4 business people leaning over a railing smiling Advisors can help by providing an in-depth plan analysis that helps to ensure previously elected features still make sense for the participant base. (Photo: Shutterstock)

The retirement plan landscape is increasingly challenging for plan sponsors, as regulatory pressure increases and more plans become the focus of legal action. In reality, the majority of small business plans won’t find themselves embroiled in a courtroom battle, but they do need to be increasingly vigilant about applicable rules and responsibilities.

Plan sponsors’ challenges are made more difficult by the law’s (ERISA) fundamental mandate that every retirement plan must appoint at least one fiduciary in charge and must be operated with a ‘Prudent Expert’ standard of care.

However, the majority of U.S. plans are sponsored by small companies, so the fiduciaries responsible for them tend to be lay people such as company owners, HR administrators or benefits coordinators who are not experts.

This Prudent Expert standard of care combines with another rule, the ‘Exclusive Purpose Rule’ which when combined ensures that all fiduciary actions taken are in the best interests of plan participants. But ERISA makes no distinction between a legitimate retirement plan expert and a lay person who is trying to manage this role among many other job responsibilities.

Thus, the potential exists for a major disconnect in how plans operate versus what the law requires, providing a great opportunity for financial advisors to bring value and solidify their relationships with plan sponsors.

Find every opportunity for education

That value starts with educating plan sponsors on the fundamentals of being a fiduciary. This includes three key facets:

1. Encourage sponsors to always ask the question, “Is what we’re trying to achieve in the best interests of plan participants?” If the answer to that question is yes, then sponsors can proceed to addressing the initiative in greater detail. But if the answer is no, they should stop right there and consider alternate courses of action.

2. Coach your clients to document everything. If a decision must be made on behalf of the plan and its participants, a staff member (or yourself) should take extensive and detailed notes of any discussions about it. This measure will protect your client in case a decision turns out poorly, because they can at least point to the documentation as evidence that the process was sound.

3. Design the plan around retirement readiness. If the goal is to provide sustainable income replacement for participants upon their retirement, then all of the decisions that follow the establishment of that goal should support it. This is the essence of acting in the best interests of participants.

Prompt periodic review of plan design choices

Design choices often dictate the success of 401(k) plans for their participants. Advisors can help by providing an in-depth plan analysis that helps to ensure previously elected features still make sense for the participant base.

Subsequently, you can make technical and practical recommendations to plan sponsors about which elements to integrate. This might entail redesigning a plan to provide greater entry flexibility or incorporating aspects like automatic enrollment and automatic progressive savings escalators that can increase participation and saving rates.

Define what the endpoint should be for participants, such as the age when they can afford to retire, which is unique and customizable for each person. Once you understand the fundamental goal of the plan, start coaching your client on the steps needed to achieve it.

Emulating the IRS when conducting internal plan reviews

One helpful step would be working with clients to conduct a miniature version of an IRS compliance audit on their plan. This entails an extensive accumulation of information, including signed and dated copies of all relevant documents, to identify potential compliance risks and immediately resolve them.

Additionally, it is recommended to periodically compare the census of the company to the results of the plan. For instance, if a plan has a low participation rate and the census indicates a recent average date of hire, ask the sponsor if they’ve been turning over staff on a regular basis or just went through a major hiring process. In either case, it would then make sense to discuss how to encourage greater participation and saving rates.

In my experience, like in other areas of business, over time institutional memory of why decisions were made is lost. In retirement plans for example, plan sponsors may not recall why their eligibility and entry requirements are configured a certain way, because those decisions were made a decade or more ago and haven’t been revisited since.

Meanwhile, the company’s size and employee demographics might have changed significantly. As a solution, advisors can help sponsors by conducting a review of plan design choices every 3 to 5 years to assess whether current parameters are still appropriate.

Gain a comprehensive understanding of behavioral finance

When considering how to structure a plan, it’s also essential for advisors to understand behavioral finance. Specifically, if anything requires plan participants to take action, recognize that adherence will likely be very low and even lower if it costs them additional money.

The key is to identify and avoid barriers to success. Two significant barriers at the participant level are incremental cost and incremental work, meaning a person has to do more or pay more. The reality is that due to inertia or procrastination, many people likely won’t take even a simple step like going online to check a box since that requires an action.

Accordingly, plans could implement features that design around barriers to success, including as much automation as possible and emphasizing negative election over affirmative election.

In other words, require a participant to indicate only if they don’t want something done, not if they do want it done. That’s the kind of strategy we’re seeing the better retirement plan advisors employing to generate better results.

Tools of the trade

Service providers in the retirement industry will often discourse about what plan sponsors and participants should do frequently providing great tools and good advice on how to use them. However, it doesn’t matter how good the tools are if people need to be proactive about using them, because the chances are that they won’t.

I believe our industry should strive to create an environment that allows success to occur naturally, rather than one requiring people to take a number of steps in order to possibly succeed.

This shift will need to change across the industry if we want retirement success to be the normal and natural result rather than the exception.


Jason Grantz, QPA, AIFA is the director of institutional retirement consulting at Unified Trust, headquartered in Lexington, Kentucky.