4 Reasons Employers Need to Review Their Retirement Plan
It’s been more than two years since the Dept. of Labor (DoL) instituted the retirement plan disclosure regulations requiring plan sponsors to be transparent regarding all fees related to the administration of their company retirement plan or 401(k) plan.
All plan sponsors have a fiduciary duty to disclose this information to all their plan participants. There are far too many plan sponsors that are not meeting these requirements. Although they are not looking for trouble they are likely to find it.
Plan sponsors have another fiduciary duty, which is to determine whether the fees they pay to their plan providers are reasonable. The only way to determine this is to have those fees benchmarked through a certified service that compares fees from other plan providers. Plan sponsors must insure that the retirement plan fees incurred by their retirement plan or 401k plan are reasonable.
The best way to accomplish compliance with this regulation is to conduct an annual plan review. Typical responses I have encountered when requesting a plan review:
- ‘Our plan is too small’
- ‘Our plan provider reviews our plan’
- ‘Our attorney reviewed our plan’
- ‘A plan review is too expensive’
Let’s look at each of these responses.
‘Our plan is too small.’
The IRS and the DoL can care less about the size of a retirement plan. They each have hired countless auditors and are auditing poorly administered retirement plans. The IRS is most concerned with retirement plans meeting qualifications under the Internal Revenue Code. The DoL wants to make sure that plan participants rights are being met under ERISA. Due to the fee disclosure regulations, the DoL audits are on the rise.
Whether a plan sponsor is subjected to an IRS or DoL audit, neither is pleasant and each would be costly. Most importantly, it is not a question of if a plan sponsor will be audited but rather a question of when an audit will occur.
‘Our plan provider reviewed our plan.’
A favorite response is that the plan provider reviewed our plan and told me our plan is good. It is not unusual that plan sponsors are told by their plan providers that their plan is “good.” This response begs a few questions. What does that mean? What type of analysis was performed? How was the decision arrived at? Is it an opinion of the plan provider? If so, isn’t this opinion inherent with conflict of interest?
‘Our attorney reviewed our plan.’
When a plan sponsor states that their attorney reviewed their retirement plan and discovered no risks, that’s a red flag. Once again this response begs a few questions.
What relationship does that plan sponsor have to the attorney? Is he employed by the company as general counsel? Does he understand ERISA? If he is a non-ERISA attorney we can liken this to going to see a neurologist for a sprained ankle.
This approach may be dangerous to the health and well-being of the retirement plan and even the plan sponsor.
‘A plan review is too expensive.’
A plan review can take on several different forms. Therefore, although a plan sponsor may balk at the thought of spending money on an annual review (we recommend at least an annual and in some cases semi-annual reviews) they are not as expensive as you may think. Some advisors offer a nominal charge for a plan review. Others offer a free review of a retirement plan’s investment options.
The cost of a plan review must be measured against the liability that would be avoided. An annual review should be performed much like an annual visit to your doctor for a physical or a routine dental checkup. The plan review will help to preserve the financial health of the plan’s retirement assets and avoid a breach of the plan sponsor’s fiduciary duty. Plan reviews should be performed at least annually to insure that the needs of the business and the plan participants continue to be met and monitored to adjust to any changes that may occur.
This is a guest contribution James J. Di Gesu, CPA, PFS, MBA. James is the Sr. Vice President of Wealth Health LLC.
Wealth Health’s services are designed to simplify the complex and daunting challenges of managing your personal finances.
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