Common Retirement Plan Mistakes

As someone who has had the privilege of wearing the recordkeeper and third-party administrator hat and the advisory and consulting hat, I have seen the mistakes companies make with managing their retirement plan. This article will share a few of the most common mistakes and discuss ways to avoid them.

1. Not hiring a specialist fiduciary advisor.

The first question you should ask your existing advisor (or any advisor you are considering working with) is, “Are you a fiduciary?” and “Are you willing to establish your role as a fiduciary in writing?”

A fiduciary advisor is always required to act in the best interests of the plan and its participants to decrease the likelihood of conflicts of interest and improper advice. Once you determine the advisor is a fiduciary – and they are willing to establish that in writing – you should find out how many retirement plans they advise and what portion of their practice is dedicated to retirement plans. The rules that govern retirement plans (ERISA) are complex, so an advisor who only dabbles in retirement plans as part of their practice isn’t likely to have a robust understanding of these rules.

2. Using one provider for all services.

This is not an indictment on bundled service providers; some do a good job. However, I've come across retirement plans that use one provider for recordkeeping, third-party administration, investment selection and support, advisory, and participant education. In my experience, these arrangements can sometimes lead to conflicts of interest and a false sense of security that the provider is “taking care of everything.”

Even if the provider says they are a fiduciary in some capacity and establishes that in writing, what are the realistic chances they will fire themselves if they underperform, charge excessive fees, or neglect to perform the tasks they were hired to do? It’s unlikely they would, so it’s up to the plan sponsor to monitor the provider.

The most common reasons companies decide to use a bundled provider for all their retirement plan services is that they are told this arrangement is less work and more cost-effective, OR they receive rebates or incentives for other things the service provider offers like payroll, commercial lending, health plans, etc. These are misleading or improper reasons to select a bundled provider.

Hiring service providers that focus exclusively on third-party administration, investment management, or recordkeeping individually may be less burdensome for the retirement plan sponsor. Further, compliance failure can be costly. Hiring a third-party administrator specializing solely in plan compliance may result in fewer compliance failures.

There are no real cost efficiencies with a bundled service provider in my experience. Choosing a service provider because they already do your payroll, commercial lending, health plan, etc., violates your duty as a plan fiduciary. Your decisions must be based on merit. Making a decision that impacts the employees in your retirement plan for a reason that isn’t solely in your employees’ best interests can dangerous and harmful to your employees and your organization.

3. No formal oversight structure or prudent processes in place.

Many smaller (and some larger companies) don’t have a formal retirement plan committee. Establishing a committee and outlining individual roles and responsibilities for committee members is a best practice for several reasons.

Instead of having one person responsible for all plan-level decisions, a committee of 3-7 members can share the plan oversight responsibilities. This fosters better discussion and decision-making. It also creates greater alignment around the decisions and direction of the plan – and it helps keep all committee members accountable for their responsibilities. Some small companies may not see the need for a retirement plan committee, but I encourage all plan sponsors to have a conversation with their advisor to determine if a committee makes sense.

As a result of not having a formal retirement committee, and in some cases where there is a committee already established, the company sponsoring the retirement plan doesn’t have a process for plan oversight. This can lead to poor plan performance, lack of employee engagement, excessive fees, compliance failures, and more. A company should establish a committee and investment policy statement, set regular meeting times, and create processes that follow industry best practices to oversee the plan.

You may be thinking this is a lot of additional time to spend on your company retirement plan. And yes, this may create some extra work, but companies that are diligent and thorough in their oversight structure often save time in the long run. This is because fees, investments, compliance processes, payroll, and plan and participant success metrics are reviewed consistently, and communication with the service providers is open and ongoing. This leads to lower fees, fewer compliance issues, greater alignment with service providers, increased confidence in your retirement benefit, and most importantly, better outcomes for your employees.

A well-constructed and managed retirement plan has the potential to provide many benefits to both the company and its employees. There's value in committing the time and resources to offer a high-performing retirement plan. Contact us to learn how we can help you create positive outcomes.