If you are a retirement plan sponsor, you may wonder if your 401(k) committee’s efforts are on the right track. With continued litigation in the space, every company should keep its attention firmly fixed on one thing: prevention of future problems.
However, being a part of a retirement plan committee is not that common. Most people don’t necessarily know what the role entails. As a firm that specializes in keeping retirement plan sponsors compliant, we often notice that committees can easily spend their time on things that are out of their control. Then, the more critical issues receive less attention than they need, leaving the door open to potential liability. To avoid that, here is a quick guide about where retirement plan committee efforts should be focused to help maximize their effectiveness.
You Can’t Control the Markets, So Don’t Try
The stock market is fascinating, no doubt, so it’s basic human nature that we seek to understand it. But here’s the thing: no matter how much discussion we have, the movements of the stock (and bond) markets are entirely out of our control. So while there’s nothing wrong with a quick market update, spending more than a token amount of time on it is not productive and may detract from critical matters. But too often, we see committees spend too much time discussing market conditions and where the market is headed.
Here are critical areas for your 401(k) committee to focus on instead:
1) Lowering Investment Costs on the 401(k) Fund Lineup.
While you can’t control the market, there’s something critical that you can control, and that’s costs. Any time you can provide a similar fund lineup with lower fees, you are doing your job for participants. And the courts have sent a clear message that if you provide high-cost funds when similar lower-cost options exist, you are assuming significant risk. So do not ignore this area of concern. After all, every dollar you save a participant in fees creates more retirement savings for them down the road…every year.
2) Lowering Service Provider Costs.
Along with offering low-fee investment options, you must also provide participants with necessary services at reasonable prices. Those include the roles of recordkeeper, custodian, trustee and investment advisor. Your committee is responsible for spending your participants’ hard-earned money wisely, so you must ensure they get value in return. The best way to display your diligence is to do periodic fee benchmarking.
You can start a Request for Proposal (RFP) and go through the entire process. However, there is an easier way. You can instead prepare a Request for Information. This allows you to periodically compare rates. Then you can use the findings to negotiate a better rate with your existing provider.
One caution: you do need to weigh value with pricing. You want to avoid switching providers frequently, which could cause new problems or considerable inconveniences. Also, don’t just automatically accept the lowest price. Make sure the provider is experienced and highly recommended.
We recommend fee benchmarking about every 3 to 5 years. For our clients, we do this every 3 years as part of our retirement plan advisor services.
3) Monitoring Performance of Your 401(k) Fund Line Up Versus Peers.
Next, you need to monitor performance. But it is not the general performance of these funds against market indexes that matters. That, again, is entirely out of your control. Instead, you must ensure your plan’s funds perform well relative to their peers. If they don’t, the plan sponsor is responsible for monitoring that and swapping out underperforming funds with a better option.
Funds can and do underperform. Some common causes are changes in management or change in investment strategy. If that happens, your participants may find themselves invested in a fund that is not keeping pace with its peers.
The courts have emphasized that plan sponsors must monitor this and proactively switch funds when needed. Our firm has a proprietary system that identifies common signals funds give off before underperforming. We use that system to help our clients proactively switch to better-performing funds when a fund begins to be problematic. But however you handle it, this is an area that requires the attention of your retirement plan committee.
4) Providing User-Friendly Participant Communications.
One area where retirement plan committees can provide considerable value is by helping to ensure that employees get high-quality communication about the plan. Frequently this is passed off the Human Resources, but that can be a mistake. Why? HR has many priorities and may not have the time and attention to devote to the retirement plan.
This is important from a liability prevention viewpoint as well, since user-friendly materials can encourage successful program use. But it should be done proactively; it’s not enough to simply improve them only after complaints arise.
Mandatory notices should be seen as the starting point and should ideally be supplemented with more approachable material. Much of that language is written by regulators or federal authorities and is not necessarily user-friendly.
As a plan sponsor, it is a good practice to provide more education and clarification than the minimum legally required. That may mean adding a cover letter or a separate piece to the required documents as a start, or ideally adding even more educational content.
5) Potential Improvements to Plan Design.
Another important use of your committee’s time is to look for better ways to serve participants. Most recordkeepers produce detailed reports that show which aspects of your 401(k) plan get the most and least use. Ask your committee to review reports periodically to see how participants use the plan.
Are participants taking loans from their 401(k) accounts more often? More education on the potential negative impacts of a loan might be beneficial. Or it may be timely to have conversations about auto–enroll features as more plans find success with those enhancements.
6) Provide Continual Education to 401(k) Committee Members on the Fiduciary Role.
Many retirement plan committee participants need help understanding their role as fiduciaries. It is a good practice to regularly revisit the topic briefly, so everyone is clear.
Why is that important? Because the Department of Labor and the legal community are watching. In 2022, the Supreme Court reaffirmed that employers have an ongoing duty to protect employees in the plan.
So all decisions need to be made for the participant’s benefit. When a committee member walks into a meeting, they often need to be reminded that their other roles at the company are not relevant in the meeting. The only thing that matters is always putting the participants’ best interests first.
7) Don’t Forget to Document 401(k) Committee Actions.
Finally, you don’t want to find out the hard way—in court—that your committee didn’t document everything effectively. Be sure to emphasize the importance of documenting committee reviews and actions. Even if a committee review didn’t result in a change, it is critical to document the process of evaluating costs and providers. (Read our previous article on documentation best practices for retirement plan sponsors.)
Most retirement plan committees are passionate about helping participants and the company, but this role doesn’t come naturally. It’s best to check in periodically and ensure your committee is on track so their time can be used most effectively.
Download our Free eBook for More Tips
For more tips on minimizing your liability as a retirement plan sponsor, download our FREE ebook today:
- Learn about your role as a retirement plan fiduciary
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As potential risks rise, make sure your organization is prepared. Invest a few minutes today to make sure you are doing all you can to prevent problems in the future.