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No Good Deed Goes Unpunished: The New Reality of Offering a 401(k)

In the 1990s the Little Caesars pizza franchise was one of the most recognized pizza chains in North America and growing. Known for quality ingredients and large family-sized portions, they offered a great pizza at a very family-friendly price. Their focus on quality ingredients and marketing geared towards the ‘Family Meal Deal’ was their key to success. Once new pizza chains took notice and started lowering prices to lure customers away from Little Caesars, it eroded Little Caesars’ market share. In response, Little Caesars was forced to shift their business model from a product-focused model to a price-focused model. Thus, the now famous “$5 Hot and Ready Pizza” and other products offered at a fixed dollar amount. This shift helped Little Caesars regain market share but as a result, they sacrificed quality ingredients and a scaled down pizza-making process.

Today business owners are facing a dilemma much the same as Little Caesars. However, instead of being pressured by other businesses to reduce their costs In order to compete, it’s the U.S. Department of Labor forcing employers to shift how they offer employee benefits, namely their 401(k) plan. The Department of Labor’s Employee Benefits Security Administration (EBSA) implemented new rules in August 2013. These new ERISA rules focus on 401(k) plan fee reporting plus the following requirements and recommendations:

• Fees paid in a 401(k) plan both at the participant level and the plan level must be “usual and customary” for what the market dictates
• Increased requirements for business owners as the plan fiduciary
• Part of ERISA 404(c) compliance in a plan must offer a fund menu consisting of a variety of low-cost passively indexed funds, giving employees access to multiple asset classes

A recommendation to provide plan participants with support/information such as online educational content, interactive retirement planning tools, and access to an investment advisor. As a result of the required changes, business owners are now under an increased level of scrutiny as the plan fiduciary. The business owner and the person (if different) that signs off on the annual Form 5500 recognized as the plan fiduciaries by the Dept. of Labor and must “act solely in the interest of plan participants and their beneficiaries with the exclusive purpose of providing benefits to them; provide a menu of diversified plan investments and pay only reasonable plan expenses.” Quite a big responsibility don’t you think?

Benchmark

To put it plainly, the business owner is expected to be the financial expert for their employees and their employees’ heirs. Unfortunately, the overwhelming majority of business owners are not aware of this enormous legal liability, both in their business and PERSONALLY, with their entire net worth exposed. The increasing number of Department of Labor 401(k) ERISA related audits are resulting in fines, penalties, and repayment of fees to the plan participants. The DOL recently hired 1,000 new auditors as watchdogs to better police these rules. To make matters worse, employees and their heirs are filing new lawsuits against their employers for offering funds with fees in their 401(k) that were considered “excessive” by industry standards. More and more employees are winning. One of the more prominent cases was settled in October of 2013 by International Paper in the amount of $30 million dollars awarded to 70,000 individual workers and former participants’ accounts. Plan participants won another recent case against their employer, Genzink Steel Supply & Welding Co, a West Michigan mid-sized steel and welding company. The lawsuit required the business owner to pay $321,000 to employees after concluding the company breached its fiduciary duties and paid excessive service provider fees to the plan’s third-party administrator. Lawsuits have even gone so far as seeing Fidelity employees suing Fidelity on their own 401(k) plan. Other cases include:

Cigna Corp. paid a $35 million settlement for excessive service provider fees
Lockheed Martin paid a $62 million settlement for excessive fees
Ameriprise Financial reached a $27.5 million settlement for breaching their fiduciary duties
• New Cases in 2016 include: Oracle Corp. and Anthem both alleging excessive fees

The Department of Labor has made it clear, their recommended solution is for business owners to hire an advisor that serves as an ERISA 3(38) fiduciary to share in the ownership and the risk of the 401(k) plan’s offerings and administration. The DOL recommends business owners should hire a 3rd party advisor to conduct a plan benchmark against these new ERISA mandates. A qualified advisor will gather some basic information and provide the business owner with a detailed report identifying any gaps in the plan and solutions to fix those gaps. Conducting the plan benchmark is a prudent decision and shows due diligence on the business owner’s part, especially in the event of an audit or worse, legal actions.

With the changes to ERISA 3(38) a business owner needs to find a qualified third party advisor to provide the independent benchmark that could not be achieved using their current plan provider. Advisors in this market provide the initial benchmark for a nominal fee and only if the plan is found to be out of compliance will they require additional fact gathering to put a plan together for compliance.

Pizza Pizza
With these changes the DOL has forced business owners to do more, spend more, and take on more responsibility all in the name of providing an acceptable 401(k) plan. In reality, it created more liability and exposure for the business owner. Much like Little Caesars, business owners are asked to provide a quality product for less, without sacrificing” ingredients”. Luckily a benchmarked and in compliance 401(k) plan will taste much better in a business owner’s mouth than a $5 Hot-N-Ready Pizza.

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