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By Doug Bailey
| July 26, 2016
The basic rules governing retirement investment advice and employer-sponsored retirement plans hadn’t changed significantly in more than 40 years.
So maybe corporate executives and business owners can be forgiven if they thought that once their plan was up and running, and employees were participating, everything went on auto-pilot, and the top brass and plan administrators got to go play golf or focus on other things.
But maybe not.
Experts in retirement-plan services say that while it’s understandable that a certain amount of lethargy inevitably exists when it comes to managing retirement plans, companies would be wise to assess, audit, and evaluate their employee programs fairly often. And there’s no better time than right now, as most plans must file a fiscal year-end (July 31) report with the Internal Revenue Service.
The incentives for running a self-check on your company’s employee retirement plan—for both financial compliance and fiduciary responsibilities—are profound, and the alternatives are a little scary. For one, a self-directed audit by an independent CPA of your choosing will be relatively inexpensive and far less anxiety producing than if the Department of Labor marches in unannounced one day for a major review.
“The thought of a DOL audit is what keeps plan administrators up at night,” said Sean McGarry, vice president and retirement plan services manager for Rockland Trust.
Secondly, there is an emerging trend, McGarry said, of plaintiff attorneys filing class action lawsuits against providers or record keepers that may have allowed their plans to fall out of compliance. All plans must be able to show that sound fiduciary procedures are in place and that a review to evaluate fund performance and the best options available is regularly conducted. Without those safeguards, companies could also be subject to breach of fiduciary duties allegations if employees begin to believe there should be less expensive alternatives, or the fees are too high or there are better plans available.
“You’re hearing about the lawsuits more and more,” McGarry said. “That’s why often plan service managers will partner with fiduciary advisers to make sure that a company’s plan is fully within compliance and operating within the regulatory guidelines.”
McGarry offers five tips on evaluating a company’s retirement plan and maintaining it within current regulations, as well as keeping DOL auditors and plaintiff attorneys at bay.
This sounds simple enough but in practice, experts say, it isn’t always adhered to. It is critically important to make sure that company plan administrators understand their plan provisions and follow the rules in practice. One of the most common mistakes is the untimely submission of payroll deferrals to the plan’s record keeper. In fact, that is the number one deficiency the DOL is currently enforcing, according to experts. Other errors occur in plans that, in writing, exclude employee bonuses from participation in the retirement accounts, but then human resources allocate a 401k deferral that includes the bonus. Companies need to review the plan provisions with their service provider regularly. In fact, plans with more than 100 participants are required to be audited each year and these types of operational “deficiencies” are what auditors look for.
In extreme cases, the IRS can disqualify plans that are not operationally sound. A plan with poor investment options, high costs, and poor participation rates probably won’t be threatened with disqualification because a CPA and IRS audit looks mainly at operations, not fiduciary matters. However, a company could be vulnerable to a lawsuit by employees. A company can delegate certain responsibilities (administration, filings, investment oversight, etc) but the sponsor of the plan is ultimately responsible for what goes on within it. With the spate of high profile class action lawsuits filed recently, it is wise to review the plan regularly to make sure your plan’s service providers and advisors update you on new ways to protect yourself. Actually, these lawsuits can provide a roadmap for smaller businesses to set up best practices.
This is a new one. In April, the DOL issued new conflict of interest guidelines that are likely to affect both qualified retirement plans and IRAs. The DOL said that because employees are often responsible for directing their own investments, there is a need for a uniform definition for fiduciary advice. Currently, there are a significant number of retirement plan professionals who provide advice but are not fiduciaries to a company’s retirement plan.
The DOL’s contention is that the lack of fiduciary accountability or transparency could result in an employee receiving (and acting upon) advice that he or she believed was made with his or her “best interests” in mind, when in fact it came from a non-fiduciary advisor. “If you’re not sure that your advisor is a fiduciary, but they perform these duties regularly on behalf of your plan, you may wish to learn more about how this new regulation will impact your plan moving forward,” said McGarry. Being a fiduciary simply means that the advisor must provide impartial advice in their clients’ best interest and cannot accept any payments creating conflicts.
Few business models hinge upon cost alone, but the retirement plan business has become increasingly fee sensitive. Fee disclosure guidelines in 2012 helped companies and their advisors make it easier to evaluate and compare their plans with others. Benchmarking can come in several forms, McGarry said. A company can simply contact a few alternative providers and match up what they offer compared to their own plans. Alternatively, advisors can compare fees and expenses using proprietary software systems and applications to determine if their costs are high, low, or average. “The software isn’t perfect,” said McGarry. “It’s similar to Zillow, which shows you how much homes in your neighborhood are worth. It’s not always 100 percent accurate but it’s a starting point.”
Like physicians who have begun concentrating on keeping patients healthy instead of only treating them when they’re ill, retirement plan managers have found there are benefits to improving employee knowledge and participation in retirement plans before any problems arise. In addition to explaining how to get the most from employee benefits, financial wellness programs focus on helping employees track where their money goes, build emergency funds, and cope with financial pressures. Small firms can still focus on education and communicating why employees need to save now. But a more comprehensive wellness program may offer webinars or onsite education focusing on managing debt, college savings, as well as income planning sessions for employees over 50 who don’t need to hear about how money grows over time but might appreciate tips on asset allocation as they approach retirement.
“I find retirement plans get very little love as an employee benefit because nobody wants to review or look at it until it’s an emergency,” said McGarry. “Yet outside of health insurance, it’s probably the most visible employee benefit that a company offers. And other than the value of their home, it’s the largest financial asset that most people own. But it’s so simple to disregard and take for granted.”
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