Running a business is tough even in normal times, and 2020 was far from normal.
Nevertheless, over the coming months things should slowly return to at least semi-normal. The routine of making payroll and keeping the books will return, too.
Probably the last thing on your mind is your 401(k) plan. The stock market is up and vaccines are on the way.
Yet now is absolutely the time to review your plan — before the “old normal” of business ramps up and time is scarce.
Few business owners grasp the concept, but as 401(k) plan sponsors they typically are named as the “fiduciary” of their own plan.
What does this mean? Simply put, whatever goes right with your 401(k) plan, your employees likely will credit to the market or their own investment choices.
And whatever goes wrong, well, that will fall to you, the business owner.
Fiduciary responsibility for a retirement plan means that you are aware of the plan’s investment processes, that you know how much your employees pay in fees, and that you check up on all this once every three years at a minimum.
Fees are a huge issue. The law requires that employers make sure that the fees employees pay for a retirement plan are “reasonable” for the service rendered. But do you know what a reasonable fee looks like?
Have you reviewed the plan’s performance over time for each investment option? How do they compare against the relevant asset class benchmarks?
What are the fees for service providers? Are they reasonable? When was the last time you reviewed them?
Here’s a hint: If your plan charges north of 1% of assets for investment advice and administration plus the cost of investments, it’s likely to fall well outside the current state of the market.
Beyond fees and investments, do your employees get the level of service they need? Do they get any service at all?
Does your plan offer diversified, cost-effective investment options? What type of investment education do you provide to employees?
Class-action lawsuits over 401(k) plan flaws were on track to quintuple in 2020, according to Bloomberg Law. Blood in the water only means more sharks will circle, turning 401(k) suits into a growing industry for hungry law firms.
Changing market
The solution to this rapidly rising small business risk is benchmarking — simply setting aside time in the New Year to compare your current 401(k) plan to what’s out there and available to small businesses. And that’s changing quickly for the better due to firms such as Rebalance, which have disrupted the 401(k) market as we know it.
You probably compare vendor costs at least annually. Most businesses review insurance quotes every year for cost comparison.
Benchmarking a 401(k) plan is no different. You learn about lower costs, better service and have a chance to reduce your fiduciary exposure, all in one shot.
While the Department of Labor requires benchmarking every three years, leaving it to the last possible moment invites disaster. The best practice is to schedule a review of your plan every one to two years.
And it doesn’t have to be painful! A phone call and a simple conversation can open your eyes to a number of ways to streamline and simplify your retirement plan offering to employees and yourself.
Some of the things you may learn through benchmarking correctly and consistently include:
- How to lower fees, automatically increasing your total investment balance over time
- Improved plan design for six-digit tax savings
- Helping your staff by having their 401(k) professionally managed
- Modernizing your 401(k) offering to attract and retain the best talent
- Most importantly, you will learn how to transfer fiduciary risk away from yourself and protect your business from the onslaught of 401(k) lawsuits
Now is the time to get ahead of your 401(k) plan benchmarking. The year ahead is revving up. Before you know it we’ll be flying and traveling and doing business as usual.
That will be great, and even better with one less thing on your mind.
