The term “fiduciary responsibility” has been in the headlines quite a bit this year. Most of the discussion is around investment advisors, but the term also comes into play for business owners and executives.
Being a fiduciary means being personally liable for the prudent management of someone else’s money, so it is a serious topic that deserves attention. For business owners and executives, that high fiduciary standard applies when it comes to employee retirement plans such as 401k and 403b plans. Those who oversee these vehicles are the plan sponsors, and while the duty is often seen as administrative, the reality is that sponsors take on an exorbitant amount of personal risk.
If you are a plan sponsor, how can you best satisfy your legal obligations as a fiduciary?
1. Know what you don’t know. There are stringent, defined rules in place, as well as a checklist of items necessary for compliance. If you shoulder fiduciary responsibilities for your organization’s retirement plan, you should know these rules – if you don’t know what you don’t know, you risk getting into significant trouble spots. Seek advice from an independent and objective retirement plan and investment advisor. This does not mean delegate the role, as shifting responsibility does not relieve you of the fiduciary obligation.
2. Design plans appropriately. Plan sponsors are required to understand the objectives of the plan and ensure that they are focused on doing the right thing for employees. This means creating a plan that is appropriate for both owners and employees, and consider elements such as the vesting schedule, different types of investment options, and plan costs.
At AAFCPAs, we have 200 employees. In order to do what is best for them, we developed 15 investment models for participants to choose from covering a range of risk profiles and ages. Obviously, a smaller organization does not need that wide an array, but plan sponsors still need to assess the participant pool to be sure everyone has suitable options. If your staff includes both lower wage earners and high income talent, for example, the plan options and structure should reflect the diversity of your team.
In terms of investment selection, you need to regularly evaluate the options and monitor performance and cost. At AAFCPAs, the trustees of the plan meet every quarter to confirm that the models makes sense, the participation is on the right track, and that the performance and cost of the investments are in line with expectations. The trustees keep detailed meeting notes documenting their discussions and decisions.
3. Educate! A trouble spot that can be difficult to manage is when employees seemingly make poor decision or participate inappropriately for their situation. While you ultimately cannot control their choices, you do need to educate them on issues such as aggressive and conservative investment timelines and the long-term nature of retirement savings. Tax implications are another crucial topic, especially as they relate to the difference between Roth and non-Roth vehicles. When the right education is in place, plan sponsors can be confident that they are providing employees with the requisite tools to make informed decisions.
Employees should also consider not just the plan itself, but also how the chosen investments and asset allocation fits into their whole financial picture. If employees are not participating in the most effective way, you (or the investment advisor you work with) should offer to meet with them to at least ensure they are making their decisions intentionally.
Too often, business owners and executives see the organization’s retirement plan as a “set it and forget it” program. As a plan sponsor, you should bear in mind that you are held to a much higher standard. Take the right steps to design the plan, educate employees, and monitor activity, investment performance and costs to ensure that you are meeting your fiduciary obligations.
If you have any questions about your investment strategy, please contact Joel Aronson, CPA, PFS, at 774.512.4114, firstname.lastname@example.org. Our mission is to provide valuable peace of mind to those who have the awesome responsibility to manage wealth.