Nobody opens a small business with the dream of being a part-time bookkeeper. Unless, of course, your business is bookkeeping.
Same with tax-filing deadlines and the myriad legal and
insurance issues that can pop up in any industry.
You probably started your business because you love caring
for your patients or building beautiful homes. Maybe you own a flower shop or a
family restaurant.
So why are you the fiduciary for your company’s 401(k) plan?
Back when you started your plan your intentions were good.
You needed to sock away tax-advantaged income for your own retirement.
Attracting and retaining good employees with a 401(k) plan was a side benefit,
something you could offer besides cash and health insurance.
You probably hardly remember the legalese in all those
initial plan forms. Here’s a reality check: If you don’t know who the fiduciary
is, that’s a red flag. It’s you, the business owner.
Fiduciary is a word that many use lightly or incorrectly. But it’s a real thing, and the consequences of misunderstanding it are as real as letting your payroll slide into disarray, failing to pay taxes or deciding to represent yourself in a tough contract negotiation—don’t go there.
If you’re not sure, ask yourself a few basic questions:
Would you feel comfortable saying you’ve done the research to show the
investments in your 401(k) plan are “prudent”?
Do you have written procedures for selecting investments?
Are you acting in accordance with your plan’s rules? Have you consulted a
qualified attorney about any of this?
The hair is standing up on the back of your neck, isn’t it?
There’s a lot of weighty stuff in the word “prudent” alone.
Unsurprisingly, legal cases against small business 401(k) plans are starting to
flood the courts.
Employees and former employees are asking their bosses to
explain why their investments are falling short of expectations.
And that’s just the most basic role of a true plan fiduciary—running the investments. Another huge part of the job is making sure that your plan investments are reviewed periodically (at least every three years) and that the review process is rigorous.
It’s time-consuming and requires a level of expertise most
small businesses simply lack.
At a minimum, having a consultant review your plan for
benchmarking purposes can insulate you somewhat from legal risk. But now comes
the real grunt work: Reviewing fees, filing paperwork on time and providing
investment education to your employees on a regular basis.
If this is starting to seem like something a specialist
should do, that’s because it is something a specialist should do. Most large
companies have highly salaried in-house financial and legal staff just to
oversee retirement plan details, crossing t’s and dotting i’s all year long.
Get the checklist
Opening a small business doesn’t absolve the owner of these
same responsibilities. Yet retirement plan providers often neglect to
illustrate the importance of these tasks.
Form 5500s must be filed, participants should have written
descriptions of the plan and any modifications, employees must get benefit
statements, fee disclosures made, investments prudent and diversified, and many
more technical points.
If you’re not sure where to start, consider printing out
this fiduciary checklist.
Let’s say you manage to do all this right and get the right
help. Yes, your employees can still sue you if they aren’t happy with the
results of their retirement investments.
Markets have a way of declining every so often and that can
generate a rash of lawsuits from near retirees who feel it’s your fault stocks
have fallen at the wrong moment for them. But it will be much harder to prove
you acting wrongly if you check all the fiduciary boxes.
Doing that in a cost-effective way takes expertise, experience and time—a valuable commodity small-business owners should “buy back” every chance they get.
Amanda Thurman helps small businesses realize their 401(k) plan potential through Rebalance’s Better K. Follow Amanda on LinkedIn or Twitter @Rebalance360.