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Navigating the Hazards: The Risks Faced by Owners and HR Representatives as Plan Sponsors of 401(k) Plans

By: Scott Van Den Berg, CFP®, ChFC®, CEPA®, AIF®, CRPS®, CMFC®,  AWMA®

I have dedicated my life to helping business owners, executives, and families navigate the complexities of wealth. Over my career, I've seen numerous business owners and HR representatives struggle to manage their company's 401(k) plans effectively. This article aims to shed light on the potential risks that you face when assuming the role of a plan sponsor for your company's 401(k) plans, especially when there is not a dedicated fiduciary advisor in place.

The Challenge of Regulatory Compliance

One of the biggest hurdles you'll encounter as a plan sponsor is keeping up with the constantly evolving landscape of regulatory compliance. Being a 401(k) plan sponsor requires you to ensure that your company's plan adheres to a multitude of laws and regulations set out by the Department of Labor (DOL) and the Internal Revenue Service (IRS). Failure to comply with these regulations can lead to penalties, lawsuits, and a damaged reputation.

To navigate this regulatory maze, you need to have a comprehensive understanding of several key areas including: 

  • Fiduciary duties: As a plan sponsor, you are legally obligated to act solely in the best interests of your plan's participants and their beneficiaries.
  • ERISA compliance: The Employee Retirement Income Security Act (ERISA) sets strict standards of conduct for those who manage and control plan assets.
  • Disclosure requirements: There are specific requirements for disclosing plan information to participants and filing reports with the government.
  • Compliance testing: Regular testing is needed to ensure your plan doesn’t discriminate in favor of highly compensated employees.
  • Plan document maintenance: Plan documents must be regularly reviewed and updated to reflect regulatory changes.

The Perils of Investment Selection

Another challenge you might face as a plan sponsor is the selection of appropriate investment options. Your plan's investment lineup plays a crucial role in determining whether your employees will have enough money for retirement. This is a responsibility that carries significant legal risks. Under ERISA, plan sponsors can be held personally liable for losses to a benefit plan incurred as a result of their breach of duty.

When selecting investments, there are several key factors you should consider: 

  • Diversification: You should offer a broad range of investment options to enable participants to diversify their portfolios.
  • Fees: Plan expenses should be reasonable, and all fees and expenses must be disclosed to participants.
  • Performance: You need to monitor the performance of the investment options on an ongoing basis and replace those that consistently underperform.

The Importance of Employee Education

Ensuring that your employees are well-informed about their retirement plan is not only good practice, it's also a fiduciary duty. Poorly informed employees are more likely to make suboptimal investment decisions, which can impact their retirement readiness and potentially expose you to legal risks.

Effective employee education should cover areas such as: 

  • Enrollment procedures: Your employees need to understand how and when they can enroll in the plan.
  • Investment options: Employees should be aware of the various investment options available and how to diversify their investments.
  • Retirement savings goals: Employees should be encouraged to set personal retirement savings goals and understand how their 401(k) plan can help them achieve these goals.

Navigating the role of a plan sponsor can be a complex and daunting task. However, by understanding these potential risks and challenges, you can take proactive steps to mitigate liabilities and safeguard the financial future of your employees. Moreover, partnering with an experienced fiduciary advisor, like our team at Century Management, can provide you with the expert guidance and support your need to manage your responsibilities effectively.

Through our firm’s rich history, we’ve continuously strived to make a positive impact, making sound decisions based on independent thinking, facts, and lessons from the past. We believe in the golden rule, treating everyone fairly, honestly, ethically, and compassionately. At Century Management, we understand small businesses because we are one. 

In conclusion, while the journey of a plan sponsor comes with its share of hazards, it's a role that also offers the opportunity to make a significant impact on your employees' lives. With diligence, proactive risk management, and the right professional guidance, you can help your employees secure their financial futures while also fostering a culture of financial wellness within your organization. It's about more than just mitigating risks—it's about guiding your team towards financial peace of mind, something we at Century Management Financial Advisors have proudly dedicated our careers to achieving.

Century Management is an independently registered investment adviser with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Century Management is also registered as a Portfolio Manager in the Province of Ontario. Past performance is not indicative of future results. The discussions and viewpoints featured are not intended to be investment advice. A full description of our Firm’s business practices, including our Firm’s investment management services, wealth plans and advisory fees, are supplied in our Form ADV Part 2A and/or Form CRS, which are available upon request or at www.centman.com. CM-2023-07-27