High Impact Tips for 401(k) Plan Sponsors: Make the Features Fit
I drive a Mustang GT to work every day. It is loud, it has well over four hundred horsepower, and is ever-so-slightly obnoxious. By normative standards, it makes little sense for a retirement plan consultant in his mid-forties with a wife, two kids, a dog, and a thing for going camping to drive this car (there is probably even some unenforced company by-law against parking it in our lot). Why not just go for an average, used metallic taupe sedan that gets 35 miles per gallon? Or maybe do what so many are doing these days and get a crossover or SUV?
Simple. Buying average or typical does not suit my needs. I will be far happier, and will save money, if I buy something that really fits me for the long term. Purchasing based on price and someone else’s definition of practicality or value just doesn’t work in my case, and may in fact cost me more eventually.
Yet some retirement plan fiduciaries hire service providers on the basis of price or dazzling features, with less emphasis on what that might actually mean for their own needs as plan sponsors, or for the ultimate consumers – their plan participants.
So what should a plan sponsor do instead?
Buy what suits your specific wants and needs.
In our last installment, we talked about how participant needs must match up with what you offer them education-wise. Really, you need to do this on a bigger scale with your provider as a whole. If you have a plain-vanilla 401(k) plan, you know a good bit about plan administration, and you don’t mind doing a bit more work to get things right, you might do just fine hiring a more generic, commodity service. Sticking with our analogy, if I really saw my car as more of an appliance, I might be absolutely satisfied with something that’s a bit less exciting. But if you need ongoing guidance, your employees have specific employee education needs, or if your plan is a bit outside of the box, you probably need to find a better match for what you and your participants actually require in order to thrive.
So make sure you know what you and your employees need, and then be willing to hire a provider that’s a good fit. The law (ERISA) requires that fiduciaries pay reasonable plan costs in light of the services that are being provided. More service (more horsepower and personality, in my case) may and probably will mean higher cost, and this is entirely appropriate – provided the service provider hiring decision is well-documented vs. the alternatives. This brings me to another point…
Realize that buying solely on price now could become more expensive later.
Some plan sponsors have extrapolated the ERISA requirement a bit, thinking the law is saying they should only hire the cheapest service providers. Or maybe it’s an employer budget issue. But that’s like buying the cheapest car just because it’s cheap, while turning a blind eye to long-term reliability. Then a few things break, and it just so happens that you’re not a home mechanic – ugh.
Notice the word “reasonable” that is used by ERISA. We agreed that you likely need to spend a bit more to get more. Taking this in the other direction, it is not good to go significantly cheaper than the norm without anticipating a commensurate decrease in services. A less expensive provider may devote fewer resources to the ongoing oversight of your plan, thus putting more on the plan sponsor. This could mean that while things are going fine now, perhaps something gets overlooked and it doesn’t come to light for years, and by that time fixing it is like unscrambling an egg. While this could happen with any provider, one that is checking your data and watching over whether you are doing your filings on time is more likely to catch something before it becomes an expensive problem.
This is not to say that the cheapest provider is the worst. Sometimes, it can make sense, provided that the employer knows its own responsibility and doesn’t mind doing a little D-I-Y maintenance.
Engaging a retirement plan provider is a bit like buying a car. It comes at a cost, it is a long-term commitment, there are many different features, and you may have a different concept of what will work for you than your neighbor (or your wife – mine has the crossover/SUV in our family!). Buying purely based on cost or features, without looking for a good fit with your organization and its needs can lead to longer-term problems. On the flip side, looking for a good match-up between a service provider’s offerings and your plan’s particulars can lead to a satisfying long-term relationship.
Questions about the features of your retirement plan? Talk to our experts today!
Keep following us for some more tips in the weeks to come, and our eventual “101 Tips” ebook! You can always find previous posts and tips on our website!
Scott Gehman, ERPA, CEBS
Retirement Plan Consultant