Benchmarking the features of a 401(k) plan

Written by promotiondept

November 12, 2018

Bchmarking the features of a 401(k) plan

Whether they’re serving clits in public accounting or working in business and industry, CPAs may to provide advice on the many choices available wh a business is offering a new retiremt plan or assist in reviewing an existing plan.

Reviewing an existing plan represts a tremdous opportunity for practitioners to offer valueadded services to their clits and for finance employees to serve their employers. Clits and businesses alike rely on CPAs to help them sure the plan continues to meet objectives.

Business owners who sponsor plans must manage their fiduciary responsibilities, including plan managemt, hiring and monitoring service providers, employee education, participant communication, administrative support, and plan design. It should come as no surprise that of all the parts of a retiremt plan, the biggest area to come under intse focus rectly is cost.

Beginning in 01, a Departmt of Labor rule required annual disclosure of total plan fees to plan sponsors and participants. The trd on fees will place additional responsibilities on plan advisers by shedding more light on plan costs and how they are assessed. Many plan sponsors and participants can usually idtify the cost of each investmt option, or a fund’s expse ratio, by refercing the annual fee disclosures they receive. But ask plan sponsors if they know the overall “weighted” investmt costs in their plans, and they may not know the answer. Unfortunately, this information is not readily available unless requested by the plan sponsor.

These questions can be used to bchmark a plan against others and to learn more about the important features of a retiremt plan. Tally your points as you answer the following 10 questions.

1. Do you periodically review plan investmt performance against bchmarks and guidelines? If no, give yourself 0 points. If yes, give yourself 1 points.

Adopting an investmt policy statemt is important, but the process of reviewing plan investmt options against guidelines and bchmarks outlined in the statemt is critical.

. Does the retiremt plan vdor or adviser offer differt levels of fiduciary services? If it offers cofiduciary protection, add 1 points. If it offers only a ranty, add 8 points. If it offers neither, add 0 points.

Some retiremt plan vdors offer ranties at no cost that promise to restore any losses to the plan and pay litigation costs related to the suitability of the investmt process and fund lineup. Some vdors offer plan sponsors cofiduciary services at little or no cost.

These services come in differt levels and are gerally referred to as 3(1) and 3(38). What’s the differce betwe these two? A 3(1) investmt fiduciary provides investmt recommdations to the plan sponsor. This level of service is for plan sponsors who want assistance with their fiduciary responsibilities but want to maintain discretion and control of their plan’s investmt s. A 3(38) investmt manager takes full responsibility for the plan’s investmt decisions. This level of service is for plan sponsors who lack expertise and want to shift more of the fiduciary responsibilities to a third party.

3. Did an investmt adviser or retiremt plan vdor provide education to participants in the past year? If no, add 0 points. If yes, add 1 points.

Education is esstial if you wish to comply with Employee Retiremt Income Security Act Section (c) regulations. Section (c) allows plans to pit participants to exercise control over the assets in their accounts (relieving the plan sponsor of some fiduciary responsibilities), but the plan must provide participants with an opportunity to obtain sufficit information to make informed investmt decisions. If an adviser has not conducted an educational workshop in the past year, it is possible plan participants may not have sufficit information to make proper decisions regarding their investmts. Wh there is an educational workshop, be sure participants confirm their attdance. Participants who decide to forgo the workshop should also sign a form acknowledging their decision.

4. Does your plan offer index funds, exchangetraded funds (ETFs), or other lowcost investmt options? If no, add 0 points. If yes, add 1 points.

largecompany stocks in geral (an investmt cannot be made directly into an index).

5. Does your plan offer professionally managed s based on a participant’s risk tolerance or anticipated retiremt date (target maturity funds)? If no, add 0 points. If yes, add 8 points.

Many participants are overwhelmed with the investmt options in their plan and feel illequipped to select and th monitor their choices. Asset allocation s make the process eer. Plan vdors oft provide risktolerance questionnaires that, wh completed, direct a participant into one of three to five already diversified s based on their risk score. Choices include conservative, moderate, and aggressive s. Another type of asset allocation , called a target date , is based on a participant’s anticipated retiremt age. These s start with an appropriate mix of equities and fixedincome funds based on one’s retiremt date; this mix th automatically becomes more conservative as the participant nears retiremt age.

6. Do you routinely review the of tinated participants and “force out” those with balances under $5,000? If no, add 0 points. If yes, add 4 points.

Many plan sponsors may be unae that small balances for tinated participants can be “forced out” of the plan, which can help reduce administrative costs. In addition, tinated participants can oft be difficult to locate. Since disclosures periodically to be distributed to all eligible employees and participants, including tinated participants, removing them from the plan will make it eer to satisfy delivery. What are the rules? Balances below $1,000 can be st directly to tinated participants, and balances betwe $1,000 and $5,000 can be transferred to an individual retiremt account. Your thirdparty administrator can help facilitate this process.

7. Do you sure annual disclosures and participant notifications are properly distributed by required due dates (i.e., fee disclosures, qualified default investmt alternatives, and, if applicable, safe harbors)? This would include the to provide notification for any investmt changes. If no, add 0 points. If yes, add 8 points.

Annual disclosures are gerally completed by thirdparty administrators and/or plan vdors and to be distributed to all eligible employees, and active and tinated participants. Investmt changes to be communicated to all eligible employees and participants as well, in advance of the changes. Plan sponsors to adhere to strict deadlines. Some recordkeepers will handle these responsibilities for a nominal fee.

8. Do you periodically review your annual administration costs and compare them with companies of your size? If no, add 0 points. If yes, add 8 points.

Administration costs come in differt varieties. Some retiremt plan vdors or thirdparty administrators charge a fee based on the number of participants or the number of eligible employees; others base the fees on the average participant’s balance. Some ev charge a flat fee. Based on your demographics, which method is most favorable? Review your administration fees to sure they remain competitive relative to other companies of your size.

9. Do you periodically review your investmt managemt fees (and asset fees, if applicable) and compare them to companies of your size? If no, add 0 points. If yes, add 1 points.

Investmt managemt fees can vary greatly from plan to plan and are oft based on “class share.” These class shares come in many varieties and are idtified with a letter following the investmt option (i.e., A, I, R, etc.). An asset fee is another layer of investmt costs and, like investmt managemt fees, is deducted from investmt returns and can therefore be difficult to monitor. Asset fees are gerally based on the level of plan assets and should tier down as plan assets increase. Many people focus on each of these fees separately, but plan sponsors to compare the total fees to those gerally paid by other companies of similar size to sure they remain competitive.

10. Have you reviewed how plan costs are assessed? If no, add 0 points. If yes, add 1 points.

If you hav’t reviewed how plan costs are assessed, you may not know if they are equitably distributed among participants or whether some pay a proportionately larger portion of the plan’s administrative costs.

Retiremt plan recordkeepers provide a number of services to plan sponsors and participants. In addition to recordkeeping, they provide:

Moreover, there is the cost of a plan adviser. How are these fees paid? If the of investmts includes only lowerfee funds (i.e., index options or ETFs), an “asset fee” is gerally added to compsate the recordkeeper and adviser. In this scario, the cost is equally shared among all participants. If the lineup does not include index options and/or lowcost fund choices, the investmt will include higherfee funds, ones whose expse ratios include a portion that is shared with the recordkeeper to help defray the administrative costs ed above (hce the t “revue sharing”). Some recordkeepers today are able to credit the revuesharing portion to the participant investing in the option and not use this to defray plan costs (thought to be a more equitable way of distributing costs). In this case, the recordkeeper may add an asset fee to offset overall plan costs.

In practice, many plan s will include both lowerfee funds and higherfee funds, some that include revue sharing and some that do not. In this scario, each participant’s selected funds support a differt perctage of administrative expses, based on the funds the participant chooses and how much the participant has invested in these funds. This practice of using revue sharing to pay for plan expses is not uncommon.

While plan participants receive detailed information about the expses of each plan investmt option, a closer look at the expse compont may reveal that a participant who selects higherfee funds that provide for greater administrative revue paymts is effectively bearing a larger portion of a plan’s administrative expses than others who select lowerfee funds that pay little or no revue tod the administrative costs. This is particularly true with investors who use actively managed funds versus investors who use passive index funds.

A plan that provides for equalization of fund revue is designed so that all participants bear a similar perctage of the total plan’s administrative services, no matter which investmt funds they choose. In the d, transitioning to a lineup on an op architecture platform with lowfee options and an asset fee may distribute costs more equitably among participants.

If you scored 80 to 100: great job! Your company retiremt plan is being reviewed sufficitly in all areas. Keep it up!

If you scored 70 to 79: good job. You may be able to improve your plan with only a few minor changes. Your adviser or plan provider can help suggest changes that will befit the program.

If you scored 60 to 69: fair job. You may befit by asking your adviser or plan provider for help. If your adviser and provider are unable to help you make the necessary changes, you may befit by meeting with an investmt professional who specializes in the retiremt plan market.

If you scored below 60: You may have significant fiduciary exposure and would befit by meeting with a professional who specializes in the retiremt plan market.

About the authors

Alan J. Fishman, CLU, CFP, is an investmt adviser with Yorktown Financial Group in Elkins Park, Pa. Charles V. Creighton, CLU, ChFC, is an investmt adviser with Financial Group in Media, Pa.

To commt on this article or to suggest an idea for another article, contact K Tysiac, a JofA editorial director, at or 919-40-11.

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