ADVICE AT A HIGHER LEVEL

Step #1: Outsource Fiduciary Liability

This has always been an option for 401k plan sponsors. Holly Verdeyen, Director of Defined Contribution Investments with Russell Investments in their Chicago office, says, "401k plan sponsors should focus on reviewing their fiduciary responsibilities in light of their internal resources and expertise, in order to determine if delegating certain fiduciary functions—such as selecting investment managers, to an experienced third-party co-fiduciary with greater buying power and extensive resources—makes sense for them. 401k plan sponsors have outsourced other functions such as plan legal services and plan administration for decades. There are additional time-consuming fiduciary functions that can be delegated to reduce the complexity of oversight and gain an expert point of contact as an extension of staff for all DC issues. The notion that a plan sponsor can’t transfer fiduciary responsibility and reduce legal exposure is incorrect. In fact, the Employee Retirement Income Security Act (ERISA) allows an outsourcing provider to accept most of the fiduciary liability for a DC plan."

Many expect the rise of a viable 401k MEP option to accelerate outsourcing. The 401k MEP represents a tried and true alternative versus the riskier (and untested) state-run private company retirement plan options. Even without access to the 401k MEP, plan sponsors have always had a reliable method to outsource fiduciary liability. "Instead of continuing to use a financial adviser to help select the funds for their 401k, plan sponsors will increasingly choose to adopt a 3(38) investment manager to select the investment lineup for their 401k plan as doing so can reduce overall fees and reduce fiduciary liability exposure," says Brad Creger, President & CEO of Total Financial Resource Group, Inc in Glendale, California.

Step #2: Remove All Conflict-of-Interest Fees

Remember, the real name of the DOL’s "Fiduciary" Rule was the "Conflict-of-Interest" Rule. It reflected the settled view that there are certain fees paid by retirement plans that were not in the best interests of the plan participants. This trend started in earnest with the DOL’s 2012 Mutual Fund Fee Disclosure Rule. Although that Rule has plenty of loopholes, a consensus has emerged that demands greater transparency in conflict-of-interest fees. "Plan sponsors who use proprietary funds of funds that their employees can’t find with a web search, where the expense ratios and other fees aren’t clearly marked on statements, and where there isn’t someone available to ask questions of, will likely begin to feel more pressure from their employers," says Laura Davis, a financial planner with Cuthbert Financial Guidance in Decatur, Georgia. "Employers, after all, are required to act in a fiduciary capacity when it comes to their company 401k plans, and those plans need to support that requirement."

Step #3: Show Employees How to Take Advantage of Market

Volatility Ironically, paying too much attention to fees can distract employees from selecting appropriate investments. When the tides of a rising market lifted all boats, poor investment decisions could be more forgiving. The dramatic swings in the market, however, might spook employees into making classic investing errors. Now is the time for employees to leverage that volatility into the opportunity it represents. "401k plan sponsors, as fiduciaries, should review all plan options and verify that the investments lineup is conducive toward adequate retirement planning for participants," says Gary Rudow Managing Director/Investments at Stifel in the greater New York City Area. "In light of the recent volatility in the markets, coordination with the financial advisor regarding the plan should be of paramount importance."

Once the basic plan menu options are solidified, focus can turn to teaching employees how to best take advantage of them. "Plan sponsors will need to focus on educating participants and providing insights into volatile markets," says Robert Gibson, a Fiduciary Consultant at Centurion Group in Plymouth Meeting, Pennsylvania. "Participants will be faced with some volatile swings, probably both up and down, and will need to be educated on 'riding it out’ and determining their time-frame to retirement."

Step #4: Combine Health and Wealth Wellness

This isn’t a new idea, as leading-edge plan sponsors have adopted these strategies over the years. Yet, with the changes in the tax laws, a need to encourage younger workers to save for retirement, and the broader availability of flexible tools, it’s easy to see why combining retirement and health benefits is ascendant. "401k plan sponsors should focus on the convergence of health and wealth decisions for their plan participants," says Ben Pitts, Vice President of Corporate Development at Picwell, Inc. in Philadelphia, Pennsylvania. "Most employers now offer a high deductible health plan option, which comes with a Health Savings Account (HSA) and often times a matching program. While not an expressed requirement of plan fiduciaries, helping employees understand the trade-off between contributing to a 401k versus an HSA is critical for retirement outcomes. Depending on plan design, participant goals, participant health risk, and participant preferences, the decision to contribute to a 401k versus an HSA may vary."

The use of these new options will make the "financial wellbeing" metaphor more apparent to employees. Rob Austin, Head of Research at Alight Solutions in Charlotte, North Carolina, says, "Expanding financial wellbeing programs has been employers’ number one initiative for the past several years. And for good reason because financial wellbeing spans the employee base from the new employee who could be saddled with student loans to the near-retiree who is working on estate planning."

Step #5: Demonstrate the Downside of Leakage

Why is this so important right now? Recent changes in the law have made it easier for employees to take out hardship distributions. These withdrawals can severely impede the ability of clients to retire in comfort. "Plan sponsors always need to be conscious of the need to maintain their plans in accordance with changing legal and regulatory requirements," says Glenn Sulzer, J.D., Senior Legal Analyst at Wolters Kluwer Legal & Regulatory U.S. in Chicago, Illinois. Accordingly, sponsors need to be aware of changes in the rules governing hardship distributions that were enacted by the Budget Act of 2018 and which will be effective for plan years beginning January 1, 2019. Under the revised rules, sponsors may amend their plans to remove both the mandatory 6-month suspension of elective deferrals following a distribution period and the requirement to take a plan loan before securing a hardship distribution. In addition, plan sponsors may now include QMACs and QNECS, and earnings on such contributions, in determining the amount of hardship distributions. Sponsors wishing to make such changes must amend their plans by the end of the plan year in which the changes will take effect. Sponsors may first need to consider whether such changes will encourage withdrawals ('leakage’) from individual plan accounts."

This isn’t rocket science. The need for 401k plan sponsors to increase their focus on their fiduciary duties and, specifically, execute strategies with can reduce their fiduciary liability, arises from this New Fiduciary Era in which we find ourselves. Fortunately, the path to implementing these strategies is well worn. It should be easy to accomplish.