Challenging Small Business 401(k) Myths
posted by Fisher 401(k) November 9th, 2016
If your small business offers a 401(k) to your employees, you’re probably familiar with the challenges that can come with making sure your plan is serving you and your employees the way it’s intended. Our work in serving small business owners with their company-sponsored 401(k) has opened our eyes to a handful of knowledge gaps and service challenges that they face on a regular basis—and we’d like to help set the record straight.
Myth #1: My 401(k) provider(s) are liable if something goes wrong in my plan.
Actually, the plan’s fiduciaries are liable. Fiduciaries are the people who are legally responsible for the plan—and they work at your company. They may be your HR Manager or Chief Financial Officer, or the owner may have the responsibility. They may be named in the 401(k) plan document, but they don’t have to be. You can tell if someone is a fiduciary by the level of responsibility they have for the plan’s operations. Does this person have decision-making authority, or are they making decisions about the plan’s investments and operations? Then this person is a fiduciary, whether or not their name appears somewhere. There’s a good chance that you, as a business owner with a company-sponsored 401(k), are a plan fiduciary.
Third parties can also act as fiduciaries to your plan. Advisers who work as 3(21) investment advisers share some fiduciary responsibility with you—they’ll advise you about your investment options, and then you make the decisions. 3(38) investment managers take on the risk for investment decisions, because you hire them to make the investment decisions for you.
Fact: Even if you hire someone to “run the plan,” you are still a fiduciary if you have authority to make decisions.
Action Step: Review your records to see who is making decisions for or acting on behalf of the plan. Have them sign an acknowledgement of their fiduciary responsibility. Consider hiring a 3(38) investment manager to protect you against the risk of choosing investments.
Myth #2: No news (from employees) is good news.
As a small business owner, you have a lot on your plate, and may not be able to keep track of everyone’s thoughts and feelings about the company 401(k). So if your employees don’t give you any input, you may believe they are perfectly content with the plan and the services they’re receiving. In our conversations with employees, we find that may not be the case. Rather, they may not say how they really feel over fears that they appear ungrateful—or they may believe they don’t have the authority to offer input for how to improve the plan.
Fact: Silence from employees is not an accurate way to assess the plan’s performance or service providers.
Action Step: Survey employees, asking them to tell you openly how they like the plan and if they’re getting good service. Make sure they know you value their honest feedback.
Myth #3: I know how much I’m paying for the plan.
On the surface, this might seem true: Your documents may show a flat fee, a percentage of assets translated into a dollar amount, or some other easy-to-understand figures. Changes to pension laws over the last several years require service providers to tell you how much they charge.
Unfortunately, there are ways around full disclosure of plan fees—some mutual funds still include hidden fees, for example. As someone who is responsible for the plan, understanding the fees and making sure they are reasonable are among your most important duties. Unreasonably high fees mean lower retirement balances for your employees—including you, if you take part in the plan. In fact, studies indicate that participants in the plan could lose out on nearly one-third of their total savings due to excessive fees.1 That aside, ignoring excessive fees could even lead to legal penalties for the plan’s fiduciaries, because fiduciaries must always act in the best interests of their employees.
Fact: You may need help figuring out how much you’re really paying for the plan—even if you think you know what you and your employees are paying.
Action Step: Request a review of your fees from a plan provider or independent adviser.
Myth #4: Retirement plan providers are pretty much the same, so there’s no reason to seek out a new one.
There are substantial differences between 401(k) providers and how you and your employees are served. Some providers offer a self-service model with education available online. Some service providers are very high-touch, making periodic visits to every worksite, explaining fees clearly, and they may even take on fiduciary responsibility to the fullest possible legal extent.
Because there is such a variety among providers, finding a few minutes here or there to evaluate a few different financial advisers can be well-worth the time. Find out whether the provider will visit your location(s) in person, what kind of educational materials and other support they offer your employees, and their availability by phone or in person. Too often, the person who sells you your plan will also be the one servicing your plan, which means they focus on cross-selling you additional services instead of providing ongoing help and education for your plan. We believe that good service shouldn’t come at a substantial increase in cost or additional fees.
Fact: There are substantial differences among providers, including fees, services, risk protection, and more.
Action Step: Commit some time to making sure your providers are truly right for you. By conducting and documenting a periodic search, you give yourself additional fiduciary protection. You also give your employees better service for the fees they’re paying.
Myth #5: My employees know whom to call if they need help.
We find that employees really don’t know how to get help when they have a question or concern about the plan. Developing a relationship with an adviser who is dedicated to helping your employees save for a comfortable retirement is key to a successful 401(k) plan—and communicating where to turn if your employees have questions is very important.
Fact: Your employees may not have real access to help or answers to their retirement-related or investment-related questions, or they may be difficult to find.
Action Step: Find a provider that makes it easy for you and your employees to get answers and education regularly and effectively. Seek a provider that offers dedicated, specific employee resources—and remind your employees of this resource regularly.
Hopefully we’ve encouraged you to challenge a few of your perceptions about 401(k) plans, but there are probably others you’ve wondered about. Reach out and send them our way—we’d be happy to address them and help you clear things up.
1The Retirement Savings Drain: The Hidden & Excessive Costs of 401(k)s. Demos, 2012.