How to ensure your 401(k) plan is an asset, not a liability

Jeremy Chambers, CIMA®, CPFA, QKA
Relationship Manager
Plante Moran Financial Advisors LLC 

Casey Veach, CFA
Plante Moran Financial Advisors LLC

This article was published in the March 2020 edition of NTEA News.

401(k) plans are considered a crucial benefit to attract and retain top talent in today’s competitive labor market. But given the complexities of administering it, fiduciary responsibility of managing it and cost of offering it, many companies view their 401(k) plan as a liability. So, how can your organization stay ahead of the curve and ensure your plan is seen as an asset, rather than a liability?

To start, a well-structured retirement plan should rely heavily on the guidance of a strong advisor, preferably one free from any conflicts of interest related to the plan’s vendors. Rules and regulations are constantly changing, and it can be a burden to keep up with all the various responsibilities and requirements. As the industry has evolved, so too have the services performed by advisors.

Many advisors are specialists that dedicate their time to understanding the retirement plan landscape and will accept their fiduciary responsibilities in writing. While selection and monitoring of investment options are key components of having a strong plan, there are other factors to consider. Employee Retirement Income Securities Act (ERISA) sets the regulations and oversight responsibilities for fiduciaries of retirement plans. ERISA does not require each person involved in the plan to be an expert, which is good because a 401(k) plan is typically only a small portion of the day-to-day tasks of any employer. But it does allow the employer to rely on others for that expert advice, and a strong advisor can help protect your business.

Employees today are much more interested in 401(k) plans and are becoming increasingly aware of related fees. Excessive fees are the most common issue raised in retirement plan litigation. Determining reasonableness of fees is a challenge and something an advisor should be able to help determine. As a best practice, employers should benchmark plan fees no less than annually and really understand all of the fees associated with their retirement plan (investment management, advisory, administration, etc.), and how those fees are paid. There are also strategies that make fees more transparent and equitable for participants, which results in a direct benefit to your employees and helps mitigate your risk.

Educational services are another component of a well-structured plan. Employees are demanding more — gone are the days where an advisor can simply show up once a year to help with enrollment. Features such as automatic enrollment have made it easier to begin participating in retirement plans, and thus the focus has shifted to developing a well thought-out, targeted participant communication strategy to increase employee engagement. Is the financial wellness of your employees a consideration when it comes to administration of your 401(k) plan? It likely should be, and a strong advisor can help build a program that balances the needs of your employees and tailor it accordingly.

The same concepts apply when it comes to plan design. Data is more available than ever before, but that’s only good if you know what to do with it. An advisor should be able to review plan-level data such as participation and deferral rates and develop ideas to optimize plan design to drive better outcomes for employees. Tailoring your plan based on your workforce demographics is also critical — for instance, if you have a younger employee base, consider offering a Roth 401(k) component to complement the traditional pre-tax contribution.

Many companies have meaningful relationships with their employees. Show them you care about their well-being and want to see them reach their retirement goals by emphasizing your organization’s 401(k) plan. You will then see that you, and your employees, look at it as an asset — not a liability.

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