The SECURE Act, which was enacted into law in 2019, opened the door to many small businesses sponsoring a retirement plan. The law offers tax credits and other enhancements that encourage organizations to offer a retirement plan.
Small businesses that take advantage of the SECURE Act can offer a major employee benefit that can improve recruiting and retention. However, a new retirement plan entails new responsibilities — specifically, fiduciary responsibilities.
The Employee Retirement Income Security Act of 1974 (ERISA) sets legal fiduciary standards for plan sponsors and other plan fiduciaries, including advisors.
Finding the best way forward
So how should new plan sponsors tackle their fiduciary responsibilities? First, they need to remember ERISA responsibilities are ongoing: Plan sponsors simply can’t set it and forget it. The plan sponsor has an ongoing responsibility to monitor the plan’s performance and expenses — every decision has to be in the best interest of plan participants.
Employers may miss deadlines or other work-related duties because of the sheer number of activities they’re doing to keep a business running. But they must comply with fiduciary responsibilities and have a system that ensures they meet standards. Such a system includes a regular review of plan administration and investments, and documenting all fiduciary decisions and activities.
An Investment Policy Statement (IPS) can help provide written clarity on the retirement plan and guide plan sponsor actions and responsibilities.
Paying mind to plan performance and fees
New plan sponsors must also monitor fees for the plan, as well as plan performance. This entails understanding what are considered “reasonable” fees and whether the plan is getting good value in return. The plan sponsor must know — and demonstrate that knowledge — what are reasonable fees for organizations of similar size in the same industry.
There are three components or levels of fees: Those charged by the investments themselves; recordkeeping and administrative fees for the retirement plan overall; and consulting or advisory fees charged.
The same standard applies to the investment performance. The investment options need to be measured against a relevant benchmark over a meaningful time frame.
Consider outsourcing fiduciary responsibilities
It’s also important that plan sponsors understand and follow the “prudent expert rule.” This ERISA standard is similar to but more stringent than the commonly referred to “prudent person” rule, which states that a fiduciary must act in the interests of the participants and beneficiaries “with the care, skill, prudence, and diligence that a prudent man would under the circumstances.”
ERISA applies an even higher standard: The prudent expert rule states that an ERISA fiduciary will be judged as a prudent professional investment manager who is familiar with retirement plans, not as a prudent person.
As a result, employers may want to consider hiring an expert to help meet fiduciary standards. As noted above, the plan sponsor must meet legal standards to ensure he or she acts in the best interests of plan participants in the manner of an expert.
The U.S. Department of Labor states that if plan fiduciaries lack expertise, they must find an expert to provide advice and guide decisions. For many small businesses in particular, it may make sense to outsource that expertise and much of ongoing responsibilities to a fiduciary advisor.
Contact HUB to speak to a retirement specialist and learn more about HUB Retirement Services.
This content is for general information only and is not intended to provide investment, tax or legal advice or recommendations for any particular situation or type of retirement plan. Please consult with a financial, tax or legal advisor on your own particular circumstances.
HUB Retirement and Private Wealth employees are Registered Representatives of and offer Securities and Advisory services through various Broker Dealers and Registered Investment Advisers, which may or may not be affiliated with HUB International. Insurance services are offered through HUB International, an affiliate.