Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them.
This has been a subjective topic sometime because the question is what exactly is the interest of plan participants? Does it mean you try your hardest to make sure they have the best plan possible? Or is it more about the plan being good enough in your eyes (funny enough some companies claim that in their fiduciary breaches). At the end of the day, it is important to consider the best interest of participants at all times to reduce your chances of future litigation. The last thing you want is an employee reporting to the Department of Labor a breach of fiduciary duty. So, make sure when you are picking and changing things within the plan it only benefits the participants, no one else.
Carrying Out Their Duties Prudently
In the Oxford Dictionary, prudence is defined as: acting with or showing care and thought for the future.
This means any changes you make must have future repercussions considered.
And trust me, the repercussions can be huge. Imagine finding out 5 years down the line that one mutual fund costed your employees 350 thousand dollars in excess fees. As a plan sponsor, every action you make will have an effect on the outcome of the plans performance. Performance isn’t just measured by annual returns. What good are annual returns if the fees on the returns are 3 times the national average? Exercising prudence is important because this is peoples retirement money that you are being held accountable with. This is their livelihood, and it rests in your hands. So be sure to keep the plan performing at its highest level and make changes when necessary. Be adaptable. The industry is always changing and so should things in the plan if needed.
There is no such thing as 100% perfect plan. But you need to ensure it is at least in the 90th percentile or else it means you are not being prudent. And if you are not being prudent then you are violating ERISA.
Diversifying Plan Investments
Time after time I see plans with mutual funds that are identical to one another! Sure, maybe the name of the funds are not the same, but they have the same holdings. Mutual funds with the same holdings are easy to find. Just check if they have high correlation and if they do, then its safe to say you need to remove one of them from your plan. Be sure to have one of each mutual fund that has a different investment aim. For example, one large cap fund for all the large cap stocks and one emerging markets fund for international exposure.
Did you know statistically participants perform worse with too many investment options?
So, ensure the investment menu is diversified but the least amount of options available. Give participants less room for error. You don’t need an investment menu with 25 investment options. The plan provider wants to give you all these options so you can pick mutual funds that pays them more in hidden fees. Don’t fall for it! It might be lower costs when you lower the investment options by the way.
Paying Only Reasonable Plan Expenses
Plan expenses can be overall expenses. I include the advisor fees as part of the plan expense. Why? Well typically these fees would get deducted out of plan assets therefore charging participants and effecting returns overtime. So, it matters! Benchmark plan expenses with the industry average to see where your company stands.
If you found out you were paying 3 times more in fees than everyone else, wouldn’t you be mad?
I mean heck it effects everyone’s bottom line. The CEO should be concerned about this too. There is a reason O’Reilly’s Automotive is facing law suit. Their admin fees were 2.5 times above the national average, and it was being charged on the participants!
No one was paying attention to whether the fees were fair or not. The thing is how do you know what’s fair? That’s why an independent advisor can help you benchmark the entire plan on its own. You can’t trust what the plan provider tells you because they don’t have the liability and accountability you have.
Small businesses (1500 employees or fewer) have the hardest time following all of these things. I think it is because they don’t face potential lawsuits like the popular big corporations do. Think about it. A random employee tweeting about Tesla’s poor performing mutual fund is probably going to get a lot more attention than any small business would. Its why companies like Tesla have an entire committee making sure there is no inefficiencies in the plans whatsoever. They don’t want to hear a single peep about it!
This is why plan providers prey on small businesses. Some of the most underperforming mutual funds are given are to small businesses. Small businesses are more agreeable to plan providers excessive fees. You never once question its design from the beginning. But you should. Its costing you as the CEO, HR, Employee and/or Business Owner money.
All positions at a company should have a best interest to keep the 401k plan performing at its best because all positions are contributing to it. It’s your money.
Sammy Khalil is a 401k Fiduciary from Nyx Moros, a firm which advises on Company 401k plans. Sammy conducts full analysis by benchmarking retirement plans holistically. This ensures the entire plan is in the plan sponsor's best interest. Being independent means I can be transparent in all advice. For more information, please visit www.nyxmoros.com. Or message me on LinkedIn. Whatever is easier for you!