According to professionals in the retirement industry, most new sponsors of small or micro plans are unaware of the duties of prudence, loyalty and diversification of investments that a fiduciary to a plan assumes—or that the Employee Retirement Income Security Act (ERISA) decrees they are a fiduciary. And, surveys have shown many small-plan sponsors are confused about their fiduciary role.
Many are also unclear that, while they have no investment committee—the individual making plan-level decisions, in essence, is that committee and must perform much the same functions the committee of a mega plan does.
For the unwary plan sponsor, this disconnect could be costly, says Jim Phillips, president of Retirement Resources. “Whether its investments or plan design or operational decisions—those are held to the prudent expert standard, so there is no defense of ‘Gee, I did my best, I didn’t know any better, it’s just a small plan, it’s only me’—none of those excuses work. Someone is obligated to operate the plan up to the prudent expert standard,” he tells PLANSPONSOR.
Small-business owners are usually spread thin. “He’s probably the salesperson, the service person, the accounting person, the maintenance person. He may work 80, 90 hours a week, and the 401(k) is an afterthought,” says Jim Sampson, founder and managing principal of Cornerstone Retirement Investors.
Sometimes, too, the sponsor’s lapse may be a result of more than his other priorities. Phillips points to a void in any formal communications—from the Department of Labor (DOL), Internal Revenue Service (IRS) or vendors selling plan products—to tell new 401(k) sponsors what ERISA demands. “Unless at some point along the sales process that pops up as a discussion point, it’s entirely possible that person will not know about his fiduciary duties,” he says.
He recommends a variety of free resources such as pages on the DOL website written specifically for plan sponsors and T. Rowe Price’s guides on fiduciary compliance in running an ERISA-governed plan. Classes, too, such as those through the Plan Sponsor University, can be found online and in local colleges—although Sampson, an adjunct lecturer on the topic, has found that small business owners, as a group, do not attend.
However they attain it, once armed with full knowledge of their fiduciary status, small-plan sponsors must come to terms with their capabilities—to what extent they realistically can play, or must delegate, the investment committee role—and the plan’s requirements.
Most owners adopt the investment committee role, as they are already sole decisionmaker for their firm. “‘I own the place, I’m just going to make the decisions,’” Sampson says. This arrangement can better serve the company—appointing other employees exposes them to liability while accomplishing little, Sampson says. Many just rubberstamp the owner’s vote to avoid his displeasure. “One man, one vote” also quickens the process, he tells PLANSPONSOR.
A small committee can almost rival a large one, from a governance point of view. Barring a formal voting process, small committees take the same steps, Sampson says. They follow the terms of the investment policy statement (IPS) and periodically review the funds; “they [determine] standards for when they’ll make a change: What’s the criteria? What’s the time frame? They should still follow that process and document it. Just because it’s an investment committee of one doesn’t mean it doesn’t have to be prudent and do its due diligence,” he says.
Acquiring fiduciary liability insurance—that specifically covers fiduciary acts under ERISA—is also key, according to Sampson.
Craig Howell, business development specialist with Ubiquity Retirement + Savings, formerly The Online 401(k), agrees that many clients are oblivious to ERISA’s demands. Ubiquity sells 401(k) plans and individual retirement accounts (IRAs), mainly targeting startup firms. The average profile: Five through 20 mainly white-collar, often IT, professionals, Web-savvy but uninterested in investments.
“We have to put some specific rails in place to help those folks,” he says. “Fiduciary responsibilities are part and parcel of offering a 401(k) plan. But there are simple measures a small business owner can take to limit liability.” Ubiquity Retirement + Savings gives customers an overview of their fiduciary role, then stresses the importance of following their plan document, purchasing a fidelity bond against losses and ensuring the reasonableness of all fees.
Financial decisionmaking should be outsourced, though, Howell tells PLANSPONSOR. By hiring a 3(38) manager, the plan sponsor becomes responsible only to monitor the adviser, not the investments. The present time is especially favorable to engage a 3(38), he says. “Technology is enabling managers to deliver their services in a really efficient way so that pricing—at least from our perspective—is really being compressed; there are some fantastic deals out there, relative to even just a few years ago.” Citing figures of 10 to 25 basis points (bps), he says, “This ‘insurance’ is really inexpensive and probably well worth it in most instances.”
Phillips also points to the value of employing an adviser. Free resources, such as the literature mentioned previously, may suffice for day-to-day compliance, but complicated questions require a professional’s help. Even just “a limited engagement,” Phillips says, could prevent a misunderstanding from becoming a lawsuit.
Sampson says, more often than not, small clients hand him the fiduciary responsibilities involved and tell him, “Hey, that’s what I hired you for.”
Phillips also recommends short-term contracting with an adviser to put systems in place: “to build the plan governance, maybe a charter and an IPS, a compliance calendar, and provide them some training on how to fulfill their fiduciary duties and make suggestions for how to get better ultimate outcomes for participants.” This trial relationship might extend when the owner discovers the benefits. “Besides [staying out of] trouble, if a plan is run more efficiently and is a better plan throughout, if the investments are more accessible, [this can increase plan assets,] which also benefits the employer,” he says.
Some small companies, though, would rather just avoid ERISA. For them, there is a second, albeit more limited, option—a payroll deduction IRA. Ubiquity, for one, sells these products, adoptable only if employees plan to save no more than $5,000 and employers waive contributing to the plan. IRAs are not subject to ERISA, Howell notes, though some of his customers like to hire a third-party fiduciary anyway. “You have the same end result but no testing, no documents, no 5500s, no fiduciary liability, at least for the biz owner. The requirements are a little easier,” he says.