The Frugal Fiduciary Small Business 401(k) Blog
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When I started my 401(k) career in the mid-1990’s, employers who sponsored a 401(k) plan with little to no assets had few 401(k) provider options. The options they had – generally, brokerage and insurance companies – treated 401(k) plans like a one-size-fits-all product by restricting fund options to expensive funds (usually proprietary) that charged a minimum amount of hidden 401(k) fees and plan designs to basic options that could be administered cheaply. Because of their hidden fees, the value of these high-profit products was rarely scrutinized by 401(k) plan sponsors. Today, small 401(k) plans have much better provider options available. Thanks to DOL fee disclosure rules and some high-profile 401(k) fee lawsuits, employers are scrutinizing 401(k) fees now more than ever and that’s forcing 401(k) providers to deliver more valuable services for lower fees. This trend has made providers that treat 401(k) plans like a service - not a product - affordable to 401(k) plans of any size. Instead of restrictions, these providers offer impartial fund advice, consultative plan design expertise and personalized customer service – often for lower fees!
The Thrift Savings Plan (TSP) is a 401(k)-like plan for Federal employees. By combining index funds and low cost administration services, the TSP offers participants professionally-managed market returns with very low drag from expenses. In an Aspen Institute article last month, I wrote 401(k) plans modeled after the TSP are the key to incentivizing retirement plan sponsorship by small businesses – which today sits at a low 52 percent. This rate is a big problem because American workers are 15 times less likely to save for retirement when their employer fails to offer a savings plan. I think TSP-like 401(k) plans offer indisputable value to participants. They make it dead simple for participants in even the smallest 401(k) plans to achieve professionally-managed, market-correlated returns for a very low all-in fee. Their value makes it easy for 401(k) plan sponsors to demonstrate their plan pays reasonable fees – an important fiduciary responsibility. In short, I think TSP-like 401(k) plans are a common sense retirement plan - a safe harbor of sorts from the confusing array of services, fee structures and investments offered by 401(k) providers today. That said, these simple and effective plans are not for everybody. Sometimes, 401(k) investments and investment-related services with higher fees are a better fit for a small business and its employees. Not sure if you’re one of these businesses? Compare these services against a TSP baseline to decide if they are worth the extra money.
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Many employers allow employees to take loans from their 401(k) account. A loan feature is generally appreciated by 401(k) plan participants, but the complicated rules that govern these loans are often misunderstood. This is a problem because taxes or penalties can result when 401(k) participants violate these rules.
This week, the DOL delayed the effective date of its Fiduciary Rule – which would define all retirement plan financial advisors as ERISA fiduciaries, effectively banning conflicted 401(k) investment advice that puts advisor profit ahead of client interests – by 60 days from April 10, 2017 to June 9, 2017. The delay was triggered by a memorandum from President Trump that directed the agency to complete a new analysis of the rule’s likely economic impact. As a critic of the Fiduciary Rule, it’s a good bet that President Trump ordered the DOL analysis to build a case for overturning it. If that happens, it would be a huge (yuge?) victory win for brokers and insurance agents – who are currently non-fiduciaries. According to a study from the White House Council of Economic Advisers (CEA), these advisors rake in more than $17 billion in excess fees annually due to conflicted advice. If you are a supporter of the Fiduciary Rule like me, it can be easy to be upset by the Trump administration delay. However, I’m not worried about it. Even if this ban on conflicted retirement plan advice is squashed, I am confident the die is cast. Following several high-profile excessive fee lawsuits, more 401(k) plan sponsors than ever are hiring fiduciary-grade financial advisors to lower their liability. The kicker? Their impartial advice is often cheaper than potentially-conflicted, non-fiduciary advice. And I have the numbers to prove it!
After the death of his beloved mother, Harry Houdini was desperate to contact her from beyond the grave with the help of psychic mediums – who claimed an ability to communicate with the dead. Mediums were very popular at the time, but it didn’t take long for Harry to discover they couldn’t do what they promised. Upset, Harry became determined to expose their lies to protect unwitting customers. Like mediums, some 401(k) providers make false claims. Their lies can easily go unnoticed to 401(k) fiduciaries due to the highly-technical nature of 401(k) services. However, believing these lies – and hiring the provider that makes them – can trigger severe consequences. They often mask excessive 401(k) fees or a lack of expertise that can increase fiduciary liability. If you’re a 401(k) fiduciary, identifying 401(k) provider lies is imperative to mitigating your plan liability. The good news? Most are easily debunked with some basic facts. I’d like to channel (pun intended) Harry Houdini by exposing four of the most common lies told by 401(k) providers today.
Small businesses that sponsor a 401k plan have a fiduciary responsibility to only pay necessary and reasonable fees from plan assets. Keeping 401k plan fees in check is one of the most important fiduciary responsibilities because excessive fees reduce investment returns unnecessarily, making a comfortable retirement for plan participants less affordable. Not meeting this responsibility can also mean severe consequences for plan fiduciaries – including personal liability.