Your 401(k) Shouldn't be Risky Business
A guide to managing fiduciary duties and risks for employers and administrators
In this section, you'll see that there are big benefits of leveraging an ERISA 3(38)
investment manager to handle the investment aspects of your plan. It's pretty easy to do, doesn't
need to cost more, and will minimize key business risks associated with your 401(k).
Understanding 401(k) fiduciary duties
Who is responsible?
Offering a 401(k) is a great benefit for a business and its employees, but more
often than not, business owners and administrators are unaware of at least some
of the duties they're required to manage and the fiduciary role they take on. Moreover,
employers are often unclear if any of their 401(k) providers share in the duties
Who typically IS
Who typically IS NOT
These can be the same person or many at your company:
- Business owner(s)
- Employees that manage the plan for your company
- Named trustee at your company
- Named investment fiduciary at your company
Your plan service providers are generally not responsible:
- Broker reps, insurance agents and financial consultants
- Recordkeepers and directed trustees
- Attorneys and actuaries
While many providers will provide investment "suggestions" and other support, most
take on no duties or fiduciary risk, and the employer and supporting staff are on
their own. For example, it's common for the owner and/or designated employees for
your company plan to be responsible for selecting and reviewing the investment options
offered in the plan.
Many 401(k) providers tout their investments and expertise, yet will take no responsibility,
let alone a fiduciary role, in supporting your plan's investment roster. Rather,
these risks and responsibilities lie squarely on their clients' shoulders –
many who aren't financial experts, don't have the time to be, and most importantly,
don't want any part of these risks.
Three big reasons to care
Besides that it's always a good idea for a provider to have the same goals as its
customers, why is this so important? The reasons are pretty simple and compelling:
Everyone wants a great
retirement benefit at your company and having a well-run and supported plan is essential
to the goal.
The employer and associated
employees are personally liable for breaches and must make good for plan losses.
Legal actions by employees
against your company may arise for not managing core responsibilities prudently.
New targets for lawsuits over 401(k) fees
"A group of fewer than 30 employees at a small company in Kansas has filed a lawsuit
against the investment adviser, record keeper and custodian for its $2 million 401(k)
plan, alleging that the trio of plan providers caused participants to pay 'secret'
and 'excessive' fees."
~ Employees name investment adviser in 401(k) suit, by Mark Bruno, July 19, 2009.
Your eight core duties
There are eight core duties that help ensure you run the 401(k) plan in your employees'
best interest, and keep your plan safe and performing well for your company. This
chart highlights the "big eight" with a few insights on managing them:
Your eight core duties
Eight core duties
1. Employees' best interest first and control administration expenses
Diverse investments, easy access, guidance materials and low costs
2. Sound decisions (Prudent Man rule)
Weigh your decisions (e.g. follow an Investment Policy)
3. Diversify investments to reduce risk of large losses
Cover major asset classes, manage in line with an Investment Policy
4. Run the plan in accordance with how it was set up
Run it with the options you chose and follow the document; amend as needed
5. Know what co-fiduciaries manage and monitor
Review assets and payroll submissions; look for large dips in balances
6. Hold assets in jurisdiction of US Courts
Typically not an issue with most US 401(k) providers
7. Don't tamper with assets for any business need
Illegal — not an option even if you intend to pay it back
8. Purchase a fidelity bond of 10% of funds up to $500K maximum
Provides some insurance if a breach occurs
The first three core duties are often the area where the greatest risks lie, as
well as the areas the company can do the most to mitigate. With regards to putting
your participating employees' best interests ahead of the company's and control
administration expenses, too often employers think they have a low-cost plan
as their company is paying little of the administration fees themselves.
Yet these fees have been pushed down to participants and frequently result in fees
exceeding two percent or more of each participant's 401(k) account. This is particularly
more common in small and mid-size company plans. A very small percentage can be
reasonable; anything else is a risky move. Unfortunately, most employers aren't
aware of exactly how much is pushed down to determine if it's reasonable or excessive.
Mitigating risks and improving your 401(k) is easy
The great news is that the simple management of costs and establishing or improving
investment management practices for your plan doesn't take a ton of time and can
make a big difference in helping employees build a bigger nest egg in their retirement
accounts. And perhaps more important, it doesn't have to cost any more to outsource
the investment management and further reduce or even eliminate this fiduciary exposure.
This also eliminates any need to buy fiduciary insurance that some 401(k) providers
try to sell as an add-on.
Here are three steps that can greatly minimize your business risks:
Step 1: Use a provider that takes on the investment management role for your plan.
Specifically, select what is called an ERISA 3(38) investment advisor and let the advisor manage
the fund roster and any model portfolio allocations for your company's 401(k) plan.
They will install an Investment Policy, and as long as it is focused on cost controls
and diversification, you are well ahead of the pack and following a Department of
Labor (DOL) best practice with the Policy.
Investment policy matters
Having an Investment Policy helps ensure a good framework is in place so that sound
decisions can be made and are easily defendable regarding the investments offered
in your plan.
Investment options need to cover major asset classes across stocks, bonds and cash.
Model portfolios that automatically diversify investments to varying degrees based
on various risk tolerances and time horizons are good to offer. This again is where
an Investment Policy can help you stay focused
Step 2: Run your plan in line with ERISA 404(c) rules.
This offers you limited liability relief for losses an employee could experience
with their investments based on their own decisions and direction. Download our 404(c) checklist to get a good sense for best
practices. Most providers should be supporting 404(c), just ensure it is being done
Step 3: Put in place a Qualified Default Investment Alternative (QDIA).
A QDIA is for employees that don't take active control of their investing in your
program. The employee may have money in their account from an employer profit share,
match, IRA rollover, or auto-enrollment situation and simply never logged on to
direct how he or she wants to invest these monies. Putting the money in a stable
fund or money market does not meet the requirement but has been a common practice.
Please call us if you need help in determining what a good option will be for your
Make sure you have the right provider supporting your plan
Here are three questions you can ask your provider, and if you're not getting the
right answers across the board in a timely manner it's probably time to get serious
about switching providers for everyone's sake.
What are my employees'
These should be less than one percent and will include more than just the fund expenses;
make sure you get them all!
Will you, or can you,
have an advisor serve as an ERISA 3(38) investment advisor on my plan for no additional
FYI – don't get confused; 3(38) lowers your investment management risks, a
3(21) advisor does not. The focus of 3(21) is more on participant investment advice.
Can you provide a recommendation
for an Investment Policy for my company that focuses on low fund expenses, diversification
and long-term investment performance?
How ShareBuilder 401k can help
ShareBuilder 401k is an ERISA 3(38) investment advisor that serves as fiduciary
on 401(k) plans for all our clients. We establish an investment policy built on
an investment philosophy of diversification, performance, and lowcost, and ensure
QDIA selections are in place for your plan. As we are not a fund provider, we have
an unbiased approach to the investment line-up we offer to our clients.
ShareBuilder 401k provides an innovative employee guidance program as part of our
404(c) support. Our videos, guides, employee account review emails and more help
to drive the engagement and knowledge you want your employees to have in saving
Capital One Advisors Investment Committee advantage
To provide you with a great investment line-up and to manage plan risks, the Capital One Advisors
Investment Committee oversees the investment options available in our plans along
with managing the make-up of the
five model portfolios (from conservative to aggressive). The committee consists
of eight investment professionals including four CFAs (Chartered Financial Analyst).
To assist in our analysis, we use a model from ASI employing a Markowitz mean-variance
technique designed to produce the highest expected return given the variable constraints
(e.g. loss limits, historical returns, etc.) for each model portfolio. With this
and other data, the investment line-up and model portfolios are managed in line
with the ShareBuilder 401k
Investment Philosophy and Policy. Essential policy objectives are asset
diversification, performance, and keeping fund expenses low.
In a nutshell, this means that we take this role very seriously. It's a service
few providers offer and we automatically include it in our
pricing. We are here to provide you superior investment support and help
you and your employees build a meaningful nest egg come retirement.