interest compounding, the effects of inflation, and risk diversification. While one-on-one education is great, there is no substitute for understanding the fundamentals. Using the knowledge gleaned from the one-on-one’s, the financial planning team can develop a curriculum based on the needs of your demographic. In the past, we assumed that everyone would benefit from education period. It fell short because it rarely spoke to the needs of the employees.

An education program that incorporates lifestyle goals, children’s education goals and other competing retirement priorities is necessary. Educating participants on how to incorporate all of their workplace benefits into their plans provides value to participant and employer.

Targeted communications and monitoring

From working with your record keepers system as well as the one-one-one work you will have a new window into how your people are doing. Imagine a performance report that tells you by demographic group, which one’s are doing well and some of the underlie causes. Let’s say that the under thirty group has low participation. You could send them targeted emails to prompt their participation. The email could come in the form of beautiful color foldout detailing where they are headed without intervention. Best of all, this can all be paid for through their individual balances. It is for their benefit and they can and will take it with them. Speaking of taking it with them…

Having terminated employees take it with them- retirement rollovers

Today’s workforce is mobile. Surveys say that many of today’s workers will have more than 10 employers. Once your participants terminate, you should prompt them to take their money with them. They could move it to their next employer’s plan or to an IRA. From their standpoint, out of sight is often out of mind. You have legal responsibilities in keeping them up-to-date will all necessary disclosures and distributions from the plan- sometimes to beneficiaries. LPL Financial through Worksite Solutions Program has developed a systematic approach to tackle this task. While it is easy to see how you benefit, there are a series of steps to take so you don’t overstep the law. The Worksite Solutions Team has been specifically trained and has documentation in place to do this compliantly.

Want to create a program your employees will love? Please email me at james.brewer@lpl.com to learn more..

(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. (2) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI

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How to manage your 401k plan risk while helping employees retire

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Managing Unnecessary 401k plan risk and Potential Liability

Do you know how many employees are on track to retire at the normal retirement age? If not, why should you care? Attorney Marcia Wagner¹ said in a recent webinar that “employers who improve the retirement readiness of their plan participants can also avoid unnecessary fiduciary risk and potential liability and can enjoy significant economic benefits from enhanced workplace productivity.

A “happy” employee is much less likely to be a litigious employee.  Generally speaking, if employees are satisfied and confident that their retirement plan savings will help them meet their retirement needs in the future, they should have little motivation to file legal claims against the plan’s fiduciaries or join a class action lawsuit…The better participants are at saving and managing their plan accounts, the smaller any potential economic loss would be, which, in turn, would reduce the plan sponsor’s potential fiduciary liability in any plan-related litigation. “

Financial Planner Led Pre-retirees are More Confident

Historically advisors and well known providers have provided group education, typically focused on enrollment. Unfortunately, many participants have felt that the education was more about how much the educator knew about investing and how little the participant knew. Worse, for man providers, the person charged with education was not a seasoned professional and was not held to any specific result.  It is commonly known that participant working with an advisor that gets to know them and provides a custom retirement blueprint are more confident and save more.

One-on-one retirement planning education vs. investment education

One-on-one retirement planning education can and should be offered to each employee. This retirement planning education focuses on generating annually recurring income or simply a retirement paycheck. The analysis focuses on answering:

  1. How much should the participant save?
  2. For how long? and
  3. What rate of return (level of investment risk)?

Ed Dressel, developer of TRAK Software says “Consider the participants’ simplest decision: selecting the percentage for 401(k) contributions. What does it mean for participants to increase their contribution from 3% to 5%? Obviously, any increase means less take-home pay, but how much? And an increase may mean receiving a greater employer contribution, but how much greater? The increase also means more savings at retirement, but how much? And what difference will it make if participants wait a year before deciding to increase their contribution? These are the participants’ key questions. Receiving answers to those questions will help them understand the effects of their retirement savings and how their decisions impact their situation. This type of education is relevant and meaningful.”

Your Fiduciary Duty to Monitor

Now that you have determined that one-on-one education is a good idea. How do you know if it works? Let’s say you establish a goal that 90% of your participants should be saving at least 10%. You need a tracking report. This report will help you see if what demographic groups need further assistance. Might you need to have semi-annual one-on-one meetings? Should you add a communication program? Should you have webinars to address topics that appear to affect everyone or just certain groups? Documenting that you have contemplated these questions will go a long way in demonstrating that you were working in the best interest of your employees.

Want to know more? Please email me at james.brewer@lpl.com to learn more about creating a custom plan for you.

1 Marcia Wagner’s supporting white paper entitled Plan Sponsor’s Fiduciary Calling to Improve the Retirement Readiness of Participants here.

(1) The opinions voiced in this material are for gen eral information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. (2) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI

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How to manage your 401k plan risk while saving time too

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If you are like most 401k responsible parties, your baptism was by fire. You might have inherited someonelse’s work and assumed it to be “okay.” The Employee Retirement Income Security Act (ERISA) exposes you to some significant risks.

Take this test to assess your risk with 401k fiduciaries duties

  1. Do you have a formal Investment Policy Statement that is used during plan reviews?
  2. Do you know what criteria to use for replacing an investment within your plan?
  3. Are your plan investments reviewed against appropriate benchmarks annually?
  4. Do you know how your plan expenses compare to similar size plans?
  5. Do you have a process to comply with the recently enacted 408(b)2 disclosures ?
  6. Which of your providers has signed on to keep employee’s interest first (a fiduciary)?

Congratulations if you got 6 out of 6. However, not having document proof to back up your Yes answers can be costly should you face a regulator or attorney.

Big and small companies have found themselves unable to defend their actions. The cost has ranged from a few thousand to tens of millions of dollars when they couldn’t provide proof they followed the 401k rules. Likely they were well meaning. However, they found themselves weighing spending more time on a plan with no revenue generation or helping the company make more money. However, being only half in can be costly.

How can you reduce your 401k plan risk and save time?

If you don’t have time to learn about the ins and outs of what the DOL holds you responsible for scrutinizing consider one or all of the following actions:

  • Hire a qualified ERISA 3(21) investment advisor to help guide and educate.
    • When you add ERISA and a section reference, you are talking fiduciary. Advisors with designations such as Accredited Investment Fiduciary, Professional Plan Consultant™ or Qualified Plan Financial Consultant show commitment to being a retirement plan pro. They can help you evaluate the rest of these actions.
  • Hire a qualified ERISA 3(38) investment manager to delegate your investment duties
    • Competent managers will answer questions 1, 2 and 3. It is their fiduciary duty and personal interest not to let extra fees be added to theirs (question 4.)
  • Hire an independent fiduciary to delegate your overall operational duties
    • They will answer all the questions.
  • Hire an attorney that specializes in ERISA and 401(k) matters.
    • Some providers say they have 401(k) attorneys on staff. Ask them if they are working in your interest? If they say yes, ask them to show you the contract. Further, be sure to get a 401k specialist, not a benefits generalist.
  • Buy fiduciary liability insurance.
    • Don’t assume that your Errors & Omissions (E&O) insurance covers the 401(k).

Please email us if you are interested in being invited to one of our presentations on managing your risk.

(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. (2) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI

Posted in 401k Management, 401k Monitoring, 401k Risk, Behavioral finance | Tagged , , | Leave a comment

15 Warning Signs That Your 401k Plan is at Risk

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You don’t know how many employees participating in the 401(k) are on track to retire

The purpose of a retirement plan is to help employees retire. Do you track who is on track? If no employee is on track, what kind of plan do you have?

Your 401(k) plan investment performance is worse than the S & P 500

Is it because the investments are bad or your employees are poor investors? If they are poor investors, have you provided retirement education?

Your plan has an investment policy statement that no one follows

A high profile lawsuit found that those responsible for the plan weren’t following the investment policy statement. If you weren’t the one that signed the original contract, have you checked the file to see if there is an existing IPS.

Your 401(k) investment menu isn’t being monitored

Investments cannot be set it and forget it. The closest you can get to that is using an ERISA 3 (38) investment manager that takes legal responsibility for the investments. They also decide what to select and remove from the menu. The norm for benchmarking includes having an investment policy statement and using advanced statistical methods to comparerisk and return performance.

You think that your current and former employees (participants) pay no fees.

Even if the company pays for the recordkeeping and other administrative fees, your investments cost the employees something, typically found in an expense ratio. Have you read your disclosure?

You haven’t benchmarked the fees since you received the plan sponsor fee disclosure.

The disclosures were not to admire and file. The disclosures were meant to help you ascertain that the fees you authorize that your pay employees were necessary and reasonable. That would mean comparing to a benchmark or to other providers. Do you have access to third party research?

You or your HR Manager gives employees hints or guidance on investing.

While it is well meaning, it is prohibited by law.

Your advisor is a client or your brother-in-law.

Can you prove that they are credentialed? Are the employees getting paid more than an advisor that doesn’t have such good access to you? Are your employees getting what they pay for?

Your advisor shares no risk

If you are like most plan sponsors, you work with a broker that merely recommends but does not advise. Bottom line, if you don’t have a contract that says they are a fiduciary, you will be alone should you get sued by the Department of Labor or a ticked off former employee.

You think that your deep pockets investment provider is handling it (all the risk)

Few providers share any of your fiduciary risk. That includes those household name-brand providers that claim that everything can be so easy. Making it easy doesn’t mean removing risk.

A high number of former employees remain in your plan

What if one of them get’s upset because they aren’t on track to retire and sues you?

You checked yes to 404(c) to be protected from employees bad choices

Do you know what 404(c) means? Fred Reish, a prominent ERISA attorney, highlights that few companies actually meet the standard. The standard must be met annually to offer protection.

The executive that set-up the plan has moved on

You likely have been putting out fires and have not read the file on the plan. What was their due diligence? How much did they know about retirement plans? Did they pick providers based on credentials, expedience or brand name?

You have received no formal education on what it legally means to be in charge

As the responsible plan fiduciary, do you know that you have to put the employees’ interests first when operating the plan? If so, can you prove it to the regulators and judges? Many companies large and small have not.

You haven’t gotten a second opinion on your 401(K)

It is important to find advisors that are specially educated in plans. Most often they will take on fiduciary responsibility for their actions. They have credentials such as Accredited Investment Fiduciary. While the volume of assets under management may be comforting it does not protect you in a court of law. However, the quality of the advisors on the plan and their legal standing will go a long way to demonstrate your wisdom.

1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. (2) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI

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401k Fiduciaries’ Duties and Not so Safe Harbors

401k fiduciaries fiduciary trouble 401k fiduciary on bridge over trouble

Does your advisor, recordkeeper or plan provider give you an evaluation of your plan based on proprietary analysis? I once looked at a plan where over 80% of the investments in the plan under independent analysis did not meet the benchmark of the Center for Fiduciary studies. However, they had semi-annual meetings that did not highlight this fact. Let’s say that correcting that fact would increase your average employees account balance by $100,000. As a fiduciary, you are legally and potentially financially responsible.

401k Fiduciaries’ Duties – A duty of Loyalty and A duty to monitor

You may feel that you have delegated that function to a financial professional or your plan provider. Unless they have signed on the dotted line you have transferred no liability. The law says in either case, that you are not relieved of “the duty to monitor.”

“Employers that sponsor retirement plans have a fiduciary duty to monitor plan assets and ensure they are handled appropriately and protected,” said Assistant Secretary of Labor for Employee Benefits Security Phyllis C. Borzi. “Contracting with an outside firm to manage those assets does not absolve them of their legal responsibilities.1

Likely someone told you about the “safe harbor” of using a qualified default investment alternative. Most employers did not consider an asset allocation or balanced investment strategy, and selected a target date strategy. If you did not consider choices from several providers, you likely did not do sufficient analysis. If you are not working with a recordkeeping provider that allows you unlimited choice of investment (open architecture), what will you do when your investments don’t score above standard? If the answer is stick with your recordkeeper, you are at high risk.

401(k) Qualified Default Investment Alternatives Safe Harbor?

The DOL recently provided guidance on Qualified Default Investment Alternatives. They stressed the need for you to document your process. “Plan fiduciaries should document the selection and review process, including how they reached decisions about individual investment options.” Clicking the picture below will provide even more information on the QDIA.

5 Things to Know About QDIAs

What does monitor plan assets exactly mean? Is the report you are using today developed by the same people you have outsourced plan administration? If so, do they share in any liability you face (you’ve had that verified by an attorney)? Isn’t it in their interest to provide you analysis that makes their services look good? Remember, Ronald Reagan’s quote “Trust and verify”.

This Plan Fee Comparison provides a sample of an independent investment benchmarking report.

1 U.S. Department of Labor, Employee Benefits Security Administration News Release: [07/18/2012], “US Labor Department action results in order to restore half a million dollars to worker retirement plans sponsored by Columbus, Ohio-based company”

(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. (2) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI

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