Plan Sponsors should assume an active role in building every 401(k) plan participant’s account. It is no longer safe for a retirement committee to assume they are fully satisfying their fiduciary responsibility by simply offering a 3% match on participant deferrals. It is time for plan sponsors to pay attention to detail. Doing so will not only maximize participant account balances – but it will also provide added benefits when negotiating pricing (concessions), investment options and flexible asset structures.
There have been many lawsuits filed claiming fiduciary breach around the topic of plan-related fees. For a quick summary of cases where the topic of Fees, Retail Mutual Funds or Revenue Sharing have been front-and-center see the summary-chart as compiled by the Groom Law Group.
Noting the plethora of lawsuits, what can a plan sponsor do to safeguard their organization and resources?
Plan Structure and Funding Strategies
The TPSU IDEAL Plan can serve as a starting point. The TPSU IDEAL Plan has the following characteristics
- Automatically enroll all new employees
- Automatically enroll employees at 6% of Compensation
- Automatically increase each participant’s annual deferral contribution amount by 1% per year, up to a 12% of compensation.
- Stretch the match (i.e. If an employer is matching 3% of compensation, then consider structuring that same 3% as a 25% match of the first 12 % deferred)
- Add a Qualified Default Investment Alternative (QDIA) such as Target Date Funds or Managed Accounts (so participants are not required to manage their own investments)
What is the Difference?
The difference between a TPSU IDEAL Plan Participant account balance and a traditional 3% deferral employee, over 35 years of plan participation is $706,036.00 – not an insignificant amount!
For a company with 25 employees, the difference translates to an additional $17,650,900.00.
For the company with 100 employees, the difference is a staggering $70,603,600.00!
However, those differences are calculated only on the growth of the in the participant asset base alone. It is not unreasonable to assume that the purchasing power of an additional $17 million or $70 million will equate to – exactly what is at the heart of the aforementioned lawsuits – fees.
Using a prudent plan design and match structure benefits all parties involved; while also building a strong defense within a fiduciary file.
