Retirement plan sponsors, now more than ever, need to be diligent in carrying out their fiduciary responsibilities. The Department of Labor, IRS and other agencies have eyes on the industry, especially with new retirement planning fee disclosures and a soon to be proposed expanded definition of “fiduciary.”
“The business owner who says, ‘I’m hiring these service providers to run the plan and I don’t have to worry about it’ is nonetheless ultimately responsible if there are problems,” says Paula M. Lewis, Manager, Client and Advisor Experience, at Tegrit Group.
Smart Business spoke with Lewis about what business changes could signal that retirement plan adjustments are necessary.
Who do plan sponsors deal with?
Plan sponsor decision-makers depend on industry experts for assistance in managing their roles and responsibilities. Although some parties may serve multiple roles, the sponsor may engage an accountant, an investment advisor, an actuary, an ERISA attorney and a third-party administrator (TPA), with each having important and distinctive functions impacting the plan’s operation.
Despite having all these providers in place, the ultimate responsibility for the plan still lies with the plan sponsor. Employers sometimes put in a retirement plan and just let it ride, but then no one is ensuring the plan grows and changes with the company and its employees.
In this dynamic environment, it’s crucial that all parties communicate. It’s best if you know that your service providers work well together, which lessens the risk of something being missed, and the best course of action is being charted.
What changes need to be communicated?
Usually, over time there are changes to the employee demographics, financial standing and even the goals of a company. The company’s retirement plan should also change over time to reflect these changes in employees, finances and objectives. Certain changes always should be communicated to plan service providers, including:
- Changes in ownership.
- Acquisition or divestiture of another company.
- Family members becoming employees of the firm.
- Major compensation changes of key personnel.
- Retirement plan goal changes of key personnel.
It’s confusing to know who to tell what, but generally, the investment advisor and TPA should be made aware of all of these changes, as they may impact fiduciary considerations and compliance. The investment advisor, along with the TPA, should be able to analyze any changes, determine which parties need to be informed, and make any plan changes to avoid any problems or penalties and ensure the plan is designed to maximize the benefits and goals of the company.
What can happen if changes aren’t reflected in the plan?
There are various penalties that are imposed if a plan falls out of compliance because of changes at the plan sponsor level. Late amendments and failed compliance testing are but two. For instance, if the spouse of the owner of one company purchases a separate company, the two companies can be considered a ‘control group,’ and for plan purposes are ‘one.’ Upon an IRS audit, the less generous company may have to increase its plan contributions, which could be an expensive correction avoidable with advance planning and appropriate plan designs.
When acquiring a company with a pension plan, you acquire its liability, especially if it’s underfunded — unless the acquisition agreements are carefully worded. Without advance planning, closing a division could produce a costly surprise as it could be considered a partial plan termination, requiring that the terminated employees be 100 percent vested.
Another area that can cause compliance issues is how certain family members of owners becoming an employee impacts the retirement plan. According to the IRS, he or she is considered highly compensated regardless of their salary. That could cause a plan to require corrective contributions. It is crucial to keep the lines of communication open with your advisors and TPA.
Paula M. Lewis, QPA, QKA, manager, Client and Advisor Experience, at Tegrit Group. Reach her at (330) 983-0485 or firstname.lastname@example.org.
Website: Visit Tegrit’s Advisor Resource Center at www.tegritgroup.com/arc for additional retirement planning tips.
Insights Retirement Planning Services is brought to you by Tegrit Group
Your responsibilities as the sponsor of a retirement plan are more significant than you may realize. It’s not enough anymore to simply hire a service provider to manage the plan and offer it to your employees. As a plan sponsor, there is a tremendous amount of fiduciary responsibility, and decision-makers are held to an expert standard in the eyes of the Department of Labor (DOL).
If they don’t have the skills to meet such stringent standards, plan sponsors need to retain outside experts to guide them through the decisions that must be made on a recurring basis, or risk running afoul of the law.
“Many plan sponsors rely on their providers to do everything for them,” says Andrew Gracan, retirement plan advisor at First Commonwealth Financial Advisors. “Because of this, not only is there a misunderstanding of their fiduciary obligations but the tendency is to run the plan on auto-pilot unless there is a major operational issue to be addressed. However, due to ramped-up enforcement and litigation surrounding retirement plans, it’s important for plan sponsors to understand their obligations and have processes in place to ensure their plans are compliant,” Gracan says.
Smart Business spoke with Gracan about key issues plan sponsors must address.
Why are plan sponsors most at risk right now?
Retirement plans and the activities of their fiduciaries are being placed under a microscope. No longer do participants have multiple plans to rely upon in retirement. The 401(k) plan is the primary retirement vehicle for the majority of today’s workforce, and the burden of savings rests on the employee. With personal savings rates and Social Security in a questionable state, a retirement epidemic is waiting in the wings.
Second, the financial crisis has exacerbated this potential epidemic and taken a toll on participant account balances, drastically changing retirement expectations and causing HR issues for companies in their workforce succession planning function. Finally, 401(k) participants bear the majority of the costs and risk associated with their plan, a dramatic change from the traditional defined benefit plan.
As a result, the government has enacted sweeping legislation through the Plan Sponsor and Participant Fee Disclosure regulations. The first wave of required fee disclosures goes into effect July 1, 2012, and with participant level fee disclosures going into effect Aug. 31, plan sponsors are assessing how their plans and their participants will be affected.
Plan sponsors also face the burden in a major increase of DOL investigations. For the past few years, the DOL has provided plan sponsors a comprehensive educational campaign focusing on helping them understand their fiduciary responsibilities. However, the time for enforcement has begun. In 2011, the EBSA closed 3,472 civil litigations, with 2,301 resulting in monetary settlements of $1.39 billion.
Why is now a critical time for business owners acting as plan sponsors?
Due to the increased government focus, litigation and negative publicity associated with retirement plans, it is important to understand the fiduciary obligations that go hand in hand with sponsoring a retirement plan. Plan sponsors are realizing it is important to be familiar with the fiduciary requirements that are placed upon them and the service providers they hire, as they are personally liable for these decisions. In addition, enforcement and legislative actions are forcing plan sponsors to take a proactive role in understanding the reasonableness of fees being charged to their plans and determining whether conflicts exist with the service providers.
What is the biggest mistake plan sponsors make with retirement plans?
The biggest mistake is not realizing that ignorance is not a viable defense. If plan sponsors don’t fully understand their fiduciary responsibilities or processes, it is their responsibility to hire a ‘prudent expert’ who does. Oftentimes sponsors view retirement plans as a product rather than a process and assume the service provider (or nonfiduciary broker or financial consultant) is giving them the necessary fiduciary guidance to mitigate risk. However, this is a major misconception, especially if the service providers are giving fiduciary advice but not taking written liability for it.
Completely understanding your fiduciary obligations, whether or not service providers are taking written fiduciary responsibility for their actions, and whether or not there are inherent conflicts of interest that exist with the service provider, are paramount to the process of being a prudent fiduciary.
How will the requirement of detailed fee disclosures affect plan sponsors?
The most imminent task will come from the plan sponsors disclosures scheduled to be delivered on July 1. The new regulations are designed to provide plan sponsors with a full disclosure of fees charged to the plan, and sponsors must ask if their fees are reasonable, how to determine whether fees are reasonable, and whether they should hire an expert to determine reasonableness.
How can plan sponsors mitigate risk?
Plan sponsors must fully understand their fiduciary responsibilities and the role their service providers play in their retirement plans. While most believe their responsibilities fall within remitting timely employee contributions, overseeing the record-keeper and monitoring investment options in the plan, these are only part of their core responsibilities. The key is for plan sponsors to be prepared to defend all of the decisions made concerning their retirement plan and to show that they have defined processes that can be measured and repeated. If you, as a fiduciary, do not understand your obligations, or don’t have the information or knowledge to run the plan for the exclusive benefit of participants, it is your responsibility to hire an expert who does.
Andrew Gracan is a retirement plan advisor at First Commonwealth Financial Advisors. Reach him at AGracan@fcbanking.com or (412) 690-4592.
Insights Wealth Management is brought to you by First Commonwealth Bank