With more than $14 trillion held in defined contribution plans like 401(k)s and 403(b)s, according to the most recent figures available from the Investment Company Institute, it’s clear that more and more Americans are building their retirement savings strategy around employer-sponsored plans. Most plan sponsors also understand the value of a competitive, well-administered company retirement plan for attracting and retaining the best and most dedicated employees.
On the other hand, many of the intricacies of employer-sponsored plans may be less familiar, and business owners have a fiduciary obligation to make sure the plan is delivering appropriate value to all its participants. In other words, business owners should not cede all oversight of the plan to someone else; rather, they should maintain awareness of the plan, its ongoing administration, and its effectiveness for those who are investing their life savings in it.
What Does It Take to Be a Good Fiduciary?
It all starts, of course, with remaining vigilant about the principal fiduciary duties of a plan sponsor:
- acting in the best interest of plan participants;
- exercising prudent selection of suitable investments;
- offering sufficient diversity in your investment menu;
- adhering to plan documents;
- ensuring reasonable, competitive fees and expenses;
- avoiding conflicts of interest.
Documenting fulfillment of these duties can be a business owner’s best protection against getting sued or losing a suit. Of course, even with the best due diligence, some funds will underperform from time to time. But when documentation and benchmarking are in place, employers can document that they have taken steps to monitor and evaluate fund managers, helping demonstrate a prudent process in the event of regulatory review or litigation. Especially where fees and expenses are concerned, it’s vital to show that fees are being monitored and compared to those of peer funds. When necessary, employers should show that they have taken steps to either get the fees reduced or changed to a different fund manager with more competitive fees. As a fiduciary, the business owner is obligated to advocate for plan participants in order to ensure the plan is competitive and appropriate. An established schedule and good recordkeeping are essential elements of providing proof of commitment to these obligations.
Being Compliant
Attention to filing deadlines, notifications to participants, required reports, and other compliance procedures is paramount. And, though not required by ERISA regulations, maintaining and updating an investment policy statement (IPS) can provide key protection against questions about how investment options are chosen for the plan. In fact, regulations stipulate that having an IPS is consistent with meeting fiduciary responsibilities for the plan. Frequently, the IPS will be the first document requested by the Department of Labor when conducting an audit.
What about Plan Fees?
One of the areas that plan sponsors should focus on most acutely is the fees being paid by the plan. After all, money paid out in fees isn’t available to accumulate for the benefit of participants, so controlling fees is a principal way to not only exercise fiduciary responsibility on behalf of plan participants but also to improve the plan’s performance as a savings vehicle.
For a sense of how sensitive the subject of plan fees can be, note that employers paid some $1.3 billion over the last five years to settle ERISA class-action lawsuits, the majority of which alleged either excessive fees paid by workplace retirement plans or underperformance of investments in the plan. Clearly, making sure the plan is paying competitive fees is in business owners’ best interest.
There are three basic types of fees incurred by employer-sponsored plans:
- Plan administration fees, which are the costs incurred for day-to-day services such as recordkeeping, accounting, legal, and trustee services;
- Investment fees, which are typically the lion’s share of expenses borne by the plan, covering the management of investments offered by the plan (typically charged as a percentage of assets invested);
- Individual service fees, usually associated with particular options offered in the plan, such as loans or specialized investment directions, and charged to the individual participants utilizing the options.
One of your fiduciary duties as a business owner is to inform plan participants of the fees being paid by providing a prospectus that is updated annually. This seems obvious, but the fact is that many plan participants aren’t receiving effective employee communication around plan fees. A 2024 survey of American workers found that a substantial percentage felt under- or uninformed about the fees and other aspects of their retirement plans.
How can you know if your plan’s fees are reasonable? By periodically benchmarking your provider’s fees with other providers and comparisons with industry averages, you can employ what the Department of Labor terms “an objective process” for determining the reasonableness of your plan’s fees.
Your Rothschild advisor offers experienced guidance and support for remaining compliant and operating your employer-sponsored plan in a fiduciary manner. To learn more about our business retirement plan consulting services, please visit our website.
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Disclosure: This material is for informational purposes only and should not be construed as investment, legal, or tax advice. Rothschild Wealth, LLC is an SEC-registered investment adviser. Rothschild Investment, LLC is an SEC-registered investment adviser and broker-dealer, member FINRA/SIPC. Rothschild Wealth, LLC and Rothschild Investment, LLC are affiliates and operate as Rothschild Wealth Partners™.
