What If You Could Exit the 401(k) Business?

There is a modern, professionally managed and outsourced alternative that, while not completely relieving plan sponsors of their fiduciary responsibilities in the eyes of regulators, removes pressure on company resources.

Many small and midsize companies face increasing pressure on resources as a result of a complex regulatory climate, concerns about fees, and greater expectations to deliver competitive retirement and financial wellness benefits to their employees.


But it comes as no surprise to most business leaders that the significant compliance requirements, costs, investment knowledge and administrative rules required to establish and run a retirement plan can very quickly look like managing a non-core, ancillary business. Fortunately, there is a modern, professionally managed and outsourced alternative that, while not completely relieving plan sponsors of their fiduciary responsibilities in the eyes of regulators, removes many of these distractions.


Outsourcing the plan can enhance plan sponsors’ commitment to their workers

Employees are the single most important asset for most companies. So why would management teams want to abdicate oversight of their company-sponsored retirement plan—one of the most valued ways to attract and retain high-quality workers—to a third party?


We think the answer lies, in part, in how different segments of a company’s workforce weigh their benefit priorities. While most workers at all ages rate their base pay as their top priority, younger workers tend to value career opportunities over their retirement plan. Mid-career professionals who are forming families tend to value health care benefits and incentive pay right below their base compensation and retirement benefits; career opportunities are less important to this group (see Figure 1).

Top management might consider what their human resources (HR) team could do to improve the organization’s overall benefits posture if it no longer had to devote time to understanding the investment, compliance and administrative aspects of the managing the company 401(k)!


Delegation of investment and administrative responsibilities may lower cost and improve outcomes

A common goal of any outsourced solution is to lessen an employer’s fiduciary risk and reduce costs. Some currently available mid-market solutions remove the investment and administrative cares and burdens of managing a plan. They not only offload the investment and operational headaches involved, but also can lead to lower costs and improved outcomes for participants. A delegated solution may be appropriate for companies that want to focus more on defining and executing on business strategy and less on managing the intricacies of a qualified retirement plan.


  • Strategy development. Delegation allows employers to define plan objectives and desirable design features while also retaining the ability to align the plan with longer-term corporate goals and strategy.
  • Investments. Companies may lessen the bulk of their fiduciary responsibility and legal liability for making investment decisions by engaging a 3(38) investment fiduciary under the Employee Retirement Income Security Act (ERISA). Through this delegated approach, the provider assumes responsibility for manager selection and termination, contract and fee negotiation, performance monitoring, and compliance oversight. Better yet, the growing use of collective investment trusts (CITs) allows plan sponsors and their participants to potentially benefit from dramatically lower fees from institutionally priced multi-manager funds appropriately matched to their unique employee demographic.
  • Plan administration and compliance. From performing Form 5500 filings and testing, to recordkeeper management and oversight, a delegated solution provider can serve as an employer’s ERISA 3(16) plan administrator to alleviate staff time-sink associated with handling onerous back-office details such as determining employees’ eligibility to join the plan and mastering the rules for managing contributions to and distributions from the plan.


A more comprehensive financial wellness solution should include 1-to-1 engagement

Plan sponsors recognize that, just as a retirement plan is only one component of an individual’s overall financial well-being, it must meet participants’ benefits needs on their terms. Many providers now offer access to a variety of wealth and health platforms through a mobile app, which research shows is the fastest growing way for employees to get information. With a mobile-first, immersive and unified user experience, participants will automatically have access to educational tools to help them get and stay healthy as well as manage their finances.


For many reasons, a company-sponsored retirement plan remains a valued benefit for employers who want to attract, inspire and retain the very best employees. Offering a 401(k) plan, however, does not mean that an employer needs to be in the 401(k) business. By using a professionally managed, fully delegated retirement-plan solution, company leaders can get back to the critical task of growing their primary business.


Liana Magner, CFA, is the US defined contribution and financial wellness leader for Mercer Investments.


This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Strategic Insight or its affiliates.