I was enjoying my Sunday morning coffee and paper a few weeks ago when I came across an article in the Boston Globe titled, “Warren’s Consumer Dream Dismantled.” The story was about how the Consumer Financial Protection Bureau (CFPB), under new Director Mick Mulvaney, was switching their focus from enforcement of rules and penalizing fraudulent financial institutions to educating those institutions on how not to screw their customers. Besides that last little jab I’ll leave the politics aside, but my interpretation of this Boston Globe article was that our government is going to keep the status quo: (1) Give you complete freedom….including the freedom to be coerced into terrible financial decisions by the entity looking to gain from said terrible decisions; and (2) create laws that technically protect people but lay the responsibility for that protection at the feet of often uninformed persons, again enabling the financial institutions to reap massive reward at your expense. In the case of your 401(k) plan those persons entrusted with protecting you are your plan fiduciaries. Spoiler alert: in many cases, especially with small and medium sized businesses, your fiduciaries do not know their responsibilities and even if they did they do not have the education or knowledge to be making sound financial decisions for you. We need to fix that and I’m going to show you how by first identifying who your plan fiduciary is and then the steps to take to enact changes in your plan.
What is and who is my Fiduciary?
I know some of you are saying, “I’ve heard this fiduciary word, but what the heck is it!” A fiduciary is someone that, by law, has to act in your best interest and in the case of your 401(k) plan (this is important for later) could be “personally liable to restore any losses to the plan, or to restore any profits made through improper use of the plan’s assets resulting from their actions.” Check out this link where the IRS has a nice detailed explanation of fiduciaries for retirement plans. The department of labor has defined the specific responsibilities of a fiduciary, including:
- Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them
- Carrying out their duties prudently
- Following the plan documents (unless inconsistent with ERISA)
- Diversifying plan investments; and
- Paying only reasonable plan expenses (another spoiler alert)
In the case of your 401(k) plan you might expect your fiduciary to be your plan provider (Fidelity, TIAA, Vanguard etc.) but you would be wrong! They may or may not be fiduciaries depending on what role they are filling for you. Being a fiduciary is not a title but a role that a person has. Long story short there can be many plan fiduciaries for you, some within your organization and some without. The good news is that you only need to find one of your fiduciaries to start the process of enacting changes with your plan. The reason you only need to find one is that the department of labor has been very clear that, “a fiduciary should be aware of others who serve as fiduciaries to the same plan, because all fiduciaries have potential liability for the actions of their co-fiduciaries.”
The Myth of Outsourcing Fiduciary Responsibility
Some employers, especially the small and medium businesses, believe that they have “outsourced” their fiduciary responsibilities to a provider or an adviser, absolving them of their fiduciary responsibility and the liability associated with it. Please listen up, because this will be important later, THAT IS NEVER TRUE. The act of choosing a plan provider or plan adviser makes that person a fiduciary and makes them personally liable. Therefore there is ALWAYS someone at your company acting as your fiduciary. Please note, I’m not saying your employer is doing anything shady or untoward if they tell you, and believe for themselves, that they bear no fiduciary responsibility to you. They were trying to make a smart business decision for them (reduce risk) and most likely doing what they thought was prudent for you by having a financial professional in charge of financial decisions for you. But in reality they may have let the fox in the hen house. I know from personal experience that your employer was probably sold a story by the providers or advisers that by hiring THEM the provider/adviser would take on the fiduciary risk, like most good stories there is a thread of truth to that. The provider/adviser has taken on SOME of the fiduciary roles and is thus SHARING the liability, but the person choosing the provider/adviser is always a fiduciary as well.
Why do you care? Fees.
I won’t belabor the point here as there are millions of great articles and blogs out there on why paying too much in investment fees is bad….including one I wrote! As far as 401(k) fees go the image below from Brightscope pretty much says it all for me.
My real focus for this blog is on the left side of the above plot, specifically the small business 401(k) plans with assets under $10M. Note that not only are the fees paid by these small plans significantly higher on average than the larger plans (orange line) but most importantly note the wide range of plan costs. The range of plan costs is staggering for small businesses with plans ranging from 0.20% all the way up to 4.5%! It is this range which says to me these plan fiduciaries are not doing their jobs. I’m NOT saying they’re bad people. Often at small businesses people have to take on roles where they don’t have a ton of experience, training or knowledge. They are most likely trying to do a good job they are just not informed. Let’s get them informed!
Some will argue that the small plans should be higher cost due to the lower balances. Bull. Clearly some small plans are just as low cost as the larger plans proving it is possible. I guarantee those low cost small plans have a well informed fiduciary running them. I run a small plan. When I got involved we were decent with about 0.70% of plan assets going to fees. With some changes to the plan we got that down to 0.22%. The issue is not the amount of invested assets, the issue is the education of small and medium sized business fiduciaries. If they were properly informed and motivated they would make the necessary changes in the plans to bring the fees down to reasonable levels.
Another interesting thing to me is that there are some plans with only one million in assets paying as much or less as plans with billions in assets. This shows there are issues with the big plans as well! If you really want to dig into the fee information I would recommend you check out Brightscope’s detailed report. Click here for the report.
What can I do?
Plenty. There are two paths I’ll recommend that can lead to millions of dollars in savings to your plan over the life of the plan.
- Request plan documents and fee disclosures from your current service provider to find out what your current fee situation is
- If it is already below 0.50% of assets your fiduciary is going a pretty good job and you mush have some nice low cost investing options in your plan
- If your plan fees are greater than 0.50%…
- Identify internal fiduciaries
- If you have an HR department (not all small businesses do) go ask them
- If you are running into road blocks figure out who chose the current service provider, that will most likely get you to the fiduciary
- Once you identify the internal fiduciary….
- Send them this blog!
- Ask the last time the plan was bid?
- If it has been more than 2 years from the last time the plan was bid ask that it get bid again with a focus on fees
Plan B – Become the Plan Fiduciary
If you are running into lots of road blocks consider stepping up and taking responsibility for the plan yourself. Many times the plan was originally set up by the owner or a random employee that happened to have some free time when the decision was made to have a 401(k) plan. Again, these people were trying to do a great thing for the employees of their small business. They just were not equipped with the tools needed to set up a good plan. Take the lead. This will involve bidding the plan out to other providers and then monitoring your plan, especially the fees, on a yearly basis. My only experience is with Fidelity. I have found that you can work with them to create a good low cost plan. But be warned, you will need to put your negotiator hat on and you will need to push back hard on them. Don’t take their first offer, push them on every fee. Ask to get the list of ALL the investment options you have (it will be thousands of funds). If you are not good with Microsoft Excel bring in a colleague that is to help you sort the fund data to look at the lowest fee options. ALWAYS offer index fund options in your plan. Pay very close attention to the life cycle fund options you offer. People will gravitate towards those so they will make up a larger portion of your assets. Make sure they are as low cost as possible. As an example I pushed back on Fidelity to offer VANGUARD life cycle funds because they were lower cost than the Fidelity life cycle funds they were pushing. Make sure your stable value option is as low cost as possible, some conservative investors will gravitate towards that and they tend to be very high cost. This advice should work with any service provider that you are currently using. Don’t be afraid to let them know that you are the plan fiduciary and that you are focused like a laser of reasonable fees for your participants. Also, you need to let them know you are shopping the plan around, this will motivate them to keep your business.
I don’t have personal experience with America’s Best 401(k) but I have read they can be a good option. Especially if you not as inclined as I am to fight the Fidelity’s of the world. My read on them is your fees will be higher than if you fight the Fidelity’s, but you won’t have to fight and you’ll still have a pretty decent plan.
Things are always changing, so new companies might emerge with some great options for small business 401(k) plans. Just google “lowest cost 401(k) plans” or “low cost 401(k) plans for small business” and I’m sure you’ll get a wealth of up to date information. Just be careful, there will be sharks lurking in those Google waters! Be vigilant and fee focused and you can save your small business colleagues, which often times are akin to or actually family, millions of dollars.