6/18/12 4:14 PM – Are You in Trouble on your 401k Plan and Not Know it?

Are you a business owner or executive whose company has a 401k plan? Did you know that you have specific duties to perform on the plan and may have liability associated with not performing them?

Owners or senior execs of a company providing a 401k plan to its employees have a legal responsibility to conduct and document regular reviews of plan costs, performance, participant complaints and plan design and to be aware of conflicts of interest. They need to ensure that costs from the various plan providers are reasonable for what they do, that the lineup of investment options is properly diversified and that performance is competitive. Many companies have done none of these on a regular, documented schedule and don’t even know that they need to, nor do their HR departments. As plan fiduciaries, that puts them in a bad spot.

Often, fididuciary responsibility spells liability. Some of this may be passed on to properly appointed advisors and administrators but their costs and performance must still be reviewed on a regular basis.

As a plan sponosr, you also should be reviewing the service agreements on the plan and ensuring that the plan is operating in line with a properly written investment policy statement (IPS). Unfortunately, most companies do not even have an IPS, do not know how to tell if the costs of the plan are reasonable and have no schedule or format for reviews.

To give you an example, at the owner’s request I just reviewed a 401k plan in which the mutual fund expenses alone were as high as 2.2% per year. I found that the funds in the plan had identically run available share classes with expenses as low as 0.4%. The broker/advisor was receiving 1% a year in trailing commissions but had not met with the owner in years to do any reviews. In addition, the third party administrator for the plan was receiving payment from the funds above what it billed the company, which is fairly common. All the owner thought he was paying for the 401k was what the administrator billed him each quarter. Wrong!

In this example, the broker’s laziness even when receiving higher than average fees put the business owner in serious jeopardy and the owner did not know it. If the Department of Labor had done an audit the owner would have had little or nothing to show. And, plan performance was weighted down by higher than reasonable fees, costing all the participants money in terms of lower performance.

If you are an onwer or senior executive with a company offering a 401k plan let me analyze your plan to see if you are in compliance with regular reviews and reports, if your costs are reasonable and your performance competitive. In many plans with $0 to $10 million in assets and even in some plans of greater size, they are not. It pays to check.