Small business owners wear many hats, from managing day-to-day operations to making critical financial decisions. Among these responsibilities, overseeing a 401(k) retirement plan for employees often takes a back seat. However, a 401(k) plan is a crucial component of a competitive benefits package that can help attract and retain top talent. As a small business owner, you may not realize that regularly shopping your retirement plan is essential to maintain its competitiveness in the marketplace and ensure it remains compliant, cost-effective, and fairly implemented.

Today, we’ll delve into the fiduciary role of a plan sponsor and why shopping your 401(k) plan is not only a best practice but also a legal obligation. We’ll also explore the benefits of competitive bids and provide valuable insights and resources to help you navigate the process effectively.

Section 1: The Fiduciary Role of a Plan Sponsor

Before we dive into the importance of shopping your 401(k) plan, it’s crucial to understand the fiduciary role you play as a plan sponsor. The Employee Retirement Income Security Act (ERISA) imposes fiduciary duties on those responsible for managing retirement plans. These duties include:

  1. Prudent Management: Fiduciaries must act with prudence, which means making informed and careful decisions in the best interests of plan participants.
  2. Diversification: Fiduciaries should ensure that plan investments are diversified to minimize risk.
  3. Following Plan Documents: Fiduciaries must follow the terms of the plan documents and act in accordance with the plan’s provisions.
  4. Minimizing Costs: Fiduciaries are responsible for minimizing plan costs, ensuring that fees paid by participants are reasonable.
  5. Monitoring and Review: Fiduciaries must regularly monitor plan investments and make necessary adjustments.
  6. Acting Solely in the Interest of Participants: Fiduciaries must act solely in the interest of plan participants and beneficiaries, without regard to their own interests.
  7. Prudent Selection of Service Providers: Fiduciaries should carefully select and monitor service providers to ensure they are qualified and cost-effective.

Section 2: The Importance of Regularly Shopping Your Retirement Plan

Now that we’ve established your fiduciary responsibilities let’s explore why regularly shopping your 401(k) plan is crucial.

1. Compliance with Changing Regulations

The retirement plan landscape is constantly evolving with new regulations and laws. Failing to keep your plan up-to-date can result in non-compliance issues and potential legal repercussions. Regularly shopping your plan allows you to identify and address any compliance concerns promptly.

Resource: U.S. Department of Labor – Compliance Assistance for Small Employers

2. Cost-Effectiveness

High fees can erode retirement savings over time. Shopping your plan can help you identify lower-cost investment options and administrative services, ensuring that your employees’ retirement savings go further.

Resource: 401(k) Fee Benchmarking Guide

3. Investment Performance

Regularly evaluating your plan’s investment options can help you replace underperforming funds with better alternatives, ultimately benefiting plan participants.

Resource: Morningstar – How to Evaluate Your 401(k) Plan

4. Enhancing Employee Benefits

A competitive retirement plan can attract and retain top talent. By shopping your plan, you can ensure it remains an appealing benefit for your employees, helping you maintain a skilled and motivated workforce.

Resource: SHRM – 401(k) Plans: A Competitive Recruiting Tool

5. Fiduciary Liability Mitigation

Regularly shopping your plan demonstrates a commitment to fulfilling your fiduciary duties. It can also help mitigate the risk of fiduciary liability by showing that you are actively seeking the best options for your participants.

Resource: Plan Sponsor – Managing Fiduciary Liability Through Plan Reviews

Section 3: How to Shop Your 401(k) Plan Effectively

Now that you understand the importance of regularly shopping your retirement plan, let’s discuss how to do it effectively.

1. Establish a Review Schedule

Set up a regular review schedule, ideally at least annually, to assess the plan’s performance and compliance. This ensures that you stay on top of any necessary changes.

2. Benchmark Plan Costs

Benchmark your plan’s costs against industry standards to determine if you are getting a competitive deal. Keep an eye on fees charged by service providers, fund expenses, and administrative costs.

Resource: BrightScope – 401k Plan Ratings and Investment Data

3. Evaluate Investment Options

Review the plan’s investment options in comparison to similar funds in the market. Ensure that participants have access to a diversified selection of quality investments.

4. Solicit Competitive Bids

Engage with multiple service providers and investment managers to solicit competitive bids. This will help you identify potential cost savings and superior services.

Resource: PlanAdviser – Tips for Requesting Proposals from Retirement Plan Providers

5. Document Your Process

Document all your actions and decisions related to the plan review. This documentation serves as evidence of your prudent fiduciary process and can be invaluable in case of an audit or legal challenge.

Resource: 401(k) Help Center – The Importance of Documentation for Fiduciaries

6. Communicate Changes to Participants

After making any changes to the plan, communicate these updates to participants clearly. Transparency helps build trust and ensures employees are aware of the improvements to their retirement benefits.

Resource: SHRM – Communicating 401(k) Plan Changes to Employees

The Bottom Line

Regularly shopping your 401(k) plan is not just a best practice; it’s a fiduciary responsibility that can have a significant impact on your employees’ financial well-being and your business’s success. By staying vigilant and proactive, you can ensure your plan remains compliant, cost-effective, and fairly implemented, ultimately benefiting both you and your valued employees.

Remember that this guide is not exhaustive, and the retirement plan landscape can be complex. Consult with a qualified retirement plan advisor  (we know one!) or legal counsel to navigate this process effectively and ensure you’re meeting your fiduciary obligations.

By committing to regular plan reviews and staying informed about industry best practices, you can build a strong, competitive retirement plan that contributes to the long-term financial security of your employees and the success of your small business.

As a small business ourselves, nVest Advisors is deeply committed to helping small businesses and their teams thrive and prosper. From financial planning for both the owners and employees of the business to 3(21) or 3(38) fiduciary management of your SEP IRA, SIMPLE IRA, 401(k), 403(b), HSA, college savings plans, and other benefits options, we strive to be an integral part of your team’s financial well-being.

If your company would like to receive professional planning and investment assistance, a competitive bid from us for your current company retirement plan, or if you need to start a new benefits plan from scratch, we’d love to partner with you. Feel free to schedule a complimentary one-hour due diligence meeting with CEO Jeremy Torgerson, to discuss your needs.