With more confusion swirling in the employer 401(k) market – not to mention an American workforce with staggeringly low retirement confidence – advisers and consultants recommend employers play a bigger role as a fiduciary when considering administration fees and investment education.
The aging workforce, coupled with a disengaged population of younger workers, may be the root of the problem. Right now, there are over 60 million plan participants in 401(k) plans with a total of $3 trillion in account balances. Meanwhile, $30 billion in administrative and investment fees are being spent on an annual basis – costs that plan sponsors still may not understand, or be able to quantify. That presents a need for fiduciary intervention, according to Trent Grinkmeyer, a financial consultant with Grinkmeyer and Leonard Wealth Management.
“You [the fiduciary or plan sponsor] are working for the employees and their beneficiaries. Your main focus is them, not the company,” Grinkmeyer said during this year’s Benefits Forum & Expo. “You want to make sure that you are paying reasonable costs for the plan, [and] you need to make sure the investment selection has a wide variety of investments.”
Citing the Employee Retirement Income Security Act of 1974 and the subsequent Pension Protection Act of 2006, Grinkmeyer told conference attendees that plan sponsors are responsible for the decision participants make when it comes investments and the forthcoming fees from retirement vendor relationships with mutual fund companies and other financial services companies.
He noted all the liability is on the fiduciary of the defined contribution plan, in the eyes of the Department of Labor. Grinkmeyer said this is evident in the surge of fee litigation since 2007, cases which have included some of the largest Fortune 500 companies.
“The Department of Labor does not care what the performance of that large cap growth fund was, or if Bill Gross left PIMCO on Friday. What they care about is your process in analyzing fees, your investments overall,” Grinkmeyer said. “If you can demonstrate process, you are 80% of the way there.”
Because there are three types of fee arrangements in the DC plan, including investment management fees, administrative fees and consultant and advisory fees, Grinkmeyer suggested that company benefit managers instill a benchmarking process every three years with vendors to ensure plan sponsors and participants are not getting overcharged when it comes to fee arrangements.
Meanwhile, lack of confidence in the fiduciary decision-making process may also be causing this disconnect among employee plan participants and their employers. Steve Branham, co-founder of 3ethos, a firm that helps to engage key decision-makers in leadership roles, explained to BFE attendees that more can be done to ease plan participant angst.
“Things have become more sophisticated with financial instruments,” said Branham, a retired rear admiral from the U.S. Coast Guard, where he served as chief financial officer of the military arm. “Participants need greater education and guidance because of that, and more trust is expected as a result.”
Recent studies show that the message is not getting across to plan participants, as 36% keep their 401(k) money in a liquid, cash state and 20% in target date funds. According to Branham, this indicates a need for more education because these safer vehicles may not be getting the best bang for their buck.
While only one-in-three workers feel they are inspired by the work they are doing, Branham noted that poor leadership is the top reason for disengagement. “Trust and confidence is really what leadership is all about,” said Branham. He recommends that retirement plan fiduciaries and employers incorporate better leadership qualities into their plans and workplaces.
“It’s not enough to just have a process, it’s not enough to have good stewardship … they want people that demonstrate leadership,” Branham said. “Why? Because you need somebody you can trust and be able to confide in with your hard-earned resources.”
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