Have You Considered?
When was the last time you reviewed the fees and services of your plan service providers?
If you have not reviewed your fees and services in the last three to five years, your plan could potentially be missing out on significant benefits for your plan.
The corporate retirement plan industry has meaningfully evolved in recent years. Services have expanded, investment flexibility has increased, and fees have been compressed. However, if you have not recently spoken to your service providers about their services and fees, it is unlikely your plan is leveraging a more competitive marketplace.
Choosing a plan service provider and using plan assets to pay provider fees are fiduciary acts subject to ERISA’s fiduciary duty rules. These rules require plan sponsors to act prudently and solely in the interest of plan participants and beneficiaries. It is your fiduciary responsibility to review fees and access whether they are “reasonable.” The Department of Labor provides “tips” for monitoring your service providers to assist in your efforts to establish reasonableness.
Genovese Burford & Brothers is well positioned to deliver a market competitive retirement plan with defensibly reasonable fees. We follow a process consistent with those Department of Labor tips. Service providers value our relationships, know we understand the market, and know we influence decisions. Those relationships provide us with leverage to get the most for your plan.
See Vendor Matching for more information.
Are your plan participants paying more than their fair share of plan expenses?
Plan fiduciaries often misunderstand how fees are deducted from participant accounts and how participants can be treated unfairly as a result. When fees are clearly understood, there is often an opportunity to improve plan design and function.
Investment product fee structures frequently create scenarios where participants can be treated unfairly. It is common for investment products to charge additional fees not related to the management of the investment. Referred to as revenue sharing arrangements, these fees are collected by the investment product and used to pay service providers. Since each investment product commonly has a unique revenue sharing arrangement, it is difficult to understand how much is being collected and who is being paid. Revenue sharing structures can leave some participants paying minimal fees while others paying significant fees.
Not understanding and managing fee arrangements appropriately as a plan sponsor can result in legal action. Groom Law Group, a nationally recognized ERISA law firm, tracks 401(k) fee cases.
In our opinion, a well-designed plan should have transparent and fairly allocated fees. Legal precedent and regulatory action consistently point to the importance of clear communication of fees and of taking action to align fees with the best interests of participants. GBB helps design plans that allocate fees to participants in a transparent and equitable manner, report fees to participants on their statements, to communicate them to plan sponsors in their annual plan review.
Is your plan an administrative burden?
The market place has evolved significantly in recent years to help companies manage their plan-related administrative burden. If your company is handling any of the processes listed here, know that professional service organizations will accept fiduciary responsibility for executing these responsibilities and may be paid for their work from plan assets.
Compliance with 404(c) requirements
Management of the investment program
Approval and signing of the annual 5500 form
Meeting of 404(a)(5) and 408(b)(2) fee disclosure and fee review regulations
Approval of all distributions (hardships, QDRO, retirement) and loans
Preparation and distribution of all annual notices and disclosures to participants
Tracking of eligibility and notification of employees of enrollment opportunity
It is required that plan fiduciaries follow a prudent process when managing each of the above functions. We find it's uncommon for companies to clearly articulate their policies for managing plan-related administrative processes. What many plan fiduciaries fail to recognize is the vast majority of fines by the Department of Labor result from administrative failures.
The Department of Labor has released a handbook titled, “Meeting Your Fiduciary Responsibility.” There are three key themes in the document:
- Understand your responsibilities
- Manage or transfer your responsibilities
- Ensure fees and services are reasonable
Genovese Burford & Brothers helps fiduciaries meet their responsibilities and reduce administrative burden.
Is your plan creating too much risk for the business?
The business risks associated with sponsoring a qualified retirement program are significant but manageable.
The Department of Labor frequently succeeds in restoring losses to participants, and most of those penalty dollars result from administrative errors. We believe those errors can be well managed with proper governance. If the parties involved in operating a plan (fiduciaries, Human Resources, Accounting, and service providers) clearly understand each of their responsibilities and the policies and processes for executing them, the risk of administrative error is diminished.
While there are resources from the Department of Labor and IRS to educate plan fiduciaries on how to meet each of their responsibilities, leveraging service providers is necessary to operate a plan well. Hiring service providers reduces your responsibility from operating the plan yourself to simply monitoring your service providers and ensuring they charge reasonable fees.
The responsibilities of plan fiduciaries can be reduced to:
1. Making timely contributions to the plan
2. Ensuring timely and accurate remittal of payroll and census data
3. Making plan design decisions
4. Documenting reasonable agreements with service providers and monitoring their performance
All other responsibilities can then be retained or delegated at the plan fiduciary's option.
Genovese Burford & Brothers’ clients benefit from our perspectives and tools for building a quality corporate governance structure and implementing processes for overseeing your service providers.
Did you know that plan design decisions you make in the board room can have a huge financial impact on the futures of employees?
It has been shown that employees tend to allow built-in plan design features like automatic enrollment and default investment alternatives to work in their favor. Regulators support the use of these automatic features and both the Department of Labor and Internal Revenue Service offer resources to support their inclusion in retirement plans.
Genovese Burford & Brothers has a track-record of improving the financial futures of participants through properly communicated implementation of automatic features.
Using the assumption that a well-designed and communicated automation program increases the average deferral rate from 5% to 8%, it is easy to show the impact board room decisions can have on financial futures. For instance, a 35 year old employee who earns $55,000, retires at 65, and increases their deferral rate from 5% to 8% can expect can expect to increase their lifetime retirement income by over $680,000!
Genovese Burford & Brothers has a passion for improving the financial futures of participants.
See Plan Design for more information.
Assumptions: 7% rate of return, 4.5% withdrawal rate in retirement, 3% inflation, 30 years in retirement
Is there a difference between a participant receiving education and advice?
Yes. There are a number of approaches to making financial decisions: trial and error, watch a seminar, read about it, use an online retirement planning calculator, or rely on a qualified professional providing advice based on your particular financial circumstances. More than one approach can work, but we believe all participants should have access to advice from a qualified professional.
It is Genovese Burford & Brothers’ passion to grow and protect participants' retirement income. Our advisors are experienced in financial planning and hold top industry credentials. We can work one-on-one with participants, hold ourselves out as fiduciaries, and provide tailored advice.
See Participant Advocacy for more information.
Did you know plan fiduciaries and plan participants typically make poor investment decisions?
Plan fiduciaries and plan participants are consistently guilty of using inappropriate measures to evaluate the potential for future fund performance. Strong recent performance of an investment often lures investors into believing that that historical performance is evidence the investment will have strong future performance. Study after study supports the conclusion that plan sponsors and participants tend to chase returns, and their investment outcomes suffer as a result.
Vanguard conducted a study comparing a return chasing strategy versus a buy-and-hold strategy when selecting mutual funds, and the results show that buying funds based on strong recent performance consistently harms investor outcomes. Vanguard also reported on another study, which tracked the results of plan sponsor investment decisions, and the evidence clearly shows that plan sponsors often chased recent performance, and that those decisions did not lead to better results. JPMorgan regularly reports on a Dalbar study which estimates average investor returns versus the market, the results support the idea that the return chasing behavior of the average investor has led to value destruction.
Genovese Burford & Brothers has developed an investment strategy to help avoid return chasing behavior. In our opinion, focusing on factors like investment philosophy, decision-making process and approach, management team experience and incentives, and fees are stronger indicators of future performance than recent performance.
Why is it important to hire an investment fiduciary who accepts discretion as defined in ERISA section 3(38)?
When an advisor accepts investment discretion on behalf of the plan, they are accepting the highest level of fiduciary responsibility for overseeing the interests of participants. The Department of Labor, in their publication, “Meeting Your Fiduciary Responsibilities,” supports hiring an investment fiduciary as an approach to managing risk and responsibility.
A discretionary investment manager not only manages investment risk, but they also accept responsibility for the administrative burdens associated with selecting and monitoring investment alternatives. Once you've hired an advisor to act as investment fiduciary, your responsibility is simply to stay informed on the discretionary investment manager’s process and ensure their fees and services are reasonable.
Genovese Burford & Brothers provides our clients written investment policies, quarterly reporting of our research to document adherence to the investment policies, and an annual meeting with plan fiduciaries to ensure understanding of and comfort with the state of your plan's investments. Our goal is to make it easy for you to be informed.
See Investment Consulting for more information.
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