The 401K plan – a twinkle in the eye of the sweeping Employee Retirement Income Security Act of 1974 (ERISA) – was introduced in 1978 as a way to allow employers to provide deferred compensation while freeing employees from paying tax on this portion of their income and more fully engaging them in retirement planning.
Although the 401K represented a more secure option than the employer-financed pensions that were prevalent at that time, it was – and continues to be – a work in progress, with rules and complexities that present challenges for both employees and employers. Setting up a sound plan, managing its day-to-day operation and mapping out a long term strategy can drain or divert company resources, while hidden fees and other expenses can limit employees’ earning potential and, over time, drain their savings.
To meet these challenges and offload the legal liability associated with many 401K programs, companies are increasingly putting their trust in Fiduciary Investment Managers, qualified advisors who can take a lead role in:
Once upon a time, employers were responsible for the custody, care and safekeeping of retirement plans through “defined-benefit pension plans.” Companies financed a specified monthly benefit based on employees’ earnings, years of service and age and then, once an employee reached retirement age, distributed scheduled payouts for life. Some companies still offer these types of plans.
A good deal for employees? Well, yes, as long as the company is viable. But if companies fail, employees can face retirement without the money they had counted on.
The 70’s ushered in a new strategy for retirement security. The 401K was a “defined-contribution plan” that gave employees the opportunity to save toward their own retirement. Under this model employees could:
Contributions, up to a certain amount, could be matched by employers, with all monies held in an account, invested and protected from loss should the company fold.
In the ensuing years, as 401K plans grew in popularity throughout corporate America, employers and employees made some critical – and unfortunate – discoveries:
Recent changes to legislation have been designed to improve the system, but the reality is this: when employers don’t have access to resources that will help them build and manage an effective plan, and employees don’t have the time, knowledge or interest to effectively direct their investments, individuals are still no closer to a secure retirement strategy.
In 2010, a ground-breaking amendment to ERISA was passed that addresses the resource deficit faced by employers as well as the information deficit faced by employees. The Department of Labor’s 408(b) rules:
As part of their fiduciary responsibility, companies will be required to educate employees about their investment options, provide a diversity of investment options, create a plan that benefits employees and continually review investment options and plan costs.
With the introduction of the new rules, a new solution has emerged that allows companies to provide the best possible plan for employees, while offloading the plan’s fiduciary liability. By hiring a Fiduciary Investment Manager, companies benefit from the expertise of a registered investment advisor who accepts fiduciary responsibility and liability, manages the 401K program and represents employees’ best interests.
With a truly independent advisor running the 401K program, employee participants are no longer limited to the mutual funds of just one fund family or insurance company. Instead, they have access to an unlimited choice of investments and receive the personal attention they need to choose the plan that meets their needs. The advisor can pick the best lineup, monitor performance (and fees) and make changes, as necessary, under constantly changing market environments. And since the plan is service by an advisor, not a broker, plan participants can get much needed individual investment advice.
The good news for companies is they can feel confident they are providing the best possible options for their employees without shouldering the liability associated with plan management and advice. This NextGen 401K plan is probably what legislators had in mind in 1978 and offers a win/win proposition for the next decade of employees and employers.
William Kring, CFP®, AIF®