In our previous blog post, we began examining the various financial pitfalls Plan Sponsors can encounter when managing their Company’s retirement plan. These mistakes can have far-reaching consequences, not only for the financial stability of the organization but also for the financial futures of the employees participating in the plan. As we continue our exploration of these critical errors, we will delve into five additional financial missteps that can hinder the effectiveness of your Company’s 401(k) plan. By understanding and addressing these potential issues, you can take the necessary steps to optimize your retirement plan, potentially improve your employees’ financial well-being, and aim to protect your organization’s reputation in the long run.
6. Lacking Proper Eligibility Notification Protocols
One growing trend in recent years is to automatically enroll participants in their retirement plan. While this has the advantage of getting retirement savings started for employees, sometimes Plan Sponsors forget to notify employees of their eligibility to participate in the 401(k) plan. This leads the employee to not knowing they are eligible to participate, and either don’t know where some of their money is going or don’t know they could actually contribute more to the plan.
There are also instances where some administrative tasks fall through the cracks. Perhaps the Recordkeeper neglects to add the participant to the plan. Or payroll doesn’t load all eligible plan participants properly, which means the recordkeeper has no way of being able to notify those new participants.
Regardless of the myriad ways of how it could happen, plan participants not knowing when they are eligible, or how the plan works, is a key mistake for Plan Sponsors to avoid. To that end, ensure proper protocols are in place so all relevant parties know their responsibilities and when to accomplish them.
7. Delaying Employee Deferrals
Another ongoing issue faced by Plan Sponsors is the late remittance of employee deferrals. The Department of Labor requires employers to remit deferrals to the 401(k) plan as soon as possible; however, in no event can the deposit be later than the 15th business day of the month following the month in which the contributions were withheld. The DOL also provides a Safe Harbor for small businesses stating that 401(k) deposits are timely if they are made within seven business days from the date the contributions were withheld from employee wages.
Notwithstanding either of these rules, if you have demonstrated you can remit these 401(k) deferrals within three days of having withheld them, that will be the standard the DOL and IRS will hold you to. If you fail to make timely remittances, the IRS rules do allow for you to “fix” the error through self-correction. You can use the DOL’s Voluntary Fiduciary Correction Program Online Calculator to make sure the error is fixed correctly. You then would need to self-report those late remittances on Form 5500 which is filed each year. Late deposits can lead to penalties, lost earnings for participants, and potential legal action. To avoid these issues, Plan Sponsors should establish a consistent process for remitting employee deferrals promptly, typically within a few days of the payroll date.
8. Not Utilizing Lower-Cost Share Classes
When it comes to the fees plan participants are responsible for paying, the two words most applicable to your standard of selection are “reasonable” and “prudent.” Fees are not required to be the lowest cost, but they do need to meet those standards. And although the initial fund selection for the plan may meet both those standards, the cost for those investment options may continue to decline through a lower share class made available by the Fund Manager. Or maybe certain minimum asset levels have been reduced or removed by the fund family to get access to the lower fund share class. Fund families are constantly revising their available share classes for the exact same fund, lowering the cost of the fund in the process, and it is very important for you to continually “troll” your investment menu to determine if a lower-cost share class is available for the fund offered in your investment alternatives.
In our experience, we see many Plan Sponsors (or their Advisors) neglect to monitor their fund lineup on an ongoing basis, and their plan participants may end up paying higher fees because of it. Beyond that, it could also lead to complaints and potential lawsuits. To ensure that your investment options meet reasonable and prudent standards, Plan Sponsors should regularly review the share classes offered to allow the availability of the lowest-cost options. As part of a regular cadence of review, Plan Sponsors should work closely with their Financial Advisors to evaluate the available share classes, comparing expense ratios and assessing the potential impact on participant investment outcomes. These periodic reviews can help Plan Sponsors stay up to date with the latest investment options and maintain a competitive and cost-efficient plan.
9. Participating in Revenue Sharing With Investment Companies
In the past, it has been common practice for Plan Sponsors to receive some form of revenue sharing from mutual fund or investment companies in the form of 12b-1 fees or sub-transfer agent fees to provide revenue to pay for plan expenses. That type of model can lead to an unequal application of fees against plan participants, resulting in some plan participants actually subsidizing others in the plan.
For example, if Participant A has $300,000 invested in a Large Cap Growth Fund with a 0.50% 12b-1 fee, his account is generating $1,500 per year in fees toward plan expenses. If Participant B has her $300,000 invested in an index fund with no 12b-1 fee, she is not generating any fees toward plan expenses. In effect, Participant A is paying for Participant B’s share of the plan expenses. To avoid this type of arrangement, which can lead to potential fiduciary liability, Plan Sponsors should work with an experienced 401(k) Advisor to consider the multiple ways this inequality can be adjusted or eliminated. By doing so, Plan Sponsors can reduce their exposure to potential fiduciary liability and promote a fairer allocation of fees across the plan.
10. Not Benchmarking Covered Service Providers
Lastly, many Plan Sponsors fail to benchmark the fees of their Covered Service Providers, including Recordkeepers, Financial Advisors, and third-party administrators (TPAs) on a consistent basis. When these fees are deducted directly from the plan, it’s essential to verify that they meet the ERISA standard of being “reasonable in light of the services being rendered.” Regular benchmarking can (a) identify gaps in features, services, or plan design being offered, (b) lower plan costs, even if only to arm you with sufficient evidence to demonstrate to the incumbent CSP that their fees are not in alignment with the marketplace and should be lowered, and (c) fulfill a key fiduciary responsibility under the rules and regulations of ERISA.
To conduct effective benchmarking, Plan Sponsors have a range of options including conducting a paper-based review relying on industry data for similar-type plans, to the most effective method of working with a 401(k) Advisor to lead a Vendor Benchmarking review by taking your plan out to bid. This latter approach is the best way to determine what the true cost of your plan should be in today’s dollars, in our view. You can either use the Advisor you have, if they have the diagnostic tools or aptitude to conduct that search, or engage an independent firm, such as ours, to conduct the review for you.
Do You Have a Structured Process in Place?
As you can tell from the items mentioned here, these mistakes are often the result of not having a structured process in place to implement as well as review and improve the plan. It’s simply not enough to set it and forget it. As a Plan Sponsor, you should constantly look for best practices to implement.
If you need help improving your plan, I would love to meet with you. We offer a complete suite of retirement advisory services with three adds you won’t find elsewhere: our proven proprietary processes, our insights, and our commitment to translating the mysteries of retirement advisory into plain English you can understand and use. Schedule an introductory meeting by contacting me at (818) 262-3458 or ssansone@sageviewadvisory.com.
About Steve
Steve Sansone has over 30 years of experience in the retirement plan industry and is the Managing Director of the Valencia office at SageView Advisory Group, one of the largest Registered Investment Advisor firms specializing in retirement plans. As an Accredited Investment Fiduciary® and Certified Plan Fiduciary Advisor practitioner, Steve works with professional service groups and companies of all sizes seeking to create a world-class retirement plan experience for their plan participants. He serves as an ERISA 3(21) or 3(38) Advisor, bringing independent, conflict-free services to both Plan Sponsor Committees and retirement plan participants. Steve’s expertise in Cash Balance Plans spans nearly 20 years and is one of the few Advisors in the industry that understands both sides of the Cash Balance equation: Actuarial and Investments. He considers his work to be the greatest financial rescue mission of this time, helping people retire on time, sufficiently prepared to write the next best chapter of their life. To learn more about Steve, connect with him on LinkedIn.
SageView Advisory Group, LLC is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where SageView Advisory Group, LLC, and its representatives are properly licensed or exempt from licensure. No advice may be rendered by SageView Advisory Group, LLC unless a client service agreement is in place.