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Retirement plans come in all shapes and sizes. You may think your plan is too big (or too small) to share the same concerns with smaller (or larger) plans. It turns out, however, there’s a lot in common between really large and really little 401(k) plans.
This is not to say there aren’t differences between big and small companies when it comes to their 401(k) plans. For one thing, smaller companies don’t have the same staffing capacity. This puts a squeeze on their ability to address critical matters as ERISA places similar requirements on all plans, no matter what their size.
So, yes, small company sponsored plans do have a substantial issue that their larger brethren do not. “They are not able to spend the appropriate amount of time on the plan given their limited resources,” says Preston Traverse, Partner-Mid Market Solutions Leader at Mercer in Boston.
While you don’t want to understate this difference, it becomes more significant when you realize the Department of Labor won’t necessarily give them a pass just because they’re short-handed. It is therefore all the more important to understand how large and small 401(k) plans overlap.
Here are three critical concerns all 401(k) plan sponsors have:
Fiduciary Duties and Liability
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As mentioned, ERISA rules all plans. This means, if you sponsor a plan, you are a fiduciary. There are duties and obligations that go along with that. “The fact is,” says Traverse, “401(k) plan sponsors have the same fiduciary and other responsibilities, irrespective of their size.”
This is the primary advantage large companies have over smaller ones: they can hire staff to handle the workload associated with the plan. This includes monitoring the plan service providers. Executives in smaller companies have to complete the same tasks. They just don’t have the help.
“Oversight and maintenance of the plan is always a concern no matter the size,” says Jason Field, Financial Advisor, CFP, Van Leeuwen & Company, located in Princeton, New Jersey. “Making sure all fiduciary duties are fulfilled by the proper parties as well as compliance and reporting are all key concerns that have to be addressed at least annually.”
Costs & Fees
Unlike fiduciary responsibilities, where there are no compromises, some leeway exists when it comes to costs and fees. It’s clearly acknowledged that larger plans have the benefit of economies of scale. They possess the raw bulk to negotiate more favorable fee rates.
Still, on the margin, costs and fees remain an issue for both large and small plans, if only on a relative basis rather than an absolute one.
“No matter the size of the plan, large or small, cost is always a key concern,” says Josh Simpson, a financial adviser with Lake Advisory Group in Lady Lake, Florida. “The larger a plan, the more likely it is that a larger company will want to manage the plan giving the sponsor more leverage to negotiate more favorable terms. But even small plans can negotiate their rates and attempt to play multiple money managers against each other to reduce their fees.”
Education & Communication
The company sponsored 401(k) represents the ultimate in logistics. Think of all the different moving parts and players. Vital to the success of any such operation are open and reliable communication lines. These messaging systems provide two important pieces to the ongoing puzzle that many employees see as their 401(k) plan: updates and instructions.
“The most critical concern for small plans that is the same as large plans is the overall education and communication of the plan specifics to participants,” says Nicholas Tzoumas, President of ClearscopeHR based in New York City. “All plan sponsors, regardless of size, have a fiduciary duty to communicate plan eligibility and features to participants so they can make proper decisions.”
Central to this information is education. You can break down education into two objectives. The first involves getting the participant up to speed with all the bells and whistles the plan offers.
Simpson has spoken with many plan sponsors who tell him they are concerned about “education for enrollees in the plan.” He says, “They want to make sure that someone will show up at least once per quarter to answer any questions their employees may have and help to explain the benefits of the plan to employees who may not be enrolled yet.”
The second aspect of education, and one that increasingly takes up the bulk of the education process, deals with providing plan participants with a basic knowledge and understanding of financial literacy.
“Plan sponsors seek to improve the financial wellness of their employees,” says Paul Swanson, Intermediary Distribution at CUNA Mutual Retirement Solutions in Philadelphia. “Middle- and lower-income workers are not adequately preparing for retirement and have other financial stresses such as student loan debt, child care, education savings, caring for elderly parents, living paycheck to paycheck, etc. Financially stressed employees are less productive. This is a universal problem. It’s not unique to plan or company size.”
Indeed, a survey from Lincoln Financial Group
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showed that 31% of small business owners offer retirement benefits to prepare employees for the future, while 28% say it’s to retain existing employees.
Sharon Scanlon, Senior Vice President at the Lincoln Financial Group in North Reading, Massachusetts, says, “Both small and large plan sponsors are focused on the well-being of their employees. One major way that retirement plan sponsors can help support the overall financial wellness of their employees is to make it easy for them to get a holistic picture of their finances, and to provide solutions that make it easy for participants to save more—whether that’s through an easy-to-navigate, mobile optimized website or by connecting one-on-one with someone to learn more about their retirement plan.”
While you might be tempted to believe large and small 401(k) plans cannot possibly have similar concerns, the more you look into them, the more alike they seem.
And this common ground might offer innovative solutions where you least expect to find them.