10 Best Practices for Retirement Plan Sponsors
1. Determine the Business’s Goals for the plan
The Companies and Private Schools that we work with have very generous plans for their staff. We find that reviewing the objectives and goals for the plans periodically gives the plan momentum and helps it move in the direction that the CEOs, CFOs, Executive Directors and Business Managers want. Having stated goals and objectives helps improve the plan and ensures it works to meet those goals. To determine objectives and goals, review the following questions:
• Do you want employees to contribute to the plan?
• Are there some employees (e.g. those who are longer term employees) that you want to get more benefit for the plan?
• Are there employees that are nearing retirement that you want to keep and want to maximize contributions to the plan?
• Is the 401(k)/403(b) plan tied into a wellness education program?
• Does you want to contribute money to the staff and not have them make contributions?
• Who is the plan set up to benefit?
• How do you want to reward employees in the plan (e.g. match, profit sharing contribution)?
• What do you want the plan to look like in a year, three years, ten years. . .?
How do you want to recordkeeping and administration, investments and education to work? In reviewing these three areas, answer the following questions:
Recordkeeping and Administration
• How complex is the plan? Do you need to work with an actuary?
• Do you want to have a dedicated contact or call into a phone bank?
• Do you want to be involved day to day or just be contacted as needed?
• Do you want an outside recordkeeper to review everything going on with the plan?
• Would you want to review plan design to make sure you have the best plan for your employee population?
• What fees are you paying for this service?
• How often do you want to hold group employee education meetings?
• Do you want a financial advisor to be available to answer questions from individual employees?
• Do you want the presenter to discuss retirement planning only or touch on other topics as well?
• Would you like fiduciary education for the investment committee?
• What fees do you pay for this service?
• Do you have an investment policy statement?
• Do you have all of the bases covered and proper diversification in your plan’s investment offering?
• How often do you review the investment options against investment policy statement criteria?
• Are the overall fees charged to your plan competitive in the marketplace?
Your Employee Savings Retirement plan is a fantastic benefit for you and your staff. It can make a huge positive difference in your retirement. By getting the plan set up properly and monitoring it ongoing, it will impact the bottom line dramatically. Know how your plan runs.
2. Know Your Responsibilities
Do you know that if you implement decisions to establish a plan, change or add features, hiring someone to handle the plan for you, or have any decision-making authority on a daily basis regarding the plan makes you a fiduciary?
According to the IRS, Fiduciaries are in a position of trust with respect to the participants and beneficiaries of the plan. Fiduciary responsibilities include:
• Acting solely in the interest of the participants and their beneficiaries;
• acting for the exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries, and defraying reasonable expenses of the plan;
• carrying out duties with the care, skill, prudence and diligence of a prudent person familiar with the matters;
• following the plan documents; and
• diversifying plan investments.
Running and managing these plans requires specific expertise. Fiduciaries can be held personally liable if they do not fulfill their duties. Check with the people that handle your plan to make sure they know about and have expertise with Fiduciary requirements.
3. Build a Blueprint
Any lasting program has a strong foundation. It is important to have a good blueprint and methodology for evaluating investment options, education programs, recordkeepers and all vendors related to the plan. It is good to review each facet of the plan quarterly and have a formal investment review completed. By creating an Investment Policy Statement for the plan, you have a formal process in writing that states the way to set up the plan’s investment options and how to monitor them each quarter. The fuel for the plan is the contributions and the engine are the investment options and the way the plan’s investments are allocated. It is good to have all working to their fullest potential.
You want to make sure that the engine is tuned every quarter and that you review the Investment Policy Statement each year. By having and maintaining best practices, your retirement account will reap the rewards.
4. Analyze and Take Inventory
If you haven’t reviewed your plan in the last year or so, it is probably time to take a look under the hood. The retirement plan industry and offerings change quite frequently and it is good to know about recent developments. How does your plan rate and compare to others on the following?
• Investment Diversification
• Recordkeeping Service
• Plan Design
• Employee Education Program
• Investment Committee—forming one or developing one
It can be daunting to review all of this on your own. There are professionals out there who can help you to do this. Look for AIF® and AIFA® designees as they have been specially trained in the fiduciary process. Many financial advisors can help with retirement planning, but company sponsored retirement plans offer a level of complexity that most financial advisors are not educated to review.
5. Bid it Out
When was the last time you got a proposal for your plan? When working with plans that haven’t been reviewed in a while, generally there are many improvements that can be made. Often, we are able to help reduce their fees by 30% or more based on client benchmark analysis. Prices have come down considerably in the last few years as the technology to run plans continues to improve. When you do get proposals for your plan, make sure that you are reviewing all fees. Different companies use different words for the same fees. For example, many have asset-based fees that could have many different names depending on if you are speaking with an insurance company, a bank or a mutual fund company. Educate yourself with the terminology so that you can get to the bottom of the fees. As a fiduciary it is important to know what you are paying. You want any extra dollars to go into the participant’s accounts. Generally, we ask vendors to provide proposals for our clients every three years.
6. Automate the Plan
Automatic enrollment can really help employees to save more and more often. Help them to build large balances. Implementing a 3% automatic contribution for all new employees, and 1% automatic increases annually, really helps to get them saving. After being automatically enrolled, many employees they tell us that they don’t miss the money. Saving money and being able to retire is about behavior. The behavior and discipline to save. It is critical. You can help the employees who don’t have great financial behavior by automatically investing helping them to save and invest their money. We have worked with many schools who offer matching contributions. Staff were reluctant to save in these plans because the didn’t want to part with their money and didn’t understand the program. They were giving up free money. During our education process, we were able to increase employee contributions dramatically and get more staff members in a position to have a better retirement.
Another way to automate the plan is to have the default investment option as a target date fund. This fund may not be perfect for everyone, but it will also get each employee saving on a path that can match up with their risk profile. Plan sponsors can also utilize all of the features that recordkeepers offer to make their jobs even easier. Speak with your recordkeeper and administrator to see if they have any new capabilities that can save you time and/or money.
7. Match it if you can
Employee participation increases quite dramatically when their monies are matched. The most common match is 50% of salary up to 6%, so if the participant contributes 6% the company contributes 3%. Employees ask about the match and really appreciate it. It is a great benefit that will attract and retain employees. Over time, we have seen these contributions add hundreds of thousands of dollars to their accounts.
8. Spread the Word
What good is a benefit if the employees don’t know about it. When the rubber hits the road, it is important for employees to appreciate the benefit and use it. If it isn’t communicated the success of the program and the employee’s sophistication level will be hurt. Determine how often you want to have meetings and stick with them. Employees will benefit greatly over time from the added attention to their finances.
Holding group meetings on a variety of financial topics help them to become savvier and less stressed out about their finances. Having someone available for individual consultation also goes a long way in helping staff to be ready for retirement and in case of a financial emergency.
9. Watch the Fees
As a fiduciary, reviewing fees is important. Make sure your plan is competitive and know that the higher the fees the less you and the staff will have in their nest egg. Compounded fees can really hurt the retirement account. If an employee pays 1% more a year for fees in their plan, they will have 1/3 less money 30 years later. Fees have a huge impact on the plan’s bottom line and the employees’ top line. Make sure that every dollar that can goes to the employees. Many of the fees that are charged are ones that aren’t apparent unless you really hone in on them and have experience in reviewing them. Make sure you know what you are paying all of your providers. It is also good to benchmark the fees. We show all clients what they are paying for their plan in comparison to plans that are of the same size.
10. Review Quarterly
You have probably heard of set it and forget it. This can work for employees who sent an investment allocation for investing their retirement plan contributions, however; the entire plan needs to be managed. You get your oil changed multiple times per year. It is also important to review the plan’s 3 main areas to see if they need a tune up.
By reviewing and implementing these 10 best practices, you can have a world class plan for good value. In using these best practices, you are maximizing the potential of your plan to provide the best platform for your staff to save. You are also showing the staff that you care for them by taking care of the plan. For most Americans, their company sponsored retirement plan is the only place where they are saving. Make it the best place that you can for your staff to save!
Margaret O’Meara is an Accredited Investment Fiduciary Analyst and a CERTIFIED FINANCIAL PLANNER™ located in Red Bank, NJ. She can be reached at 732-224-9900 or firstname.lastname@example.org. Securities offered through LPL Financial Member FINRA/SIPC.
The target date is the approximate date when investors plan to start withdrawing their money. The principal value of a target fund is not guaranteed at any time, including at the target date.
This material is being provided as a general template for plan sponsor review. Plan sponsors should seek legal guidance in developing a document specific to their plan. In no way does advisor assure that, by using this template, plan sponsor will be in compliance with ERISA regulations.