Common challenges of employee retirement plans
Implementing an employee retirement plan is an effective way for small and midsize businesses to support their recruitment and retention efforts. However, offering a 401(k) plan comes with three main challenges that, if not addressed, increase business liability and cost.
Challenge 1: Accepting a plan trustee role without understanding the liability
When an organization starts an employee retirement plan, it becomes a plan sponsor and fiduciary. The fiduciary’s role is to run the plan solely in the interest of participants and beneficiaries. Plan fiduciaries can also be plan trustees, investment advisors and administrators. (A plan trustee holds and administers assets for a third party.)
Fiduciary responsibilities are inescapable for plan sponsors. Unfortunately, many business owners are unaware of the risk associated with being a plan trustee, and they don’t realize that taking on this role is optional.
A plan trustee’s legal responsibility is so high that most third-party retirement plan administrators—even banks—won’t take on the highest level of trusteeship: the discretionary trustee. Instead, businesses often become their own trustee or have a directed trustee and an investment advisor or investment manager. Without assigning a third-party discretionary trustee, a business takes on more liability than necessary.
This matters because the parties named in retirement plan lawsuits are typically the plan sponsor and the plan trustee. A plan trustee should know enough to keep a company out of lawsuit territory; but when the plan trustee is the business, this generally isn’t the case. (“I didn’t know” is a weak argument in a trustee lawsuit.)
Challenge 2: Becoming out of compliance with ERISA is extremely easy
Qualified retirement plans must comply with the guidelines in the Employee Retirement Income Security Act of 1974 (ERISA). The problem is that it’s easy to be out of compliance with ERISA, and the repercussions include fines and lawsuits.
Falling out of ERISA compliance is as easy as:
- Failing to file Form 5500.
- Failing to provide automatic contribution notices.
- Depositing employee plan contributions late.
- Enrolling employees into the plan late.
- Recording incorrect deferral percentages, loan repayments, hours worked, etc.
To put fines and lawsuits in perspective, failing to provide automatic contribution notices comes with a fine of up to $1,788 per day for each affected participant. And in the last 21 years, there have been 201 settlements—totaling $6.2 billion—for class-action lawsuits against employers for improperly administering retirement plans.
Challenge 3: Engaging multiple vendors increases costs
Administering a retirement plan is complex, and plan sponsors often hire multiple vendors to handle all the administration duties. A multi-vendor administration solution typically involves an investment advisor, investment management company or fiduciary advisor, a third-party administrator (TPA), and a recordkeeper. Plan sponsors may also engage a corporate or institutional trustee and a plan auditor. (A discretionary trustee isn’t included here because, as mentioned earlier, many plan sponsors become their own plan trustee despite the liability associated with this responsibility.)
When multiple vendors are responsible for different parts of retirement plan administration, it adds complexity and can decrease customer service for plan sponsors. Plus, the more vendors involved, the higher the costs.
Addressing these retirement plan challenges
These challenges can be somewhat addressed by not offering a retirement plan, setting up a SIMPLE IRA, working with an investment manager to reduce fiduciary responsibility, or using a pooled employer plan (PEP) with simplified IRS reporting. However, these approaches all have downsides, and none of them involve the benefits of having a third-party discretionary trustee.
The complete solution that addresses all the challenges mentioned above is hiring a bundled service provider that acts as the discretionary trustee. This reduces liability and complexity for the plan sponsor, and it often reduces the plan sponsor’s plan management and administration costs by 20 to 25 percent versus a multi-vendor engagement. These factors truly make it easier for small and midsize businesses to offer qualified retirement plans while keeping liability and costs manageable.
To learn more, read Save Money & Reduce Liability Associated With Your Company’s Retirement Plan: A White Paper for Small- and Midsize-Business CEOs and Legal Counsel on Navigating the Challenges of ERISA Compliance, Fiduciary Liability, and Using Multiple Vendors to Administer a 401(k) Plan. Visit www.bankeasy.com and search for “White Paper” to download the complete paper.
Ray Mosher is a Wealth Management Senior Relationship Manager at First Bank & Trust. He has his bachelor’s degree in political science with an emphasis on international policies from Arizona State University and has attained the Series 6 and 63 licenses. Mosher has more than 15 years of experience in defined contribution and non-qualified plan services.