Don't Make These Mistakes with Your Company's Retirement Plan

We’ve written before about how investing in your people and the need for small businesses to be competitive in the marketplace. Many companies accomplish this by offering 401k plans. But if not done right, 401k plans can become a headache for management and frustrating for employees. We asked our friend Courtenay Shipley, founder of Retirement Planology, to describe some of the top blunders companies make with their retirement plans.

Retirement plans are often sold to smaller businesses similar to, “Would you like fries with that?” with another service like payroll or health insurance. It’s no wonder that things can go downhill with them and business owners/CFOs/HR can find themselves dealing with a blown budget, grumpy employees getting refunds from their 401k’s failed testing, or an operation error that requires correction ASAP. 

In the spirit of helping you avoid these sorts of issues, here are the top blunders that we see companies make when running a retirement plan.

1) Not monitoring providers on a regular basis. No matter what, you’re still responsible for oversight. Hiring a prudent expert or a vendor takes some of the work away and distributes responsibilities, but you will always be accountable for making sure they’re qualified and doing their job.

2) Not realizing who is a fiduciary or what it means. It’s important to know WHO a plan fiduciary is and to understand that the test isn’t based on your title, but your function with the plan. This level of authority comes with strings attached. For example, personal liability for fiduciary breaches under the Employee Retirement Income Security Act (ERISA)!

3) Not understanding that prudence is based on process. Due diligence is part of a fiduciary’s duty.  You must ask questions, including “Can we prove this was done in the best interest of participants? Do we have enough information and education to make an informed decision?” If you don’t have the expertise, you should hire a prudent expert to help.

4) Choosing a plan and providers without having a defined WHY for the plan. Chances are you didn’t go into business to provide benefits. You started your company to produce a widget or offer a service to fill a need in the market. Similarly, your retirement plan fills a need for the company. Yes, it’s to provide a way for employees to save for the future, but it likely serves another purpose too. For example, it may be a recruiting tool, a way to share profits with employees, a chance for the owner to save for retirement since they leveraged everything to start the business, a way to make sure top talent sticks around, etc.

5) Assuming that the plan is a static entity. Your company and your plan—and the regulations both are subject to—will all grow and change over time. Your plan “design” (which includes the nuts and bolts of the plan document, investments, and features) should be customized for your company culture and values. Revisit your plan as part of the total benefits package and for maximum impact on getting YOUR employees to retirement.

6) Not realizing there is extra scrutiny that goes with the default investment. The Pension Protection Act of 2006 gave rise to the qualified default investment alternative in a plan. This means if a participant didn’t elect any investment options when they enrolled, you could direct their money to the default investment while avoiding liability for choosing for the employee. The default can be a target date fund, a balanced fund, a managed portfolio, or cash for 120 days, but it has to be directed to one of the others after that. Since this default investment awards the plan sponsor some protection, it’s imperative that a smart decision is made as to which fund is the default and whether it’s appropriate for the “default participant.” Similar to all the other investments offered in the plan, the default funds need regular monitoring and review not just for performance, but for a thoughtful fit for the “default” employee.

If you’re puzzled about your plan or just want someone to take some work off of your plate, please reach out to us. We help organizations navigate retirement plan decisions and reduce the burden of the plan along the way. Retirement Planology can be reached at 703-595-2829, or you can check our blog for more resources at www.retirementplanology.com.

Our thanks to Courtenay Shipley for sharing her excellent advice! She can be reached at cshipley@retirementplanology.com.