Surprise! Qualified Plan Sponsors Are Fiduciaries

A 401(k) or any other qualified plan is an extremely important part of one's overall financial planning for the long-term future. Participation in a qualified plan gives one a head-start on their long-term financial security. The qualified plan not only provides a mechanism for saving, it also allows the money in the account to compound tax-deferred (or in the case of a Roth, tax-exempt). That means the earlier one begins to participate in making contributions, the greater chance one has in amassing a substantial retirement account that may ultimately provide one with their future financial independence.

A high-quality advisory firm takes an active role in shaping clients' qualified plan portfolios such as 401(k)s, 403(b)s, 457s, etc. The advisor looks at a client’s overall portfolio in a holistic fashion, addressing all of their accounts including individual accounts, trust accounts, retirement accounts, etc. In some cases, the retirement account/qualified plan represents the majority of one’s portfolio.

Only exceptional advisors will also offer assistance to employer sponsors of qualified plans. This is of particular importance right now as the Department of Labor and the IRS crack down on out-of-compliance sponsors of plans that are not up to snuff.

Plan Sponsors Are Fiduciaries

Many plan sponsors don’t realize they are fiduciaries. Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of retirement plan participants and their beneficiaries. The most important responsibilities include, but are not limited to, drafting an investment policy statement, selecting the funds that will make up the investment menu, and providing education to the participants. (For related reading, see: Meeting Your Fiduciary Responsibility.)

Here’s an example of a plan sponsor that is out of compliance and hence subject to penalties and other liability:

It's 1990 and a small business owner is told by his accountant that he and his employees need some type of qualified plan for their savings vehicle. The owner whips together a basic plan with little instruction, throws some investment options in there based on some chatter at a cocktail party, and basically sets and forgets it. Little education is provided to the employees after the establishment of the plan. Paperwork for new hires is handled by an employee not hired for such service. Fast forward 20+ years and the plan is using the same basic funds and investment menu that was provided over two decades ago. Those funds may not be appropriate anymore. They might have large fees. They may have horrible past performance. Furthermore, the menu may not provide appropriate diversified choices. For example, for equity funds there should at least be an option for large-cap, mid-cap, small-cap, international and emerging markets. In fixed income, there should be choices like short-term bonds, international bonds, high-yield bonds, etc. There should be active and passive options available. Passive options are a good way to keep costs down. Furthermore, the employees still aren’t getting any education or instruction on how to invest, how much to invest, etc.

Plan Sponsorship Compliance Is a Must

The example above is happening out there today in many, many plans. Long story short, the investment world has changed dramatically over the last couple decades. Compliance cannot be taken casually as regulation has increased exponentially. Most importantly, the goal should be to optimize the success of all the participants in the plan. The plan sponsor needs to be cognizant of what's happening with these plans, they need to understand and monitor what their employees are doing and provide some form of education and direction on what to do with the options. If not, that plan sponsor could be running afoul of the rules and regulations set forth under ERISA, and may be subject to fines and other time-wasting penalties. (For related reading, see: Employer Responsibility for Pension Plans.)

It goes without saying that there are a lot of employer plan sponsors that do not take this job seriously. Many of them may not even know of or understand their responsibilities as a fiduciary. They need to get up to speed with the requirements set forth by both the Department of Labor and the IRS. Here are just some of the issues plan sponsors face today:

• Investment analysis and menu selection
• Plan design and conversion services
• Investment monitoring and committee meetings
• Fund replacement and manager searches
• Investment fee analysis 
• Asset allocation modeling
• Plan sponsor fiduciary responsibility
• Employee education 
• Employee meetings
• One-on-one guidance

If you or someone you know has an employer plan in need of getting up to speed, find a qualified financial advisor to help.

(For more from this author, see: Why Alternatives Belong in Your Portfolio.)