401(k) Outsourcing: The Next Big Thing

Outsourcing (Photo credit: Hangout Lifestyle)

There are an abundance of benefits to outsourcing the fiduciary risks and responsibilities of your company sponsored qualified retirement plan. Given the increased regulations and scrutiny by Capitol Hill, outsourcing makes sense for most small to mid sized businesses. Most business owners do not have the time to manage their retirement plan with the attention it deserves and demands. One question must be ask, if you could go back 6 years and prevent ObamaCare would you? Now is the time to do something about the qualifed retirement plan you provide.

Companies outsource many services, including payroll, auditing, marketing, legal defense, building maintenance, HR services and advertising, to name but a few. The reasons for outsourcing generally include:

  1. Cost savings
  2. Better outcomeCost savings
  3. Increased productivity
  4. Allows employees to do the things that they do best

Numerous business experts and consultants tout the benefits of outsourcing. “Do what you do best and outsource the rest,” says Tom Peters, management consultant extraordinaire.  Former HUD Secretary Alphonso Jackson once stated, “When work can be done outside better than it can be done inside, we should do it.”

There is now a growing trend to outsource 401(k) services for many of the same reasons, but also because there are additional benefits in so doing, such as:

  1. Reduced liability
  2. Increased objectivity
  3. Fewer conflicts of interest
  4. Increased service level

There are numerous benefits to outsourcing the fiduciary functions of your qualified retirement plan. You are far too busy running your company to properly manage a quality retirement plan for your employees and yourself. Your broker in most cases cannot or will not accept the fiduciary risks and responsibilities of managing your company retirement plan. They are more than happy to recommend investment choices, however, you retain all risks and responsibilities.

Please comment or call to discuss to determine if outsourcing is right for your company.

  • The Difference an Adviser Can Make (401kplanadvisors.com)
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The Difference an Adviser Can Make

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The qualified retirement plan industry has been taken over by salespeople. This must stop if we want our employees to successfully retire. Your employees look to you for guidance, like it or not it is your resonsibility to guide them to a successful retirement. Your company retirement plan should be treated like a pension fund like plan not a lead generation tool for financial salespeople.

Partnering with a professional retirement plan adviser offers benefits for plan sponsors, according to a study for the Retirement Advisor Council.  —

However, only 25% of 401(k) and 403(b) plan sponsors, with 100 or more employees and plan assets between $5 million and $500 million, partner with a professional retirement plan adviser. Most of the others do business with a generalist adviser; some do not use an adviser or consultant at all. Laura White, vice president at Diversified, a partner in the research, told PLANADVISER, historically, advisers other than professional retirement plan advisers have held a larger share of the not-for-profit market, but Diversified expects the gap will close with time.

Half of respondents who use a professional retirement plan adviser say it is a necessity to retain the advisers’ services for their plans. Forty-four percent say retaining the services is very beneficial to their plans. In addition, 16% of respondents with no adviser said retaining one is a necessity and 59% said retaining a professional retirement plan adviser would be very beneficial.

Overall, 46% of plan sponsors have measured the retirement readiness of their participant population more than once. Clients of professionals are unique in that 75% monitor year-over-year changes and 31% say more than 70% of their participants are on-track to achieve a successful retirement. These superior outcomes may be the result of plan designs that encourage saving. Another contributing factor could be new ideas that clients of professionals adopt more readily than other plan sponsors.

More than any other category of plan sponsors, clients of professionals rely on a retirement plan committee that meets regularly to make plan decisions. White said 74% with a professional retirement plan adviser state a committee who meets at regular intervals makes decisions regarding the design of the plan or array of investment options. In addition, 70% complete an investment review at least twice a year; 40% twice a quarter.

Only 41% of those with another adviser type complete a periodic review of investment options with their adviser as compared to 79% with a professional retirement plan adviser; 73% of those with a professional retirement plan adviser state it’s absolutely critical to review investment options periodically, White said.

A professional retirement plan adviser dedicated to your company plan will lead to improved results and less burden on your staff. Many advisers use the 401(k) plan as a lead generation tool to sell ‘product’ to your employees. This concept can lead to disgruntled employees if the products don’t work out.

Please comment or call to discuss how this can affect you and your company.

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Will 2012 be the Year of the 401k Fiduciary?

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Many plan sponsors do not realize the extent of the fiduciary responsibilities they assume when they sponsor a qualified retirement plan. Many do not take the responsibilities seriously and overlook the 401(k) plan of their company. This will change soon with the new changes to retirment plan and the fiduciary standard. All plans should be reviewed by an independent fiduciary to confirm compliance.

Robert Richter, vice president of SunGard’s wealth management business and also the president of the American Society of Pension Professionals & Actuaries (ASPPA), describes the current situation to FiduciaryNews.comthis way: “It is important to note the regulatory scheme is primarily focused on providers, not plan sponsors. So, the question isn’t whether plan sponsors will pay more attention to their fiduciary responsibilities. Rather, the question may be whether service providers, including investment advisors, are paying more attention to the fiduciary dutiessuch that plan sponsors do not have excessive fiduciary exposure. Ultimately, plan sponsors have fiduciary responsibility, and the regulatory activity has already heightened the awareness of many plan sponsors of this duty.”When this anticipated onslaught of regulations emerges, the world will change for 401k plan sponsors. Kyle J. Pifher, Principal, Findley Davies, Inc. of Columbus, Ohio, says, “The new regulations will require more oversight from the plan sponsor than ever before, and places much of the onus on the plan sponsor for disclosure, due diligence, and frequent monitoring of providers for quality services for the fees paid.”

The onus may be more acute for plan sponsors of smaller plans. Kevin Watt, Senior Vice President, Security Benefit Corp. of Topeka, Kansas, points out, “The impact will be most keenly felt and the risks greatest for small and micro plans where plan sponsors may not have the time and knowledge to address their fiduciary responsibilities.” Christopher T. Thomas, a Financial Advisor with Signature Financial Partners, LLC based in Washington DC, adds, “The bottom line is being a fiduciary takes time.” He sees this as “being a huge burden on smaller companies that don’t have full blown HR departments to handle the increased workload and who might not be willing to pay a professional fiduciary.”

Small to mid sized companies will need to pay more attention to who is advising them on their company plan. Outsourcing the fiduciary responsibilities to professionals may be the prudent choice for most companies.

Please comment or call to discuss how this affects you and your organization.

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New Survey Reveals How 401k Plan Sponsors Rank 8 Hot Topics

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Most small to mid sized employers are ill prepared to deal with the complexities of their company sponsored retirement plan. This lack of attention reduces their competitiveness for talented employees. If these employers lack the expertise and/or resources they should seek outside help.

(Weighted Rank: 3.99) Improving understanding of (and potentially reducing) plan expenses.Again, this topic is similar to the topic ranked immediately below it (#4 above). Here’s the unexplained irony of this survey (and what may reveal the very real likelihood for sticker shock once 408(b)(2) kicks in): 84% of those surveyed feel their fees are competitive yet fully 76% admit to being in a bundled relationship. Bundled relationships often feature higher fees.#2 (Weighted Rank: 4.08) Reducing plan risk and potential fiduciary responsibility. One might read into this topic “reducing potential fiduciary liability.” Many might feel this topic ranking a clear #2 might be surprising, especially since the plan sponsor cohort has been mysteriously silent on the whole issue of the DOL’s proposed new definition of fiduciary. That this topic ranks so high could be a signal they’re listening. The question is: Does the DOL recognize plan sponsors are listening?

#1) (Weighted Rank: 4.33) Providing the right investment to help participants achieve retirement goals. This topic is related to the #6 ranked topic (retirement readiness of active participants). Given the nature and purpose of retirement plans, this should always rank as the top priority for plan sponsors and fiduciaries. That it has received so little treatment from the 401k media of late might be what is really surprising. There’s been a large body of research, particularly in the area of behavioral finance, addressed this issue on point (see “3 Ways 401k Plan Sponsors Can Help Employees Make Better Investment Decisions,” “3 More Ways 401k Plan Sponsors Can Help Employees Make Better Investment Decisions” and “Avoiding Decision Paralysis: How to Create the Ideal 401k Plan Option Menu.”

Plan sponsors and their employees will benefit from a thorough analysis of their qualified retirement plan. Addressing the concerns above will make your competitive in the market for talented employees. No business is too small to benefit.

Please comment or call to discuss how this will benefit you and your company.

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The 401(k) regulatory tsunami

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Plan sponsors can fulfill their requirements by having an independent benchmark analysis done on their plan soon. This analysis will help meet their obligations and result in a better retirment plan for their company.

The new rules require plan providers to disclose fees to employees in chart format in quarterly statements. Currently, these statements show investment returns net of fees, so employees don’t know how much they’re paying plan providers or investment companiesthat supply products for their plans.Though the rules require plan providers to disclose fees in an easily understandable format, there are indications that the revised account statements may turn out to be long, confusing documents — something on the order of a prospectus. Confusion will ensue, and employees will queue up at HR to ask what it all means.

After making sure employees understand the newly required disclosures — which is, itself, a fiduciary responsibility — employers will undoubtedly be lambasted with bitter complaints from employees who were unaware of the amounts of fees being deducted from their accounts and others who simply thought their actual investment returns were lower.

Accordingly, it’s imperative that employers act now to “X-ray” their plans or engage a qualified consultant for that purpose, so they understand precisely what fees are being charged for the services being provided. This will involve reviewing reams of plan documents and confronting plan providers to ascertain fee information.

Plan sponsors are unaware of the risks they assume with their company qualified retirement plan and their broker cannot be relied on to avoid these risks. The regulators are placing much more emphasis on enforcement of the rule, including fines and employee lawsuits.

Please comment or call to discuss how you can protect your company and provide a better plan for your employees and yourself.

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A Closer Look at Fiduciary Status Under ERISA

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When you sponsor a retirement plan for your employees you are assuming an awesome responsibility. Both legally and morally.

Determining ERISA Fiduciary Status
ERISA states that a trustee, a named fiduciary, the plan administrator, an investment manager or anyone else (as relevant) will be deemed to be a fiduciary of a qualified retirement plan to the extent that the person (1) exercises any discretionary authorityor control in the management of the plan or disposition of the plan’s assets (ERISA section 3(21)(A)(i)), (2) can or does render investment advice for a fee (section 3(21)(A)(ii)) or (3) has any discretionary authority or control in administering the plan (section 3(21)(A)(iii)).Note that the test for fiduciary status is a functional one. For example, anyone from the owner of a plan sponsor on down to the janitor could be deemed to exercise or have “any discretionary authority” with respect to the plan’s assets or administration of the plan. Under ERISA, it’s what an entity actually does with respect to a retirement plan–whether or not such acts are spelled out as duties in a written document–rather than any formal (or informal) title the entity may bear that will make it a fiduciary. As a result, the ERISA section 3(21)(A) functional fiduciary test is very broad. This statutory scheme is a reminder of the broad net cast by ERISA in making sure that anybody working at the employer level (irrespective of title) that has any discretion, or any advisor that has any discretion, will be deemed to be a fiduciary of a qualified retirement plan.

As regulations change, plan sponsors will be required to understand who is a fiduciary for their plan and what each fiduciary’s role is.

Please comment or call to discuss how this affects your company retirement plan.

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Employees Want a More Pension Fund Like Plan.

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The Pension Protection Act of 2006 made significant
improvements to the features available to qualified retirement plan sponsors.
The most notable include auto enrollment and auto escalation which helps more
employees contribute to a retirement account with increase deferral amounts
each year. The employee can opt out of the plan within 60 days with no penalty.

Studies have shown that this negative election results in
a significant amount of employees staying in the plan and saving for their own
retirement. Experts call this inertia, meaning employees prefer to not change
anything. Another overlooked feature is the qualified default investment
alternative QDIA.

This allows plan sponsors to by default enroll employees
in a risk adjusted portfolio. Of course, the employee may opt out of the QDIA
and choose their fund mix. This hands off approach, will allow more employees
to successfully retire.  When plan
sponsors provide low cost, globally diversified, professionally managed
portfolios and adjust the risk level as the employee ages, a successful
retirement will result.

Individual investors are unable emotionally manage their
own investments, many times making bad decisions at the most inappropriate
times. Numerous studies have proven this to be the case. Professionally managed
portfolios remove the anxiety and the emotions of saving for retirement.

These features combined,  result in a more pension fund like plan leaving
plan participants more time to concentrate of their careers and personal lives.

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Reducing Fiduciary Risk

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A prudent process is essential when designing your qualified plan. If you do not have the expertise to properly design a prudent process formally hire an expert.

Fiduciaries and business owners already take on enough risk elsewhere. In an environment that allows government protection by following a series of procedures and practicing due diligence, it makes no sense to place fiduciariesat added risk.Plan sponsors should review their investment-policy statement for a quantitative approach to investment monitoring. A good rule of thumb is: If you can explain to a novice the criteria of “how and when” a fund is placed on a watch list, removed or replaced, your work is done.

The formula should be simple: for example, a scorecard of each investment based on distinct and unique criteria, including peer group comparisons of:

* Fees;

* Risk-adjusted performance;

* Performance consistency; and

* Fund manager value-add.

Every quarter, the figures are formulated and the outcome is clear: A fund passes or fails. The removal of qualitative factors to skew the decision makes the process more meaningful and effective.

The worst investments decisions are based on emotions. Removing emotion from the equation provides added protection from risk for plan fiduciaries, whatever external factors might make the markets swoon.

When you are sponsoring a qualified retirement plan for your employees a prudent process is essential. Following this prudent process will reduce your fiduciary risk as well as provide your employees with the best plan possible for your firm.

Please comment or call to discuss how this affects your company.

  • The Use of ERISA § 3(38) Investment Managers in Defined Contribution Plans (401kplanadvisors.com)
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