Retirement plan sponsors face a huge responsibility when providing a retirement plan for their employees. One out of three Americans has no retirement savings at all. Of the working-age families that do have some savings put away, the median balance is only $5000, not nearly enough to be impactful in retirement. As a plan sponsor offering a retirement benefit, your benefit may be the only way some families will save for retirement.
Once you have decided to implement a retirement plan for your employees, the plan must be administered carefully to avoid legal liability. Common mistakes include not following the plan document correctly, or not properly defining employee eligibility for participation. In May, a story in InvestmentNews quoted one attorney as saying, “In the ERISA arena, if you can’t prove why you did something, it will be very hard to prevail on that litigation.”
These issues can cause plan sponsors to feel overwhelmed and even a little scared. Having a robust fiduciary process can help you not only reduce stress, but also potentially shift the legal liability off your company. The following tips can help you accomplish both.
Analysis and Documentation
A robust fiduciary process involves several key elements, but it’s best to start by analyzing and documenting your plan. This enables you to understand what changes you’ll need to make. A simple review should cover three major areas: performance, fees, and diversification.
An analysis of your plan’s performance can help you determine potential weaknesses. For example, comparing your plan’s performance to a benchmark will give you an objective idea of your plan’s strength. If the plan consistently fails to meet or outperform the benchmark, it could indicate that you’re paying excess fees. It may also indicate that the benchmark you chose might not create a useful comparison. If the benchmark is not similar to your plan’s holdings, you can’t determine how well your plan is doing, and therefore can’t make an informed decision regarding the plan.
Fees are directly correlated to plan performance. For example, if two plans exist with identical holdings, the plan with lower fees will generally have a higher return. The problem with analyzing fees is that they may be hidden. You may think your fees are low or even zero, but the fees may be much higher than what a fiduciary adviser may consider reasonable. It takes a deeper dive into the details to really see how much a plan costs, and it may help you to get outside eyes on the matter. Excessive fees may also be an indication that your adviser isn’t acting in your best interest.
Diversification is two-fold. The first part includes diversification of the underlying investments in the funds. The investment options in the plan should span many industries and asset classes. This helps as a hedge against volatility. Diversification is the shock absorber that smooths out the ride. The second part involves diversification across risk profiles, such as:
- Very low risk and return
- Moderate risk and return
- Moderately high risk and return
- High risk and return
- Very high risk and return
- Cash or money market
When AMDG Financial helps plan sponsors analyze their plans, we often find that they have a large concentration of investment options in the moderate and moderately-high categories and no options in the very low and very high categories. Having both provides your employees with the opportunity to best match their risk profile to their goals and objectives.
While conducting your analysis, be sure to document your process. You should have a record of your findings, decisions, and actions. This record may be useful to you later, in the event of a lawsuit.
Get Help with Your Process
Having a well-planned, documented, repeatable process not only gives plan sponsors peace of mind; it also helps employees make the most of their plan contributions. If you need assistance reviewing your plan, AMDG Financial can help. Our Fiduciary GPS program helps retirement plan sponsors better understand and comply with their duties as fiduciaries, potentially reducing their legal risk while improving their plan’s efficiency and effectiveness. To receive a complimentary assessment of your plan, simply contact us. You may be surprised at the results!