In today's business landscape, it is common for companies to offer defined benefit plans as part of an employee benefits package, an aspect that allows many firms the opportunity to compete with larger companies in their industry.
However, on January 1, 2012, when the Department of Labor's new 401(k) regulations take effect, business owners will face new challenges in managing their company's plan.
The 401(k) changes on the horizon are aimed to benefit participants by giving them access to vital information needed to make informed investment decisions and truly make the most of their retirement savings plan. Calling for plan sponsors to take a more active role in providing comprehensive reports and resources to their employees, the regulations will cast new light on employers' fiduciary role.
With so many changes slated to take effect, business owners need to carefully prepare, educating themselves on the new regulations and taking the time to position their plan ahead of new legislation.
Outlining the upcoming changes
Overall, the Labor Department's new rules are designed to allow employees to better manage their retirement savings. Mandating comprehensive information on investment choices, fees, and expenses in an easily understood format, investors will be able to compare their plan's options and be fully aware of how their plan and their savings are managed.
The regulations are rooted in the belief that 401(k) plan participants were largely under-informed regarding their savings and how their money is being invested on their behalf. In order to achieve the new objectives, employers who act as the plan administrator and are legally viewed as the plan's fiduciary must provide participants with detailed information related to their plan and investments. Participants will receive thorough records of plan-related information, including information on the plan's structure, administrative expenses, and individual expenses such as those associated with plan loans, as well as investment-related information, which covers all performance and benchmarking data and investment fees and expenses.
What every business owner needs to know
Providing extensive plan information and increasing fee transparency is sure to raise some questions among plan participants. As such, it is vital for business owners to take strides now to position their company to tackle these changes head on.
As it stands now, many employers don't realize that they are their plan's fiduciary, and the new changes dramatically alter the role that employers will serve in the plan. When the new legislation takes effect, fiduciaries will be accountable for excessive fees, investment selection, and compliance regulations, and if the choices are deemed ill-fitting or unsuitable for employee needs, the plan sponsor opens the business to scrutiny and potential legal action.
Strategies to reduce liability exposure
This new level of responsibility and consequently, liability is the most impactful and potentially devastating aspect of the regulations to business owners. Education is key to protecting the business and its owner. A business owner must perform a complete review of the company's existing 401(k) plan to uncover every detail and identify specific aspects within the plan.
Within a comprehensive review, the plan sponsor can identify all of the fees and expenses associated with their plan. Falling into several categories of recordkeeping and administrative expenses, investment expenses, and trustee expenses, the expenses can be broken down into additional fees that add up against an investor's assets. Oftentimes, some fees are disclosed while others are not, and those charged against the accounts can be expensive and surprising.
Once disclosed to employees, it is likely that some participants won't be bothered by the now transparent fees, knowing that they have paid the expenses throughout the life of the account and that they have been actively saving for retirement.
However, others will compare what they have been putting into their plan and what has actually been invested and they may be surprised to find that it doesn't match up. They may wonder what their employer has done to reduce the impact of fees on their savings, turning what was once a company benefit into a business owner's headache. If an employee is concerned that their employer didn't manage the plan effectively or that the employer didn't go through the correct process to select the investment options and outside managers, the employees have the option of taking legal action.
Preventative measures to familiarize business owners with the 401(k) plan they are offering will effectively reduce liability exposure and protect the business and individual assets.
As the 401(k) legislative changes draw nearer, time is running out for business owners to prepare their business' plan, and now is the time to take action. Taking the time to carefully review a plan now can significantly benefit the business, its owners, and employees in the long-term.
Chris Abts is president and founder of Reno-based Cornerstone Retirement Services. Contact him at 853-9033 or through www.cornerstoneretirement.com.
