Entrepreneurs are some of the busiest people on the planet and sponsoring a 401(k) plan creates unique risks. Our job is to help business owners navigate the complex rules of ERISA and implement processes to mitigate liability. Juggling responsibilities can make it difficult to stay organized and compliant.
Luckily, there are a few simple steps every plan sponsor can easily follow.
1. Hire a fiduciary advisor
Managing a 401(k) plan in the highly regulated ERISA environment is no easy task. An experienced advisor can help setup policies and procedures designed to manage your fiduciary risk.
The Department of Labor will review the selection and oversight of plan investment options. The regulators want to make sure the investment options offered to participants were prudently selected and continually monitored to best serve employees. Plan sponsors can choose to hire an advisor to assist with the management of this process. Additionally, some advisors serve as 3(21) or 3(38) oversight, which offers more protection.
A 3(21)-investment advisor is a co-fiduciary role, where an advisor gives advice to an employer with respect to the investment funds offered in a 401(k) plan.
A 3(38)-investment advisor is also a fiduciary and is granted discretion to make fund decisions. The employer has reduced liability in this relationship but must continue to monitor the advisor.
2. Form an Internal Plan Committee
A smart way to fulfill plan fiduciary duties is to form a committee. Some of our more successful and high functioning clients have a formal investment committee that meet regularly. This is advantageous for a business owner as it reduces a portion of the burden for oversight and selection of providers. Formalizing policies and procedures brings prudence to managing the retirement plan. Following this simple ERISA “best practice” can reduce your workload and create better outcomes for employees.
Cross sections of long-standing employees are well suited to joining a plan committee. Typically including members from Finance and HR enhances plan communication and receptiveness by the workforce.
3. Hire the right Third-Party Administrator (TPA)
Hiring the right TPA for your plan depends on a variety of factors. Larger plans may be better suited using a regional or national TPA that can handle scale. Smaller local TPA’s are a good fit for smaller businesses looking for help with creative plan design like Cash Balance Plans. Contacting your financial advisor and conducting a search online are good places to start.
Many TPA’s offer 3(16) fiduciary oversight in which they assume the day-to-day operations of the plan. Similar to 3(38) investment oversight, plan sponsors can delegate a portion of the administrative liability to a TPA.
The right TPA will ensure all notices are properly distributed to plan participants, loans and distributions are processed correctly, and Form 5500 is filed with the IRS in a timely fashion.
Plan sponsors are personally liable as fiduciaries and are required to prudently manage all aspects of the retirement plan process under ERISA.
Careful consideration of these three strategies goes a long way in helping protect the entrepreneur while creating better employee engagement and outcomes.