There’s a new sheriff in town and that badge on your chest means you’ll be busy. As the new CFO you may have a dozen top priorities, and may question whether evaluating the retirement plan should be anywhere near the top of your to-do list.
But there are good reasons to spend some time looking into the 401(k) plan you just inherited. You’ll want to know, for example, if your plan advisor is saving or costing you time and money. By understanding what responsibilities your provider is taking on, you’ll know what duties are left to the plan sponsor. As the new CFO, it’s highly likely that employees will be looking to you, as the expert on their retirement investments, so diving into the weeds of the 401(k) will help you look informed. As a result, your to-do list may be bigger than you think!
Perhaps most importantly, you will want to learn if your 401(k) advisor is minimizing your compliance liability, or dropping more liability onto the company than you anticipated.
Just a bit of digging can provide key insights into whether your 401(k) advisor is a good fit for your business. For a quick indication of how your 401(k) plan is doing, take a look at the participation and savings rates. If fewer than 75% of your employees are enrolled in the plan, that’s a red flag. Similarly, if employees are socking away less than 5% of their earnings, you may want to look for a provider with a track record of delivering hefty participation and savings rates.
Five retirement plan elements every new CFO should evaluate
Once you have an idea if your provider is experienced serving businesses like yours, and you understand how the plan is doing based on key measures of success, you can take a deeper dive into how well your advisor is meeting your company’s needs.
There are five elements to every 401(k) plan that you’ll want to get familiar with as the new CFO. The quality and management of each are keys to the plan’s success. Each of these elements can either be delegated or managed in-house. By reviewing the 401(k) plan, you can match your expectations of what should be delegated to the actual duties performed by the provider. And of course those delegated duties should be performed at a reasonable cost.
1. Compliance: Understanding fiduciary responsibilities and liabilities
Is your investment advisor acting an investment fiduciary? If so, which kind of a fiduciary, a 3(21) or a 3(38)? If they are a 3(21) fiduciary, even one who helps selects the 401(k) investments for the plan, then it is your company who bears liability for the investment decisions. Do you have meeting minutes from regular investment committee meetings, and a process for monitoring investment options? You may prefer a 3(38) fiduciary who has full discretion over investments in the plan, and bears all of the advisory risk. If your advisor is a 3(38) then your company should bear less risk – assuming that they are doing a good job. Ask your advisor for the most recent investment policy statement, and find out when they last evaluated your company’s investment lineup.
Plan administration is another area fraught with fiduciary potholes. You will also want to know if your plan provider is responsible for non-discrimination testing. If not, you should ask who in your company is performing these tests – find out if you are passing! And you will definitely want to know if your provider completes, reviews and signs the IRS Form 5500. This may take a bit of investigating because some providers complete the form, but claim no responsibility for reviewing and signing. If you want a turnkey operation, you will want your plan provider to handle all aspects of Form 5500. You could seek to minimize the company’s role in both administering the plan and work with a 3(16) fiduciary, who should be responsible for signing the Form 5500 and who takes on the administrative fiduciary responsibilities.
2. Investments: What are the options and are they low cost?
If you have experience overseeing retirement plans, you know that investment fees can account for the bulk of a plan’s costs, and that these costs become particularly burdensome because they compound over time. High-cost funds can take a big bite out of employee retirement savings. Some studies even suggest that high fees can eliminate the tax advantages of a 401(k) account.
Be sure to ask your advisor if they are a broker or an advisor, and if they are being compensated by any 12(b)1 fees. Even if they are not being compensated by any asset-based sales commissions, every new CFO should understand if the investments offered are owned by the same company as the plan provider. This is because you’ll want to ensure that your provider’s chief concern is a sound financial future for participants, not how much they can earn from the plan’s investment offerings.
Does your plan have actively managed or passive funds? Be wary of actively managed funds, as they may be more expensive than a similar fund that is passively managed. As mentioned in the liabilities section above, request the Investment Policy Statement and make sure the funds in your plan match your stated policy and that they are being actively monitored.
If your provider is offering few services and yet fund costs are high, you may want to sniff around for alternatives.
3. Overall plan costs: How much does your current plan cost and how much would your ideal plan cost?
When did you last benchmark your plans overall fees? While understanding and controlling costs is a natural tendency ingrained into most CFOs, understanding a 401(k) plan’s costs is disappointedly complicated.
As mentioned above, investment fees are likely the greatest expense of running your 401(k) plan. If this expense is greater than 0.75% of assets—including fund fees—you may want to consider other options. If fund expenses include 12b-1 fees, it’s likely you have plenty of room to lower costs by finding different 401(k) investment options.
To compare your current plan costs against competitors, be sure to review each cost category including fund fees, recordkeeping, custodial, TPA charges and advisory fees. If you have difficulty identifying these various costs, ask your advisor for an itemized list of fees. While you are at it, ask if there are charges to amend the plan, or for employees to move assets among funds. Ask about fees for less common but fundamental tasks like rollovers, loans and distributions.
Find out when your company last evaluated recordkeepers, and consider asking an independent 401(k) advisor to compare pricing on several recordkeeping platforms. You can do this while asking your existing advisor to benchmark your plan – this will give you multiple data-points to compare, and could help you negotiate lower costs.
4. Administrative work: Who is doing what for whom?
Here’s one way to see if your workload as the new CFO may be heavier than expected: Ask your payroll person if they are responsible for manually updating payroll every time an employee makes a deferral change. Do you need to calculate the discretionary match or the profit sharing allocation, if your plan allows a profit sharing contribution? Whose job is it to track enrollment status or eligibility – HR? Your recordkeeper? Payroll? And are employee eligibility communications happening on time, and are they recorded in case of an audit?
The good news is, if you would rather focus on other aspects of your company’s finances, that’s possible with the right provider. One key to getting out of 401(k) administration and into your new job as CFO is integrating your plan with an online payroll provider. Is this something your current provider can do?
5. Employee experience: How well is the 401(k) serving the employees?
A 401(k) plan offers a number of benefits to employers, including the tax deductibility of contributions and tax-free compounding of investment returns. But for a 401(k) to be successful, the plan also must work well for employees. Their satisfaction translates into high participation and savings rates. These are critical for boosting their odds of a successful retirement, and for avoiding a top-heavy asset base that violates IRS rules.
Certain plan features can increase the odds for your plan’s success. These include automatic enrollment and automatic annual increases in employee deferrals. A good advisor will educate your employees on various aspects of the plan, for example, explaining the benefits of participating in the company match. The ability for employees to change contributions online or even on a mobile device can add to the employee experience. Does your provider do these things well?
Of course, to get the most from a great selection of low-cost funds, your employees need to understand them. As the new CFO, may want to learn how your advisor educates employees about their investment options. Further, do they provide investment advice about asset allocation or explain how target date funds work? Does your advisor provide more general education, like advice on handling student loans or credit card debt? Do your employees have the opportunity to speak one-on-one with a financial advisor? If so, how many employees are taking advantage of this opportunity?
Now that you, as the new CFO, are an expert on your company’s 401(k).
Once your review is complete, you will understand the cost of your plan, your company’s responsibilities and the level of administration required to keep the plan running smoothly.
As the new sheriff in town you’ve already got your hands full. A smooth running 401(k) can give you more time to keeping your company’s finances on the straight and narrow.