Big 401(k) Changes: How The Modifications Will Impact Your Company’s Plan
On April 8, 2016, the Department of Labor (DOL) passed a new rule that, “affects how investment advice is provided to every 401(k) plan, every IRA, and every rollover or distribution to or from either,” according to a U.S. Chamber of Commerce issue brief. If you are responsible for your company’s retirement plan or sit on an investment committee then this 401(k) change directly affects you.
Let’s examine how these changes impact you and how you can be ahead of the curve:
1. YOUR ADVISOR RELATIONSHIP
What may surprise many plan sponsors is that, prior to the issuance of this regulation, most individuals that sold investments to retirement plans were not fiduciaries, and thus had no duty to act in the best interest of their clients. An advisor employed by an insurer, mutual fund or brokerage firm was generally not subject to a fiduciary standard.
Going forward, the rule change to 401(k) and other retirement plans will require those providing investment advice (ex. your financial advisor) to retirement plan sponsors and participants, to follow the fiduciary standard of conduct. That means your advisor must act in your “best interest” and if they are not doing this, they must disclose any potential conflicts of interest.
Seems like common sense, right? However, up until now this has not been required.
Some questions to ask your current advisor:
- Are you conflicted?
- Are you a co-fiduciary to our plan?
- Are you qualified to act as a co-fiduciary?
- How many retirement plan clients do you have?
- With the new DOL rule, should we be aware of any conflicts of interest?
- What is your compensation?
- Is your compensation levelized?
- Could you provide a list of your services?
- How is your firm training and educating you on the new rule, in order to best service your plan and reduce your fiduciary risk exposure
2. YOUR INVESTMENT COMMITTEE PROCESS
In the 401(k) world, the process that got you to your decision might be more important than the decision itself.
If you are a plan sponsor, plan administrator, trustee, and/or are involved in the decision making process for your company’s retirement plan, chances are you are a plan fiduciary. With that, you already have a fiduciary responsibility to act prudently and with undivided loyalty to the plan and to its participants.
Here are a few questions to consider:
- What processes do you have in place to confirm that your decisions are in the best interest of your plan and your participants?
- What are you doing to document clearly and objectively that every fiduciary decision meets the new standards?
3. TERMINATED EMPLOYEES AND MANAGEMENT
We expect this rule to have a significant effect on rollovers. Since the rule makes recommendations of rollovers a fiduciary act, this might cause a behavioral shift and a slowdown with 401(k) distributions into Rollover IRAs. Thus, terminated employees might keep their retirement assets in the company’s plan for a longer period of time.
This could make it difficult for your Human Resources team to keep track of terminated employees as they move from house to house, career to career, and through other life changes. Communicate with your HR team about how they currently manage terminated employees and verify that they have a thorough, organized, and maintained recordkeeping system. Additionally, ask your retirement plan service provider how they expect to keep track of employee movement to help alleviate the burden on your staff.
While these changes will directly impact your company’s retirement plan and increase the importance of plan documentation, it’s okay. This rule change is for the benefit of the retirement investor. It will raise the advisor standard to genuinely act in the best interest of their clients. At TrueNorth Retirement Services, our people have been serving as fiduciary advisors for over 20 years. We have invariably had our client’s best interest in mind. This is business as usual for us and we’re proud to continue servicing our clients as fiduciaries.
As the retirement plan industry works to comply with the new rule, you will see a variety of news articles and information about the good and bad fallouts from the changes. Remember, at the end of the day, a company’s retirement plan is a vehicle that enables your employees to navigate from employment to a comfortable retirement. As a plan fiduciary it is your role to assist them to the best of your ability to achieve a successful outcome.
Mike Haynes, TrueNorth Retirement Services
Mike’s primary focus at TrueNorth Retirement Services is on providing better retirement plans to small and mid-sized companies in Utah. Believing that the retirement plan industry has failed the 401(k) participant, Mike’s objective is to bring sophisticated academically-based investment methodologies at a lower cost to companies, enabling them to support their employees’ retirement goals and comply with the law.