Advisors can help by providing an in-depth plan analysis that helps to ensure previously elected features still make sense for the participant base. (Photo: Shutterstock)
The retirement plan landscape is increasingly challenging for plan sponsors, as regulatory pressure increases and more plans become the focus of legal action. In reality, the majority of small business plans won't find themselves embroiled in a courtroom battle, but they do need to be increasingly vigilant about applicable rules and responsibilities.
Plan sponsors' challenges are made more difficult by the law's (ERISA) fundamental mandate that every retirement plan must appoint at least one fiduciary in charge and must be operated with a 'Prudent Expert' standard of care.
However, the majority of U.S. plans are sponsored by small companies, so the fiduciaries responsible for them tend to be lay people such as company owners, HR administrators or benefits coordinators who are not experts.
This Prudent Expert standard of care combines with another rule, the 'Exclusive Purpose Rule' which when combined ensures that all fiduciary actions taken are in the best interests of plan participants. But ERISA makes no distinction between a legitimate retirement plan expert and a lay person who is trying to manage this role among many other job responsibilities.
Thus, the potential exists for a major disconnect in how plans operate versus what the law requires, providing a great opportunity for financial advisors to bring value and solidify their relationships with plan sponsors.
Find every opportunity for education
That value starts with educating plan sponsors on the fundamentals of being a fiduciary. This includes three key facets:
1. Encourage sponsors to always ask the question, "Is what we're trying to achieve in the best interests of plan participants?" If the answer to that question is yes, then sponsors can proceed to addressing the initiative in greater detail. But if the answer is no, they should stop right there and consider alternate courses of action.
2. Coach your clients to document everything. If a decision must be made on behalf of the plan and its participants, a staff member (or yourself) should take extensive and detailed notes of any discussions about it. This measure will protect your client in case a decision turns out poorly, because they can at least point to the documentation as evidence that the process was sound.
3. Design the plan around retirement readiness. If the goal is to provide sustainable income replacement for participants upon their retirement, then all of the decisions that follow the establishment of that goal should support it. This is the essence of acting in the best interests of participants.
Prompt periodic review of plan design choices
Design choices often dictate the success of 401(k) plans for their participants. Advisors can help by providing an in-depth plan analysis that helps to ensure previously elected features still make sense for the participant base.
Subsequently, you can make technical and practical recommendations to plan sponsors about which elements to integrate. This might entail redesigning a plan to provide greater entry flexibility or incorporating aspects like automatic enrollment and automatic progressive savings escalators that can increase participation and saving rates.
