The world of retirement plans has transformed during the past five years, but the majority of companies sponsoring employee retirement plans have yet to catch up with the changing times.
"It is no longer acceptable to take a wait-and-see approach with your plan unless you are willing to accept the risk and the consequences of that decision, which in many regards could be very costly on a corporate and personal level," says Drew Gracan, Vice President of the Retirement Plan Advisory Group at First Commonwealth Financial Advisors.
Smart Business spoke with Gracan about what employers need to be aware of to modernize their retirement plans with the current environment.
What has changed with retirement plans in the past five years?
For the past 40 years, the Department of Labor (DOL) and the Employee Benefits Security Administration (EBSA) has largely focused on the rules governing the proper management of a retirement plan when plan fiduciaries were either fraudulent or grossly negligent in their decision-making processes. That's changed in the past five years.
The government has stepped up its efforts to ensure decisions are being made prudently and for the sole benefit of plan participants and their beneficiaries. This can be attributed to the demise of the defined benefit plan, the increased burden of savings, fees and investment decisions being borne by the individual employee, and the reality that 401(k) plans are now a significant part of an individual’s retirement savings. At the same time, there are widespread participant-based lawsuits against employers for imprudent decisions, bad publicity from the press and the government about the viability of the 401(k), and increased employee/plaintiff council scrutiny of fees.
What might plan sponsors not fully understand about their retirement plans?
The five questions employers/fiduciaries need to answer are:
- Do you fully understand your fiduciary responsibilities to plan participants and the requirements under the Employee Retirement Income Security Act?
- Do you fully understand the roles of your service providers, whether or not they are assuming any fiduciary liability for their actions, and if there are any conflicts of interest that may affect their recommendations?
- Do you know all of the direct and indirect costs of your plan, and how your service providers are compensated in relation to the value of services received?
- Do you have a formal process in place to make sure you are documenting your decisions?
- Are you consistently measuring participant behavior and the likelihood of success for them in their pursuit for a successful retirement?
How can retirement plan risk be mitigated?
The first step in mitigating risk is really understanding your service providers' roles and how they are compensated for their services. The main question fiduciaries need to ask their service providers is whether or not they are assuming any fiduciary liability for their rendered services. This would include record keepers, administrators, financial consultants/advisers, trustees and custodians, and third-party administrators. Once you know if service providers are assuming any liability for their services, you can then determine which aspects of risk in the decision-making process you want to mitigate through the hiring of a co-fiduciary.
In addition to hiring a co-fiduciary, it is extremely important to have a formal decision-making process for the plan and thoroughly document all retirement plan decisions to ensure you have the necessary proof to defend those decisions.
What coming regulations deserve attention?
In the immediate future, there are two areas that seem to be the focus of regulators. The first is the requirement that retirement income projections be provided to participants on account statements. The second is a broadening of the definition of a fiduciary to ensure service providers that are performing fiduciary functions — advising participants, investment menu recommendations, etc. — take liability for their advice and don't exonerate themselves in the fine print of their contracts.
Drew Gracan, ChFC®, AIFA®, is a vice president, Retirement Plan Advisory Group, at First Commonwealth Financial Advisors. Reach him at (412) 690-4592 or firstname.lastname@example.org.
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