When your company sponsors a 401(k) plan, the law requires you to ensure that the plan serves the best interests of participants.When your company sponsors a 401(k) plan, the law requires you to ensure that the plan serves the best interests of participants.That means you should periodically review administrative processes; investment offerings and managers; and compliance processes to ensure that your business is fulfilling its fiduciary obligations.
In addition, certain changes over time mean that a review simply makes good business sense. Generally, it’s wise to review your company’s plan every few years, depending on changes such as:
- Your organization’s goals and needs
- Shifting participant demographics
- Evolving technology
- The investment climate
- A significant increase in plan assets
- The need to consolidate multiple retirement plans
- Corporate acquisitions
- Poor service or fund performance
When reviewing your company’s 401(k) plan, consider the following seven factors:
How much does the plan cost your company and participants?
Participants pay their share of plan costs through reductions in the investment return credited to their accounts. Examine the extent of this reduction recognizing that high expense ratios can erode the growth of their accounts.
And determine whether the costs your company bears are reasonable, including compliance fees, consulting costs, staff expenses and cost of communications.
2. Choice and performance:
Determine if the plan offers an appropriate array of investment choices in terms of risk and return. Do the choices fit well with your employees? How does performance measure against benchmarks or against similar options offered by other vendors.
If your company outsources the responsibility for compliance matters, such as nondiscrimination testing and annual filings, be sure that the vendor is completing those tasks in a timely and correct manner.
Is the plan running the way you expected? Check whether your staff is promptly and accurately processing employee contribution and investment elections or changes, as well as, requests for loans, withdrawals and distributions. Evaluate the amount of time spent on administration and oversight of the plan.
5. Self-service features:
Participants don’t usually require much administrative help to perform many of their daily plan-management tasks, such as changing investment elections and determining their account balances. Much of the paperwork has been eliminated from today’s 401(k) plans with internet and telephone capabilities. Review the plan’s self-service features to ensure they are user-friendly, easily accessible and help employees get the most from the plan.
6. Customer service:
When participants need assistance, evaluate how readily the vendor makes help available. Are customer service reps knowledgeable and courteous?
7. Employee participation:
Check to see if participation rates match your expectations. Any of the above factors can affect participation, as can the quality and adequacy of communication materials.A 401(k) plan is one of the most important benefits your company can provide to employees.
Evaluating the Vendor
Simply believing that your company’s 401(k) plan is competitive doesn’t offer much protection against lawsuits and regulatory review.
The Employee Retirement Income Security Act (ERISA) requires sponsors to ensure that a plan is designed for the sole benefit of participants and that expenses are reasonable using the “prudent man” standard.
Under that standard, a fiduciary is required to act “with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man, acting in a like capacity and familiar with such matters, would use….”
Of course, choosing a plan carefully helps. And in that regard, the Labor Department’s ERISA Committee recommends that plan sponsors:
- Avoid entering into transactions with vendors who refuse to disclose the amount and sources of fees and compensation received.
- Require plan providers to provide detailed written analysis of all fees and compensation (whether directly or indirectly) to be received for its services to the plan prior to retention.
- Obtain all information on fees and expenses, as well as, revenue sharing arrangements with each investment plan.
- Require vendors to provide annual written statements with respect to compensation, both direct and indirect, received by the provider.
- Calculate the total plan costs annually.
A thorough, periodic review of the plan is important to ensure that it is operating efficiently and effectively for your employees and your company.
We have a team of professionals dedicated to Employee Benefit Plans. Let us know if we can help assess your plan. Call us at 434.296.2156 or email us at firstname.lastname@example.org.
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