Fiduciary duty and 401(k)s Featured

7:00pm EDT November 25, 2008

Recent volatility in the equity markets has had a devastating impact on 401(k) performance — a fact that’s certainly not lost on anyone who participates in an employer-sponsored retirement plan and receives a quarterly earnings statement.

But, besides earnings, there’s another concern growing behind the scenes.

“Business owners and operators who have fiduciary responsibilities for their 401(k) plans need to recognize they are at much greater risk today,” says John Nave, the president of Brentwood Advisors LLC.

“Basic plan administration lapses that might never attract attention in good times are now receiving close and intense scrutiny. And the longer those lapses are left unchecked, the greater the exposure and potential liability.”

Smart Business asked Nave to outline the key issues every employer offering a company-sponsored 401(k) should revisit and address.

What puts a business at risk when it comes to its 401(k) administration?

Losses in any retirement account will create anxiety and may invite some form of scrutiny, especially when the losses are in the 20 to 30 percent range (typical of what’s currently being experienced). A loss of this magnitude is understandably painful, but even more so for those employees who are closer to retirement and sensitive to losses because of their investment timeline horizons.

For the business owner/operator who maintains fiduciary oversight of a 401(k) plan, the fundamental question you must answer is this: Does the underlying performance of your plan drastically underperform the index/average? If it does or if there are ‘undue losses’ that may appear to result from mismanagement or neglect, those losses can cause employees to feel victimized and can open you up to lawsuits and litigation.

What are some of the danger signs that indicate a plan may require attention?

With smaller companies, having one provider that offers only that one provider’s funds is an obvious red flag. Likewise, red flags are raised whenever plans have a limited range of investment options (for instance, if most of the options involve stock investments). Your plan’s adviser should be evaluating the 401(k) plan each year and looking at the underlying investment options that are being offered. Any plan should allow for ‘full allocation’ in each of the asset classes, segregated by value funds; growth funds; index funds; bond funds; cash or money market funds; large, mid and small caps; and international or global funds.

Generally, you need more than one fund in each category, and funds in the plan should not overlap. In other words, the same stocks should not be appearing across multiple portfolios within the plan offering. The plan’s adviser should also look at whether the existing plan is cost-effective, whether it offers features that allow participants to do things like take out a loan, and whether it allows participants to decide how funds can be allocated in a self-directed manner.

Participation levels should also be monitored, since low participation levels are a major indicator of a plan that is bad. If employees are being hit especially hard with losses, this may indicate that they are not adequately diversified. So in addition to making sure that the plan isn’t compounding problems due to a lack of adequate investment options, your plan’s adviser should be offering your plan participants guidance to help them determine their appropriate risk tolerances.

Who can the owner turn to for help or a second opinion regarding his or her plan?

If you’re a small or midsize business operator, a good starting point might be to find a personal wealth management adviser with experience advising company retirement plans. The critical link between your plan, your company and your employees is the plan adviser. If changes are deemed necessary, it will usually start there. And if you ultimately decide to change your plan’s adviser, you want to select someone who not only has experience in advising 401(k) plans but also excels in individual advisory situations.

Don’t underestimate the small stuff. Even something as simple as updating beneficiary information can make a huge difference. We’ve seen situations where ex-spouses receive all the benefits because the plan never received updated beneficiary information to change or include a new spouse. When routine updates aren’t being made, it can be an indication that your adviser isn’t advising as thoroughly as he or she should.

What happens if changes need to be made to the plan itself?

Keep in mind that you don’t necessarily have to change providers. The major 401(k) providers offer a vast array of plan options, so changing to another provider probably won’t be necessary. Instead, by changing plan advisers, your new adviser will simply take over your existing contract, re-evaluate the way your plan is set up, make recommendations and implement changes, and interface with your employees to explain why those changes have been made. This will allow you to transition with an absolute minimum of inconvenience.

It is especially critical for owners and operators to understand that your plan’s adviser is there to service the plan on behalf of your company and its plan participants. If your adviser isn’t meeting with your employees, you aren’t receiving a big part of what you should be getting, which may help explain why your plan is in such need of attention.

JOHN NAVE is the president of Brentwood Advisors LLC. Reach him at (412) 308-2095 or