Hiring the Right Advisor for Your 401k Retirement Plan
From managing growth opportunities and hiring the right people, to navigating laws set forth by the Department of Labor and maintaining employee engagement, it is clear that small business owners have a lot on their plate. With so many irons in the fire, oversight of the company 401k retirement is an area that often suffers. However, the business owner has a fiduciary obligation to the employees to periodically confirm 1) the features are accomplishing the goals established by the plan, 2) the plan costs are reasonable for the service provided, and 3) the investments are performing similar to benchmarks.
Over the last couple of years, HFG Trust has placed a greater emphasis on assisting business owners with the management of their 401k plans. This is because we have observed a clear need for fiduciary services in the marketplace. Outlined below are the areas in which a fiduciary advisor can add tremendous value to the management and oversight of a company retirement plan.
First of all, it is important to understand that not all investment or financial professionals hired to assist 401k plans are working in a fiduciary capacity. Non-fiduciaries are not legally required to do what is in the best interest of the plan or the employees. For the best outcome, hiring a fiduciary advisor is critical.
One way to ensure that you and your employees are receiving expert advice centered on your best interests is to hire a Certified Financial Planner™. Such professionals have met the education, examination, experience, and ethics standards established by the Certified Financial Planner Board of Standards. Your employees will greatly benefit from having a qualified expert who is available to discuss questions and concerns on investment risk, as well as other planning topics such as retirement, tax, and estate planning.
401k plan feature review
On several occasions, we have provided a complimentary second opinion review of 401k plans only to discover that the goals of the owner(s) were not being accomplished. We have found that oftentimes the current advisor has either not met with the business owner to review goals and discuss plan feature changes, or in some instances, there is no advisor at all. It is important to note that goals can change as a company experiences growth, making it imperative to regularly review the features of the plan and confirm the needs of both the employees and the employer are being met.
In the annual Defined Contribution Trends Survey by the Callan Institute, they surveyed business owners and found the three most important factors in measuring plan success are:
- Contribution Rate
Improving employee participation and contribution rate
In visiting with local business owners, we discovered their primary concerns and objectives are similar to the top three issues found by the Callan Institute. In order to improve the first two areas, many 401k plans have added automatic enrollment and escalation. To increase participation, employers are modifying plan features to automatically enroll employees upon meeting the eligibility requirement, typically at 3-4% of their income. To take it a step further, some are also automatically increasing the deferral rate each year for the employee, typically by 1%, until the employee reaches a certain deferral rate. These features are easy to add and improve both employee participation and average contribution rate.
In addition to helping the owner with plan features, we visit with employees to discuss the importance of plan participation and general financial planning, as well as answer any investment-related questions they may have. For the business owner, providing employees with a valuable resource to answer their questions and relieve concerns is of great benefit to the employees.
Investment expenses and plan fees are two of the most common reasons for 401k lawsuits by employees. Despite recent improvements to plan fee disclosure requirements, business owners are oftentimes unaware of the true amount paid in plan fees due to the payment of some costs through mutual funds expenses. Additionally, some retirement plan mutual funds have a higher cost structure, with part of these expenses paid to service providers on the plan. By doing this, the overall cost being paid may not be readily apparent to the employee. As a fiduciary, the employer has an obligation to review and understand all plan costs, especially when those costs are passed on to the employee. Conducting annual reviews of these fees to confirm the costs are reasonable based on the assets in the plan, number of employees, and the services provided is of the utmost importance.
At HFG Trust, we are required to fulfill our fiduciary duty by reviewing plan costs and services. We help the business owner review industry averages and service providers to confirm the expenses are reasonable for the service received.
Monitoring investment performance
Reviewing plan investment options and confirming they are performing as expected is another area that is important for the business owner (plan trustee) to review each year. The plan trustee has the obligation to select investments that perform well; and if these are not monitored, the trustee could be at risk of not fulfilling their fiduciary duty.
At HFG Trust, we help the trustee by crafting an Investment Policy Statement that identifies the parameters for determining which investments should be used for the 401k plan. We then monitor the performance of each investment in light of the policy. Not only does this relieve business owners from having to monitor mutual fund performance, a task that takes both time and expertise, but delegating this authority helps reduce the risk to the business owner as well.
If you are a business owner and have questions or concerns about your employee participation, plan features, costs, or investment monitoring, we would be happy to visit with you and answer your questions.
Stephen Palm, CFP®