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.
Without question, the COVID-19 pandemic has created a great deal of economic uncertainty. In response, we have received numerous crisis-related 401(k) questions from small business owners. In general, they want to know their options for cutting (or delaying) plan expenses and participant options for taking a 401(k) distribution and loan. This FAQ includes answers to many of the most common questions we have received.
Inappropriate investment selection is one of the top three reasons why 401(k) fiduciaries are sued today. In my experience, employers can easily avoid these lawsuits by having a clear understanding of their investment-related 401(k) fiduciary responsibilities. These responsibilities are surprisingly basic. They boil down to selecting enough “prudent” investments to permit any plan participant to sufficiently diversify their account – to minimize their risk of unrecoverable losses. A prudent investment is simply one that meets its investment objective for reasonable fees. I’ve never seen a leading index fund from providers such as Vanguard, Fidelity, or Schwab fail to fit this bill. For that reason, I consider these funds to be indisputably prudent 401(k) investments.
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On December 20, 2019, the President signed the Further Consolidated Appropriations Act, 2020 into law. This year-end spending package included the most extensive retirement plan legislation in over a decade - the Setting Every Community Up for Retirement Enhancement (SECURE) Act. After the SECURE Act was passed by the House, I judged the bill a mixed bag of good, bad, and ugly – the good representing welcome reform, the bad representing undue complexity, and the ugly representing handouts to the financial industry. That view has not changed now that the bill is law.
On October 22, 2019, the Department of Labor (DOL) proposed new regulations that would supplement the agency’s current rules for the electronic distribution of 401(k) disclosure notices to plan participants. Specifically, the proposal would add a new “notice and access” rule that permits employers to post notices to a website when certain requirements are met. This common-sense 401(k) plan reform is long overdue.
There is no better scorekeeper in the active vs. passive fund debate than the SPIVA Scorecard. Published by S&P Dow Jones Indices, the semi-annual report measures the percentage of actively-managed funds that outperform their market index benchmark over specific periods of time, net of fees. I consider the SPIVA Scorecard a must-read for 401(k) fiduciaries.
According to the Government Accountability Office (GAO), about half of private sector workers in the United States are not covered by a workplace retirement plan. That’s a problem when you consider workers are 15 times more likely to save for retirement when a plan is in place. To expand coverage, Congress is considering ways to encourage plan sponsorship by employers. Two bills under current consideration are the Setting Every Community Up for Retirement Enhancement (SECURE) Act and Retirement Enhancement and Savings Act (RESA). They have similar 401(k)-related provisions. I have mixed feelings about them.