A Tale of Two 401(k) Issues

Employers – 401(k) costs are an issue

The news is full of lawsuits against employers (owners, executives, CFOs and HR managers) who sponsor retirement plans because fees, services and investment options have not been properly and actively monitored by the trustee(s). The trustee to a retirement plan is a fiduciary and it’s the trustee’s duty to have a process in place to monitor the retirement plan. Here are four reasons why creating a process and conducting a fiduciary audit should be a top priority.

First, as a fiduciary to the company’s retirement plan, the trustee is personally liable. The trustee must monitor service providers to ensure fees are reasonable. One of the best ways for a trustee to demonstrate they are monitoring the plan is to complete a third-party detailed plan, audit that benchmarks all aspects of the retirement plan against plans of a similar size.

Next, many companies implement a retirement plan with the purpose of helping employees reach their retirement goals. Sometimes, recordkeeping, custodial and investment fees can make it more difficult for an employee to retire with sufficient savings if the fees are eating away at their savings. The law requires employers to ensure that all fees are reasonable, and a third-party plan audit discloses if they are reasonable and provides full disclosure of who is being paid what.

Further, a third-party plan audit analyzes the services that are being delivered (or not) by the various service providers/advisors. Not all providers/advisors are created equal. Some have extremely high service models, some have advanced technology, others simply get the job done, and sadly, some just don’t show up once the plan is in place.

Many employers don’t even know what to expect from service providers. A third-party plan audit measures typical services that each service provider should be providing so that the trustee knows what to expect from the service provider. It also determines if there are any overlaps in services so that the trustee can negotiate reduced fees from the service provider(s).

ProVise offers a 401k fiduciary audit to trustees with this guarantee: if the audit doesn’t find enough annual savings to pay for the audit, we will refund the audit fee in full.

Reducing the trustee’s personal liability, saving the company and participants’ money, and improving the services being received should be a top priority. If ever questioned about the fiduciary process through a lawsuit or DOL/IRS audit there is no better way to demonstrate a fiduciary process than through a third-party plan audit.

With ProVise you have our guarantee that the audit will find savings that pay for the audit or your money back. Why wait?

Participants – What to do at retirement?

When you leave an employer and move to another, or retire, what do you do with your 401k? Most 401k participants think that the best thing to do is to transfer to an Individual Retirement Account (IRA). But that may not be the best alternative.

Each 401k participant generally has four choices:

1. Rollover to an IRA
2. Stay with the former company plan
3. Move to the new employer plan
4. Take a lump sum

Each choice has pluses and minuses, and you should consult with your tax and financial advisors. There is no rule of thumb. Every situation is different and needs to be carefully analyzed. Some of the variables to consider include:

1. Costs
2. Investment choices
3. Services provided
4. Age
5. Employment status
6. Creditor protection
7. Required Minimum Distributions (RMDs)
8. Estate implications
9. Advisory services

Taking a lump sum is discouraged since you will likely have automatic withholding for income taxes at a 20% rate. Some investors take a lump sum to pay off debt. Generally, this is not a good idea. A good reason to take a lump sum, however, is where you have highly appreciated company stock in the 401k plan. In taking a lump sum of the stock, you will pay ordinary income tax only on the original cost of the shares, and if you hold the shares for at least one year, then the gain in the stock will be taxed at a capital gains rate.

In making a decision between staying with the old plan, or rolling to the new plan, it is often one of simplification and convenience. If you are separated from service and are over age 55, but under 59 ½, you can take money from your 401k without incurring the 10% premature withdrawal penalty associated with an IRA.

The advantages of an IRA rollover include:

1. More investment choices
2. Use of a stretch IRA
3. Consolidation of funds
4. Greater Required Minimum Distribution (RMD) flexibility
5. Use for charitable donations
6. Estate planning

The negatives to the rollover include:

1. Possible higher fees/commissions
2. Potential inappropriate products being sold by an advisor who is not a fiduciary
3. Potential lack of creditor protection (not generally an issue in Florida).

If you find yourself facing this type of decision, contact us for a fiduciary (your best interest) opinion for a no-obligation initial discussion?