Why retirement plans need a hands-on approach
For many employers, once they select a provider for the employees’ sponsored retirement plan, they no longer think about it. Other than ensuring that the contributions are submitted appropriately, the rest is set on auto-pilot. This is not the best strategy because as with everything in life, the financial insurance industry is constantly changing and employer-sponsored plans need to be evaluated along with those changes.
Laws and regulations are continually being developed and re-evaluated, not just in the investment fund types but in the overall plan design, too. Anything a company once knew about their employees’ plans could change in the blink of an eye. For example, a new law may now allow a company to bypass previously mandated contributions. The type of product or investment requirements within plans may change, as well. Last but certainly not least, client-employee-adviser relationships certainly will see changes as we are on the cusp of the DOL fiduciary rule.
The single biggest mistake employers can make is to assume that all is well simply because participants are in the plan. Now more than ever, retirement education is important and employers need to ensure they are providing that for their employees. Employers wanting to comply with the Employee Retirement Income Security Act are required to offer “periodic” reviews to plan participants. Employers, if your provider is not offering to do this on an annual basis, at a minimum, it would be best for you to look elsewhere for a provider. Depending on their provider’s arrangement, this education should be at little or no additional cost to the employer. Minimal efforts in providing education could keep employers away from big costs in the courtroom.
When plans are set to auto-pilot
Lifecycle funds, or “target date” funds, have been increasingly popular over the past dozen years. Participants like them because they are easy to choose with the assumption that a fund company will manage the money in an appropriate way up until their retirement.
The challenge with setting these lifecycle funds on auto-pilot is the assumption that everybody has the same definition of “appropriate.” Income level, other assets, and propensity for risk are all elements that are not one size fits all, but lifecycle funds treat everyone the same based on a date. In addition, it is often difficult to tell what underlying assets comprise these funds and what performance and fees are associated with them. Lastly, a big concern is that some of these lifecycle funds only take the employer up to the target retirement date but not through it.
Consider this scenario: Two years ago, a business owner had 30 employees. Due to economic conditions, they had to reduce staff to 20. From a legal standpoint, a layoff of more than 20% of employees within one year has significant implications in the eyes of the Department of Labor and Internal Revenue Service from a plan perspective.
Aside from the legal aspects, we must think of the impact on those remaining 20 employees. Making sure they have had the option to sit with a financial adviser for a one-on-one review of their retirement plan can be an important boost in morale and in their financial future. The employer does this now with a registered representative or broker, but should the DOL fiduciary rule go into effect the broker may have a problem.
However, if working with an RIA (Registered Investment Adviser) with a review designed as part of the services provided, this would not be an issue and can be a nice added benefit for these anxious employees. If you’re a business that treats your employees like family, a layoff is tough on everyone. Look for ways you can give them a boost without additional costs.
Plan sponsor have an obligation to their employees to check in on the plan on a periodic basis. These periodic checks help them comply with Section 404(c) of ERISA and can mitigate their risks as an employer and trustee.
Securities offered through ValMark Securities, Inc. Member FINRA, SIPC. Financial Planning and Investment Advisory Services offered through B&E Investment Advisers, Inc., a State Registered Investment Adviser. Business & Estate Advisers, Inc., B&E Investment Advisers, Inc. and B&E Pension Advisers, Inc. are separate entities from ValMark Securities, Inc.