Objectively, How Good Is Your Retirement Plan?

September 26, 2014 (PLANSPONSOR.com) - Objectively, how good is your retirement plan? Without some comparative analysis, how would you know?
By PS

Doing a comparative analysis can be a daunting task, and if there is no clear need, it’s human nature to snooze it. In Part 1 of this two-part article we hope to show you that over-using  the “snooze button” is risky, and in Part 2 we will provide a roadmap for performing comparative analysis on your plan.

The “If it ain’t broken…” approach is unacceptable, for two main reasons:

1.       Your plan may very-well be “broken”, and you simply don’t have the perspective to see that.  Having a broken plan increases your financial risk. Under the employee Retirement Income Security Act (ERISA), plan-level decision makers [you and any other committee members] owe the plan a duty of loyalty and a duty of care. If your plan management style is more on the reactive side, you may not be fulfilling these two duties. This could lead to fines, legal costs and settlement payments.

2.     A broken retirement plan squanders dollars and potential.  Would you tolerate a habitually overpaid or underperforming employee? Why should your retirement plan be held to a lower standard of efficiency or performance? We have seen plans paying tens (and even hundreds) of thousands of dollars more annually than the prevailing market level, simply because the fiduciaries had never bothered to check. Further, an underperforming plan can leave your employees far short of the savings they will need to retire with dignity at an appropriate age.

Retirement Resources cartoon2

Don’t feel bad.  In twenty years of working with employers, we have found very few of them started with an understanding of where their plan fell within the competitive landscape. Plan decision-makers are busy people, for whom the retirement plan represents just a small fraction of their overall organizational responsibilities. However, as fiduciaries, plan decision-makers do have a legal and moral responsibility to find out how their plan compares to other available options. 

Remember, plan assets belong to the plan participants.  When you are spending their money, your fiduciary obligation is to act wisely. This boils down to getting the best value you reasonably can for them. The Department of Labor is serious about this. For example, under ERISA, it is a prohibited transaction for unreasonable amounts of compensation to be paid to plan service providers.  Addressing this issue was the impetus behind the recent 408(b)(2) regulations that require service providers to itemize plan expenses so that employers can see the true costs. To determine whether plan costs are reasonable, fiduciaries are supposed to look at those costs within the perspective of the services being received. This is because you can’t assess reasonableness on the basis of cost alone. You must assess the value the plan is receiving.

Understand that the 408(b)(2) disclosures are a double-edged sword.  On one hand they provide valuable information. On the other hand, because you now have easy access to cost information, the Department of Labor has taken away the “I didn’t know” excuse. 

If you are now fired up about performing a competitive evaluation, Part 2 of this article will lay out three very different courses of action you can pursue.

 

Jim Phillips, President of Retirement Resources, has been in the investment industry for more than 35 years, the past 18 of which have been focused in the area of qualified retirement plans.  Jim worked for major national investment firms for 14 years before “going independent” in 1990.  Jim is an Accredited Investment Fiduciary, has contributed to two books on 401(k), and his articles have been published in Defined Contribution Insights, PLANSPONSOR’s (b)lines and ASPPA’s 403(b) Advisor, and Jim is a RetireMentor on MarketWatch.com. His work has been acknowledged with multiple Signature Awards from the PSCA, he has been named to the 2012 and 2013 list of Top 100 Retirement Plan Advisers, by PLANADVISER Magazine, and he was a finalist in 2012 for the Morningstar/ASPPA 401(k) Leadership Award. Jim has been a frequent speaker at national conferences, including SPARK, ASPPA, AAO and the PLANSPONSOR and PLANADVISER National Conferences.   

Patrick McGinn, CFA, Vice President of Retirement Resources, is a CFA charterholder and has been in the securities industry since 1993. In addition to the Chartered Financial Analyst designation, he is an Accredited Investment Fiduciary and a member of the Boston Security Analyst Society. Together with Jim, Patrick has co-authored a number of articles which have been published in industry publications on topics about managing successful 401(k) and 403(b) plans. His work has been acknowledged with multiple Signature Awards from the PSCA, and he has been named to the 2012 and 2013 list of Top 100 Retirement Plan Advisors, by PLANADVISER Magazine. He was a finalist in 2012 for the Morningstar/ASPPA 401(k) Leadership Award.  

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.  

Any opinions of the author(s) do not necessarily reflect the stance of Asset International or its affiliates.

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