Five "Best Practices" for Employer Retirement Plans

By Daniel J. McGee CRPS is a Vice President for Business Development - Retirement Services with the Principal Financial Group. Dan is active in working within the consultant, TPA, RIA, wirehouse and independent broker/dealer channels. You may contact Dan at mcgee.dan@principal.com.

There are many considerations which employers have to deal with when they sponsor a corporate retirement plan. The most popular plan today is the 401k, named after the section in the internal revenue code where it is referenced. The typical 401k allows employees to defer a portion of their pay, pre-tax and generally, the employer matches a portion of the employee's savings.

From the employer's perspective, implementing the retirement plan is just the first step. We utilize five key "best practices" with our clients to use as guide to ensure we have a comprehensive and competitive retirement plan.

Best Practice #1 - Define who the plan fiduciaries are, understand their responsibilities and implement processes to deal with plan requirements.

Often, many executives at small and medium size businesses don't necessarily realize they are plan fiduciaries. In addition, retirement plan and/or investment committee members are often fiduciaries as well. A fiduciary is anyone who has "discretionary" control over plan assets. This includes, but is not limited to, individuals involved in choosing the plan administrator and other plan fiduciaries as well those involved in deciding what investments are offered to employees.

Each plan should identify who the plan fiduciaries are. ERISA places a number of duties on plan fiduciaries and imposes joint and personal liability in the event any of these duties are breached. In other words, plan fiduciaries (company executives, committee members, etc.) are personally liable as fiduciaries of the retirement plan. Their personal assets are at risk. There are several things an employer can do to help minimize their fiduciary liability including: implement and maintain an investment policy statement; annually benchmark the retirement plan (particularly with respect to plan expenses); implement a coordinated employee education plan; and, consider outsourcing their investment fiduciary responsibility to an "investment manager."

Best Practice #2 - Maintain a diverse set of investment offerings and provide employees with structured/pre-set portfolios.

Developing a diverse menu of investment offerings is the place to start in minimizing fiduciary obligations. There are many reasons for this, but one surrounds the uncertainty of the investment markets. It is very difficult, if not impossible to determine what asset class (stocks / bonds), what investment style (growth / value) or what investment manager will do best in any given year. Anyone can "Monday morning quarterback." Everything is 20/20 in the rearview mirror. In order for employees to be able to construct a diversified portfolio, a diversified menu of investment offerings must be available. Plan participants can't make good decisions unless plan sponsors do.

The prudent employer should also consider adding pre-set portfolios for employees. Why? Because many employees, including executives, don't have the time, knowledge or inclination to implement a custom investment strategy. Therefore, making pre-set portfolios available helps the employee with their investment strategy and helps to ensure they have a diversified and disciplined investment approach. Only then will they obtain peace of mind and be on their way to a secure retirement.

Best Practice #3 - Education and Communication

Generally speaking, employees that are participants of a 401k plan are most frustrated with the lack of education or communication. The 2001 Principal Well Being Index™ found that 76% of workers are not confident with their retirement plan preparations. Plan Sponsor Magazine, July 2001, indicated that 85% of all investors would prefer to have someone else do their investing. These numbers have not changed in recent years.

Employees need to understand not only the importance of a diversified portfolio (in order to deal with market uncertainty / market risk), but they also need to understand the importance of saving. The fact of the matter is that many employees are under funded when it comes to adequate retirement savings. People need to save more and invest more wisely. Employers can facilitate this learning through a comprehensive and honest education/communication program -- honest in the sense of adequately demonstrating the needed savings levels for retirement security.

Best Practice #4 - Assist executives in dealing with the limits of qualified retirement plans.

Many employers implement supplemental retirement plans to deal with the contribution limitations within qualified retirement plans like the 401k. Executives are limited in three simple ways; income which can be counted, dollar amount of maximum salary deferral and by the amount that lower paid workers on average contribute to the plan. Left to just the qualified plan, many executives would not have an adequate nest egg at retirement.

Executives or higher paid workers need a specific and integrated savings and investment strategy to ensure they have saved enough to replace their pre-retirement earnings. This includes Social Security, employer retirement plans, private savings and non-qualified/deferred compensation plans. Employers should consider these plans not only as a means to help the executive with their retirement planning in a tax advantaged way, but also strategically as an additional way to attract, retain and reward key employees.

Best Practice #5 - Maintain and Monitor

The employer's work doesn't stop upon implementing a retirement plan. The plan, just like a business plan, needs to be evaluated and monitored on an ongoing basis. The investments need to be reviewed, employee appreciation and satisfaction needs to be monitored and plan design and plan expenses need to be evaluated.

Employers can partner with retirement plan professionals to assist in the maintenance and ongoing evaluation of their plan. Success should have plan fiduciaries protected, employees educated, plan performance elevated and the plan appreciated.

Other articles by Daniel McGee: Approach Your Retirement Plan Like You Approach Your Business and Opportunity Knocks.

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