In a nutshell, the goal of a pension plan is to help your employees put aside money for their retirement. This can be done strictly on an employee deferment system, or you, as their employer can make contributions to help them reach their retirement goals. The problem is, however, with Americans living longer and the need for current resources, most of your employees will not be able to put away enough money to meet their retirement goals. This is nothing new. The pension fund industry has been historically challenged with generating sufficient returns to keep up with life expectancy and cost of living changes. While 2020 and 2021 were good years overall for the stock market, 2022 has dramatically suffered due to high inflation, supply chain shortages, and federal interest rate hikes. This has caused plans to consider broadening their investment choices and even asset classes in an effort to improve overall returns for their participants. On the flip side, there has been increased pressure on plan administrators to be more socially responsible in their investment options with increased pressure by participants for plans to adopt environmental, social, and governance principles (“ESG”).
When you think about it, through your company’s pension plan, you are entering into a legally binding contract to appropriately invest pension funds entrusted to the plan by your employees. As a plan sponsor, you have a fiduciary responsibility to ensure that you fulfill your legal obligation, otherwise your staff can sue you for breaching your contract with them. I realize this may seem counterintuitive … you are trying to help your staff save for retirement and if they don’t have enough when retirement comes, they can potentially sue you for not making the right decisions on their behalf. Yet certain jurisdictions (such as New York City) may require you to have a plan and even if it’s not a requirement, good luck attracting and retaining staff without one. Kind of that rock and a hard place dilemma.
The number of class-action lawsuits aimed at participant-directed 401(k) and 403(b) defined contribution retirement plans has been on the rise, with employees alleging that plan fiduciaries breached their ERISA (Employee Retirement Income Security Act) duties in ensuring that plan investments and overall options were appropriate. Many of these lawsuits have focused on the plan sponsor’s lack of appropriate monitoring of plan fees, investment alternatives, and/or didn’t offer appropriate investment options or classes and as a result, plan participants investments suffered (or were not maximized). In January of this year, the Supreme Court made it easier for these lawsuits to gain traction. In Hughes vs Northwestern University, the Supreme Court overturned a lower court decision, basically saying that it is the responsibility of a plan’s fiduciaries to conduct their own independent evaluation of plan investment options to determine which plan investments may be prudently included in the plan’s menu of options. If the fiduciaries fail to remove an imprudent investment from the plan within a reasonable time, they breach their duty. This definitely makes it easier for plan participants to have their day in court if you are not meeting your fiduciary responsibility.
So what should you do in order to help your employees meet their retirement goals and still ensure that you’re maintaining your fiduciary responsibility as the plan trustee/sponsor?
1.) Implement plan provisions to help your staff save:
Many plans take a passive approach to employee enrollment, waiting for employees to come to the realization that they need worry about themselves when it comes to retirement. Adding an automatic enrollment option to your pension plan may be a much better option. An automatic enrollment provision does just that, it automatically enrolls employees into the plan when they become eligible unless they affirmatively opt out. This gets your employees into the plan and putting money aside for retirement as soon as they can. You can couple this with an auto-escalation provision that increases the percentage an employee puts away each year up to a predetermined level … for example all employees are auto enrolled at 5% with an auto-escalation of 1% per year, capping out at 12%.
2.) Educate your staff about plan and investment alternatives:
Most employees do not understand their investment options or their pension plan in general. As a result, they are paralyzed into doing nothing, especially if you offer a broad base of investment options. By working with your investment advisor to come in regularly throughout the year to educate your staff about investing, investment options, and your plan, you will be giving your staff the tools they need to make better choices and increase the likelihood they will meet their retirement goals.
3.) Review your investment options on a regular basis:
Investment performance of mutual funds change on a periodic basis. This occurs because individual money managers change, portfolio economics change, funds grow, etc. A top producing mutual fund one year, may completely underperform the next. What’s more, different mutual funds have different levels of risk, even if they have the same strategy (such as large cap growth fund). What’s more, there are different types of shares of mutual funds (retail vs. institutional) and different mutual funds come with different expense charges. This can get very complex, but it is also extremely important. You should be meeting with your plan’s investment advisor on a regular basis (say quarterly) to review the various investments in your plan and determine whether these investments should remain in your plan, be put on watch, or replaced within the plan. This will help to ensure that your employees consistently have access to appropriate investment options.
4.) Stay in compliance with regulations:
Regulations change on a regular basis with respect to pension plans, and even when they’re not changing, your business may be. This could result in you going out of compliance with your plan provisions. You should assign someone on your staff to be responsible to ensure that you remain in compliance with plan provisions. The IRS has outlined plan sponsor responsibilities that is a good starting point to ensure you’re compliant.
It is important to communicate with your employees throughout the year and make sure if they have questions or concerns, they know who to go to and they feel that their issues and concerns are being heard and addressed.
Document your policies with respect to the above and document all your meeting to review your investment alternatives to support that you are appropriately meeting your fiduciary responsibility with respect to your pension plan.
Having a pension plan and helping your employees meet their long-term retirement goals is great for both you and your employees, but you need to remember having a plan comes with certain fiduciary responsibilities. Ultimately, you are responsible for ensuring the plan is operating effectively, that investments are appropriate, that fees are not excessive, and that you are following your plan document and IRS and Department of Labor regulations. While this may seem like more than you bargained for when you initially set up your plan, implementing procedures and controls, and aligning yourself with trusted advisors that are familiar with the regulations who can help you along the way, can significantly mitigate your risk. This will help you better focus on why you started the plan to begin with … to help make a difference in the lives of your staff, who invest in helping you operate effectively on a daily basis.
Crystal is a member of Cerini & Associates’ audit staff where she focuses on serving organizations across a wide spectrum of industries, including nonprofit, technology, and contractor clients. She has experience performing assurance work and outsourced accounting work, as well as preparing tax returns. Crystal has extensive knowledge surrounding the operations, controls, and environment of the sectors she focuses on. She brings her expertise, diversified background, and helpful approach to all of her engagements.