As the sponsor of a retirement plan,
CEOs are helping their employees
achieve a secure financial future.
Sponsoring a plan, however, also means
that you, or someone you appoint, will be
responsible for making important decisions about the plan’s management.
The Employee Retirement Income
Security Act (ERISA) requires that those
responsible for managing retirement plans,
referred to as fiduciaries, carry out their
responsibilities prudently and solely in the
interest of the plan’s participants and beneficiaries. Among other duties, fiduciaries
have a responsibility to ensure that the
services provided to their plan are necessary and that the cost of those services is
reasonable.
“With more companies offering defined
contribution plans rather than the traditional pension plans and given that the
future of social security is hazy, there’s
both a legal and moral obligation to make
certain that the company’s 401(k) plan is
managed prudently,” says Roy Rader, manager for audit and business advisory services for Haskell & White LLP.
Smart Business spoke with Rader about
what CEOs should know concerning the
responsibilities of 401(k) plan sponsorship.
What steps can CEOs take to evaluate plan
fees and expenses?
Oversight of the plan’s costs is getting
harder to do because many of the plan
administration fees are not fully visible to
the plan participants. Many CEOs, especially in smaller companies, also serve as
trustees or fiduciaries of the 401(k) plans.
Therefore, in that capacity, you should first
ask for full disclosure of all plan fees and
administrative costs. Second, monitor
what you are charged via monthly statements and audits to make certain that the
plan is compliant. You can certainly shop
various firms to see if what you are being
charged is in line with market comparables. Before you seek bids or estimates,
establish your requirements. You will need
to know how much of the work will be
done in-house and what duties will be
required of an outside administrator. This
will help you compare service plans and
the proposed fees.
In addition, ask each prospective
provider to be specific about which services are covered for the estimated fees and which are not. To help in gathering information and making comparisons, you may
want to use the same format to review the
pricing for each prospective provider. The
U.S. Department of Labor Web site is a very
good reference tool that can help you
know what fees will be charged and what
is reasonable and customary.
What other responsibilities rest with the plan
fiduciary?
The fiduciary is held to certain standards
of conduct and certain responsibilities
including:
- Acting solely in the interest of plan participants and their beneficiaries and with
the exclusive purpose of providing benefits to them - Carrying out all duties prudently
- Following the plan documents (unless
inconsistent with ERISA) - Diversifying plan investments
The bottom line is that, following Enron,
plan administrators have greater responsibility to educate their employees about
how to manage a defined contribution plan
and to make certain that they provide a
wide array of investment choices for their
employees. Also, if company stock is
offered as an investment option in the plan,make sure to stress the importance of
diversification through educating the
employees about how to choose investments that will fit their risk tolerance and
future financial and retirement needs.
What education should fiduciaries provide to
plan participants?
Many firms are hiring outside consultants
to conduct seminars, and they are providing employees with access to Web sites
that provide plan information and help
employees figure out how much they’ll
need to retire. These same sites provide a
long-term forecasting tool that can show
expected returns by investment type as
well as historical trends. Employees can
become more comfortable with their own
risk tolerance and how to plan for their
financial needs at retirement.
Are 401(k) plan audits required?
All 401(k) plans are required to file a form
5500 annual return/report with the federal
government. An audit is required once a
plan elects to file as a ‘large plan’ after
reaching 100 participants at the beginning
of the year. A copy of the auditor’s report
must be attached to the form 5500 filing.
The information reported under the 5500 is
distributed to all of the various governmental agencies that oversee pension
plans, including the Department of Labor
and the IRS, as well as the public and the
plan participants. There are penalties for
failing to file required reports and provide
required information to participants.
What penalties can be levied against a fiduciary for failing to meet the administrative
responsibilities of 401(k) plan management?
Fiduciaries who do not follow these principles of conduct may be personally liable
to restore any losses to the plan or to
restore any profits made through improper
use of plan assets. With so much riding on
the success of these plans, it behooves all
executives to make certain that their firms
are fully compliant with their fiduciary
responsibilities.
ROY RADER is manager for audit and business advisory services for Haskell & White LLP. Reach him at (949) 450-6315 or [email protected].
