Fiduciary Informant | December 2017
Trends and Recent Events
Since the mid-1990’s a majority of 401k service providers promoted the so-called “free” 401k plan. As 401k plan assets grew over the next decade, many plan sponsors continued to over-look the expense of their plan’s investment options. The actual fund expense ratio contained much more than the investment management fee. Built into the expense ratio were a number of added fees for commissions, record-keeping and administration.
Recently, due to a number of well published 401k lawsuits along with the DOL’s 2012 Fee Disclosure Regulations; more plan sponsors are paying attention to how much the underlying investment expense is subsidizing their basic 401k services. However, many small 401k plans are still overpriced and frequently underserved.
Another recent trend is the growth of Exchange Traded Funds (ETFs) within 401k plans. ETFs are often seen as “clean shares” because they usually have no sales load and typically have lower transaction costs than most managed mutual funds. ETFs also can be bought and sold throughout the day when markets are open, which is not the case with mutual funds. ETFs will continue to gain traction in 401k market place especially when more record-keepers in enhance their platforms to effectively trade ETFs on demand, when the market is open.
Believe it or not, premium service is a trend. Not too long ago, investment advisors were praised for negotiating lower fees from service providers. Fees are no longer the primary focus. Service is a major consideration, nowadays many plan sponsors are looking for investment advisors to provide hands-on investment advice and financial wellness to their plan participants through one-on-one meetings.
Fiduciary Insight for Plan Sponsors
Many plan sponsors wrestle with the question of who is considered a fiduciary within their 401k plan. Under Section 402 of ERISA every plan must have a Named Fiduciary. The plan sponsor is almost always the Named Fiduciary with a duty to oversee any other co-fiduciaries to the plan. If you have any “discretionary authority” with respect to the plan then you are a fiduciary. Two examples are the selection of service providers and the plan’s investment options.
A good step to consider for reducing your exposure as a fiduciary, is hiring a discretionary 3(38) Investment Manager as defined under ERISA. The Investment Manager has full fiduciary responsibility for its investment decision. The Plan’s Fiduciaries are thus relieved of all fiduciary responsibility for the investment decisions made by the investment manager. The plan sponsor has a continuous duty to monitor the investment manager that is actually performing the services, but need not second guess its investment decisions.
Tip of the Month
Focus on offering your employees broader financial plans. For many employees, retirement is not the most pressing financial concern as it was 30-50 years ago. Increased financial obligations in the form of student loans or college savings plans are now eating away at employee funds which were delegated towards retirement plans, like 401(k)’s. Over 40 million Americans hold over $1.3 trillion in student loan debt, with the average American holding at least $30,000 in student loans. Employees need a more holistic financial plan in order to deal with their changing needs. Employers who manage 401(k) plans have the ability to adjust plans to incorporate solutions for these issues. Employers who address these needs stand to gain substantially in finding and retaining top talent.
Establishing a successful financial wellness program can benefit employers through increasing employee productivity, improving workforce and cost management, and optimize your investment in employee benefits.
Any discussion about financial wellness should start and end with your organization. Any provider you’re considering should be willing to successfully partner with you and your advisor, to understand your organization’s strategic objectives, drivers and challenges. This will help you assess how your benefit programs are performing and inform you how they can be fine-tuned to attract and retain key talent, help more workers reach on-time retirement outcomes, and help unlock better workforce management.
A Message From Our Team of Experts
We are excited to launch the inaugural issue of the Fiduciary Informant. This newsletter is dedicated to effectively inform our clients of current trends within the 401k marketplace. We aim to raise and address fiduciary matters, provide helpful tips for improving your plan, and identify the benefits of a good financial wellness program.
Accompanying, this newsletter is a brief video which allows you easily to see and hear directly from our team. The video is intended to compliment the newsletter. We are always looking for better ways to serve our clients, and would appreciate your feedback and any suggestions you might have for us.
Financial Wellness is a newer employee benefit. In fact, it’s one of the fastest growing employee benefit as of 2016. But what’s all the interest in this program? Over 80% of companies have already employed a wellness program of sorts. We have seen the dramatic affects it has on employee productivity and retention.
This article was a bulletin written by Andy Williams of the Golan & Christie law firm. In the article he expresses the fiduciary duty of the employer, and the steps plan sponsors should take to help their plan fiduciaries.
On April 1, 2017, a fiduciary responsibility will be applied to financial advisers of 401(k)s and IRAs with the Department of Labor’s new fiduciary rule.
Just ask any large 401k plan sponsor and they will tell you. You are indeed the captain of this fiduciary vessel, and a good captain should go down with the ship…right?
The Department of Labor (DOL), and their enforcement arm Employee Benefits Security Administration (EBSA), are responsible for the investigations and audits of any size 401k Plans. Even if you’re a small company, with just a handful of employees, your Plan could be investigated or audited.