As a law firm administrator, your responsibilities are endless, and becoming an expert in every area your job touches is not only unrealistic, it’s probably impossible.
As such, the wise administrator will gather a team of topical specialists to carry out the day-to-day operations of the firm. Adding specialists to the team can help you avoid some potentially dangerous 401(k) myths, including the following.
This is a half-truth. Most of the day-to-day fiduciary responsibility can indeed be outsourced to a qualified 3(38) adviser and a 3(16) administrator. However, plan sponsors retain the responsibility for making sure the third parties are in fact qualified for the positions they take, as well as the duty of oversight to continue monitoring their decisions and actions to ensure they are actually performing the duties as outlined. If you have been told that you don’t need to know what goes on behind the curtain, it may be time to take a look.
Fees are important and must be reasonable, but there are many other factors that are equally or even more important. Sometimes cheap is cheap for a reason. Are there participant engagement plans in place, retirement readiness data, a website and other access points with financial tools and resources?
Regarding the funds, simply choosing the lowest cost index fund solely for the fact that it is low cost is not an absolute liability defense. As you consider services and features of your plan and the associated fees, be sure to keep in mind your end goal.
Let me be clear: There is no such thing as a no-cost plan. True, your firm may not bear any out-of-pocket costs to administer the plan, but all that means is the fees have been shifted to the participants. Shifting all the fees to the participants can cause instances where the firm partners and highly compensated individuals are paying more out of their 401(k) balance in fees than they contribute in a year.
“All these myths can be thoroughly demystified with an independent benchmarking of your plan. As luck would have it, now is the perfect time to do that.”
It may be a better option for the firm to pay for certain fees directly. If the firm pays certain plan-related fees as an out-of-pocket expense, the firm can write those expenses off for tax purposes and receive a much greater benefit from that arrangement than taking money out of the partners’ personal retirement accounts to pay higher fees. Ultimately, fee transparency is an essential component in determining appropriate fees.
This is very similar to the fees discussion. A focus on value rather than simply cost is the wiser course of action. In times of full bull markets, it is true that index funds outperform actively managed funds with a fair amount of consistency. When every stock is a winner, the delta for picking winners from among winners is relatively small.
But when the market enters bear territory, picking winners from among losers is a valuable ability indeed. When evaluating your investment options, keep in mind your goals and remember a well-constructed plan will include options for any market environment.*
In the case of a generalist, this is probably not true at all. In the case of a specialist, it’s probably partially true. Any adviser worth their salt will benchmark the plan periodically in several areas — fees, fund performance, third-party administrator and recordkeeper services. Very rarely will they include their own fees and services in that benchmarking. Best practices would suggest a full independent request for proposal (RFP) is advisable at least once every three years.
All these myths can be thoroughly demystified with an independent benchmarking of your plan. As luck would have it, now is the perfect time to do that. We have just entered into the mandated plan restatement period for all prototype and volume submitter plans (the vast majority of plans fall into these categories).
This mandated plan restatement started fall 2020 and extends through summer 2022. During this timeframe, all plans must be restated to include updated language to the plan documents or risk being disqualified. The law states that all plans must be restated every six years, and this is the third required restatement since the law was passed, so this is not new. This requirement provides an opportunity to review your current plan to make sure that it not only complies with the most recent legal updates but also with your firm’s goals and objectives, and to make sure that you are not falling prey to the misleading myths that have surrounded retirement plans in the past.
*Exchange traded funds (ETFs) trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETF’s net asset value (NAV). Upon redemption, the value of fund shares may be worth more or less than their original cost. ETFs carry additional risks such as not being diversified, possible trading halts and index tracking errors.
Past performance is no guarantee of future results.
Note: This information was developed as a general guide to educate plan sponsors. It is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does the adviser assure that, by using the information provided, the plan sponsor will be in compliance with ERISA regulations.