The Frugal Fiduciary Small Business 401(k) Blog
Get the latest industry news, deadlines and tips you need to know to help tackle your fiduciary responsibility needs.
One of my favorite Warren Buffet investing principles is “never invest in a business you cannot understand.” I think the rule of thumb is helpful in mitigating risk. If you’re a small business owner, I recommend you extend this principle to managing your 401(k) plan – never hire a 401(k) provider you cannot understand. What you don’t know about your provider can hurt plan participants and increase your fiduciary liability
Mutual fund companies usually make their funds available to 401(k) plans in multiple share classes. While all classes hold the same underlying securities, they can charge very different fees. In general, employers have a fiduciary responsibility to choose the lowest-priced share class available to their 401(k) plan – so participant investment returns aren’t reduced unnecessarily by avoidable fees.
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In multiple lawsuits, Fidelity Investments is being accused of charging excessive, undisclosed 401(k) fees. At issue is an “infrastructure fee” the company demands from some third-party mutual funds in return for access to Fidelity 401(k) clients. Fidelity claims the fee is not 401(k)-related. The lawsuits claim otherwise, saying the fee represents indirect compensation – a form of 401(k) fee that must disclosed in a 408b-2 fee disclosure to be legal under the Employee Retirement Income Security Act (ERISA).
To meet retirement goals as affordably as possible, 401(k) participants must do two basic things – save early and often and invest appropriately. To invest appropriately, participants must construct - and maintain – an investment portfolio that includes a diversified mix of investments based on their time horizon (time to retirement) and risk tolerance. An appropriate portfolio balances the participant’s growth potential with risk of losses. Striking this balance is important. Otherwise, a participant could miss out on returns by investing too conservatively when young or sustain unrecoverable losses by investing too aggressively when older.
A 401(k) plan may, but is not required to, allow participants to take a hardship distribution in times of financial stress. This type of 401(k) distribution can be a financial lifeline when someone has nowhere else to turn for cash. Last year, the IRS released a proposed regulation that made several changes to the 401(k) hardship rules, generally relaxing how and when these distributions may be taken. Both employers and 401(k) participants should understand how the regulation will affect their retirement plan.
All 401(k) plan contributions have deposit deadlines – and it’s up to 401(k) fiduciaries to meet them. Yet, many employers are unclear about the deadlines applicable to their 401(k) plan. That confusion can easily lead to late contributions. When that happens, there are always consequences for the employer. They range from mild (losing a tax deduction, making participants whole for lost earnings) to severe (plan disqualification, IRS and/or civil penalties). Fortunately, these consequences are easily avoided with some basic education.