Recent volatility in the equity markets
has had a devastating impact on 401(k)
performance — a fact that’s certainly not lost on anyone who participates in an
employer-sponsored retirement plan and
receives a quarterly earnings statement.
But, besides earnings, there’s another concern growing behind the scenes.
“Business owners and operators who have
fiduciary responsibilities for their 401(k)
plans need to recognize they are at much
greater risk today,” says John Nave, the president of Brentwood Advisors LLC.
“Basic plan administration lapses that
might never attract attention in good times
are now receiving close and intense scrutiny.
And the longer those lapses are left
unchecked, the greater the exposure and
potential liability.”
Smart Business asked Nave to outline the
key issues every employer offering a company-sponsored 401(k) should revisit and
address.
What puts a business at risk when it comes to
its 401(k) administration?
Losses in any retirement account will create anxiety and may invite some form of
scrutiny, especially when the losses are in the
20 to 30 percent range (typical of what’s currently being experienced). A loss of this magnitude is understandably painful, but even
more so for those employees who are closer
to retirement and sensitive to losses because
of their investment timeline horizons.
For the business owner/operator who
maintains fiduciary oversight of a 401(k)
plan, the fundamental question you must
answer is this: Does the underlying performance of your plan drastically underperform
the index/average? If it does or if there are
‘undue losses’ that may appear to result from
mismanagement or neglect, those losses can
cause employees to feel victimized and can
open you up to lawsuits and litigation.
What are some of the danger signs that indicate a plan may require attention?
With smaller companies, having one
provider that offers only that one provider’s
funds is an obvious red flag. Likewise, red
flags are raised whenever plans have a limited range of investment options (for instance, if most of the options involve stock investments). Your plan’s adviser should be evaluating the 401(k) plan each year and looking at
the underlying investment options that are
being offered. Any plan should allow for ‘full
allocation’ in each of the asset classes, segregated by value funds; growth funds; index
funds; bond funds; cash or money market
funds; large, mid and small caps; and international or global funds.
Generally, you need more than one fund in
each category, and funds in the plan should
not overlap. In other words, the same stocks
should not be appearing across multiple portfolios within the plan offering. The plan’s
adviser should also look at whether the existing plan is cost-effective, whether it offers
features that allow participants to do things
like take out a loan, and whether it allows
participants to decide how funds can be allocated in a self-directed manner.
Participation levels should also be monitored, since low participation levels are a
major indicator of a plan that is bad. If
employees are being hit especially hard with
losses, this may indicate that they are not
adequately diversified. So in addition to making sure that the plan isn’t compounding
problems due to a lack of adequate investment options, your plan’s adviser should be
offering your plan participants guidance to help them determine their appropriate risk
tolerances.
Who can the owner turn to for help or a second opinion regarding his or her plan?
If you’re a small or midsize business operator, a good starting point might be to find a
personal wealth management adviser with
experience advising company retirement
plans. The critical link between your plan,
your company and your employees is the
plan adviser. If changes are deemed necessary, it will usually start there. And if you ultimately decide to change your plan’s adviser,
you want to select someone who not only
has experience in advising 401(k) plans but
also excels in individual advisory situations.
Don’t underestimate the small stuff. Even
something as simple as updating beneficiary
information can make a huge difference.
We’ve seen situations where ex-spouses
receive all the benefits because the plan
never received updated beneficiary information to change or include a new spouse.
When routine updates aren’t being made, it
can be an indication that your adviser isn’t
advising as thoroughly as he or she should.
What happens if changes need to be made to
the plan itself?
Keep in mind that you don’t necessarily
have to change providers. The major 401(k)
providers offer a vast array of plan options,
so changing to another provider probably
won’t be necessary. Instead, by changing plan
advisers, your new adviser will simply take
over your existing contract, re-evaluate the
way your plan is set up, make recommendations and implement changes, and interface
with your employees to explain why those
changes have been made. This will allow you
to transition with an absolute minimum of
inconvenience.
It is especially critical for owners and operators to understand that your plan’s adviser is
there to service the plan on behalf of your
company and its plan participants. If your
adviser isn’t meeting with your employees,
you aren’t receiving a big part of what you
should be getting, which may help explain
why your plan is in such need of attention.
JOHN NAVE is the president of Brentwood Advisors LLC. Reach him at (412) 308-2095 or [email protected].
