Is your 401(k) OK?

With the recent Enron fiasco and the subsequent discussion in the media and Congress about proposed changes to 401(k) retirement plans, I feel compelled to discuss your employer fiduciary responsibility to your company’s retirement plan. Because of their popularity and wide use as a pension plan allowing both employer and employee contributions, I’ll discuss 401(k)s.

One of your biggest investments in your business is in employees. High on the list of reasons to establish a 401(k) was to retain key workers and help them prepare for retirement. At the inception, you felt your role was to select the service provider and make sure employees had a investment choices.

However, did your role end there? Did you overlook the fiduciary responsibility bestowed upon you by the Department of Labor (DOL) and the Employee Income Security Act (ERISA)?

Here are some tips from ERISA for responsibly overseeing the process:

* Establish, review and revise the company’s investment policies as necessary.

* Use professional money managers (“prudent experts”) to make investment decisions.

* Appoint, monitor and discharge investment managers as necessary.

* Periodically evaluate manager and fund investment risk performance.

* Control investment expenses.

Reports indicate there have been frequent substitutions of 401(k) service providers, and employers have found themselves converting plans to other sponsors looking for the best retirement plan. What becomes clear to business owners is that the search for above-average short-term investments has proven fruitless, as has the search for the lowest cost service provider.

With ERISA as the benchmark, it is the process and the conduct of the plan that determine fiduciary responsibility — not short-term investment performance.

The business should produce and maintain an Investment Policy Statement (IPS). The IPS can provide a guide to select, monitor and make prudent ongoing decisions with respect to investment alternatives. The IPS ensures continuity of investment strategy while reassuring participants of investment stewardship. The DOL reminds fiduciaries that fees are just one factor considered in the decision-making process. Compare services to be provided with the total cost.

The common breaches of fiduciary conduct are the failure to follow a structured investment process (lack of IPS, no process to appoint and discharge investment managers). Some business owners ignore the investment provisions in the plan documents. Some may select inappropriate asset classes and/or fail to properly diversify the investment portfolio. Just having random choices available in the 401(k) is not enough to justify diversification.

As you agonize over the investment performance of the retirement plan and listen to the complaints of employees, evaluate your 401(k) using the above criteria. Analyze your fiduciary responsibility team.

Do you have an investment professional and custodian/administrator who have teamed up with you to bring you into compliance with ERISA and DOL guidelines? If not, the time you’re spending second-guessing last year’s investment choices should be spent interviewing the members of your new permanent fiduciary team. Robert A. Valente,([email protected]) is president of RAV Financial Services Inc. He can be reached at (216) 831-4900.