401k Toolkit

If you currently sponsor a plan, or considering it, your level of knowledge will have a direct impact on investment returns and liability exposure.  We’ve put together our own Employer 401k for Dummies, if you will, to help educate and inform you.

Our goal is that you will understand the following:

  1. The difference between Open Architecture and Closed Architecture Plans.
  2. Your fiduciary obligations.
  3. How to mitigate your liability and reduce costs.

Open Architecture vs Closed Architecture

Open architecture 401k means the record keeper, investment manager(s), and custodian are all separate entities.  All fees are listed up front and there are no hidden costs. The participant fees are fully disclosed as a line item on the participant’s statement. Fees are not “hidden” inside the investment returns.  The record keeper has the ability to trade virtually any mutual fund or exchange-traded fund (ETF), and has a stable of custodians/trustees from which to select.

Closed architecture means the entities mentioned are not separate.  Fees are not fully disclosed, and revenue sharing among these entities (sub-TA and 12b-1 fees) occurs at your expense.  Nearly all plans offered through an insurance company or a mutual fund family are closed architecture.

Important Questions to Ask about Your 401k Plan

1. When was the last time you have met with your financial advisor?

2. Is he or she a fiduciary and completely fee-only?

3. Do you have an investment policy statement and the minutes from your last investment policy committee meeting?

4. Are there 12b-1, sub T/A or finders fees being paid. If so, to whom and for what services?

5. Do you have a diversified investment selection?


Fiduciary Obligations

As the employer, you need to understand that you are the fiduciary of the plan as defined by Employee Retirement Income Security Act (ERISA).

These responsibilities include:

• Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;

• Carrying out their duties prudently;

• Following the plan documents (unless inconsistent with ERISA);

• Diversifying plan investments; and

• Paying only reasonable plan expenses.

Lawsuits are flourishing.  Last year, the Department of Labor (DOL) investigated 3,500 civil suits, with 4 out of 5 resulting in $1.2 billion in fines.  The risk for employers  comes hidden fees, revenue sharing funds and non-diversified plan investments.

   How to Limit Your Liability

  • Hire a co-fiduciary to share the responsibility and perform the required ERISA due diligence.

  • Have an open-architecture plan with a transparent fee structure and diversified plan investments.

  • Hire an outside Registered Investment Advisor to oversee investments and educate participants.


Useful Potty Reading Resources

10 Signs Your 401K is Garbage Department of Labor Guide to Fiduciary Responsibilities Why You Are Always On The Hook for Liability Misconceptions Employers Have About Fee Disclosure 10 Signs Your 401k is a Clunker