As we look forward to a bright 2022, one thing is certain; prudently managing a 401(k) plan is getting more difficult. The potential costs associated with missteps are increasing across the board. Marketing gimmicks abound despite regulatory authorities attempts to expand fiduciary coverage. Recordkeeper consolidation, investment solutions, new plan types and the ever-present possibility of legislative and regulatory changes give plan sponsors a lot to think about. Plan sponsors can’t focus on everything, so we’ve made a list of questions that we think are critical for plan fiduciaries to address this year.
1. How effective is the plan’s benchmarking process?
One thing the retirement industry has done very well is creating systems designed to make itself look good. Index funds, for example, aren’t likely to cause an adviser to be removed for poor investment performance because it tracks the index by design. Provider costs are benchmarked to industry averages, disconnecting the cost from the amount of work required. It may be tempting to use industry standards as a benchmark for a metric, but plan sponsors tend to care more about how your plan compares to their local competitors than national averages. Asking current providers to benchmark the plan is akin to handing inmates the keys to the asylum. Instead, engage an independent party to assess your plan at least every few years, and this is a great year to start.
Suggested Action: Hire an independent fiduciary to provide unbiased assessments of the plan and its service providers.
2. What does it mean for the plan to be successful?
Many plans receive some sort of periodic plan health report, complete with many metrics designed to identify areas that could use some attention. These are good metrics if the objective is to get the most money into accounts as possible (which maximizes provider compensation), but the truth is that sometimes participants shouldn’t contribute their next dollar to the plan. Consider thinking of the plan as a tool that is available to assist participants in creating a more robust financial plan that incorporates goals other than retirement. It could be that plan design tools used to drive contributions into the plan are causing participants to disengage with their savings which could have a negative long-term impact even though the typical plan metrics look good. Prudent plan sponsors should recognize the opportunity costs of plan contributions and seek to help participants make sound financial decisions without regard to whether that causes the next dollar to go into the 401(k) plan and craft metrics accordingly.
Suggested Action: Consider whether the objective of your benefits package is holistic financial wellness or specific to the retirement plan and craft appropriate metrics to keep you on track.
3. How will you identify and address undelegated fiduciary responsibilities?
When sponsors outsource fiduciary duties they generally expect to delegate all of the associated responsibilities. Fiduciary providers, on the other hand, often carve out some of the most critical functions in their service agreements. This leaves sponsors unknowingly responsible for important plan decisions. Many 3(38) investment managers, for example, don’t accept responsibility for selecting the plan’s default investment, where the lion’s share of plan assets are typically invested. Similarly, plan sponsors are often responsible for the plan’s investment policies even if they outsource the investment selection, effectively making sponsors responsible for telling the hired expert how they should do their job (and, consequently, on the hook for poor any processes that may be employed.).
Suggested Action: Ask an ERISA attorney or other qualified expert review your current service agreements to identify any gaps that may exist.
4. Is your recordkeeper adhering to cybersecurity best practices?
Your recordkeeper not only has personally identifiable information about your participants, but it also controls access to retirement funds, making them a tempting target for cyber-criminals. Plan sponsors may not know that recordkeepers are not independently required to adhere to any regulatory standards to prevent cybersecurity breaches. The Department of Labor created a list of cybersecurity best practices to help recordkeepers in which they note that “responsible plan fiduciaries have an obligation to ensure proper mitigation of cybersecurity risks” suggesting that the burden is on the plan sponsor absent delegation of this fiduciary expectation (see question #3 above). With recordkeepers facing a constant barrage of requests to integrate with other services, the risks associated with cybersecurity could be direct or indirectly through weaknesses in integrated systems and processes. In any case, these risks are material and warrant careful consideration from plan fiduciaries.
Suggested Action: Many recordkeepers have a due diligence package available that addresses their cybersecurity practices and summarizes applicable controls and audit results. Plan fiduciaries should request this from their recordkeeper periodically.
Transform Retirement is ready to help with any of these tasks. Contact Mark at (920) 246-1889 or mark@transformretirement.com to schedule a time to discuss how we can assist.