Fear of the Unknown
When I was a kid driving through mountain passes scared me half to death. I remember skipping out on a few opportunities to go camping with friends or family because I was terrified of driving near the edge. Because I was young, I could not see the edge of the road through our car window. All I could see was the steep ravine as we drove up the mountain, and I wasn't 100% sure my dad could see this impending doom since his steering wheel was on the opposite side of the cliff.
I feel like many 401K plan sponsors and administrators feel the same way about their 401K plan. As I have talked to plan sponsors and plan administrators of 401K plans, one of the most common fears is not knowing if they're doing everything correctly. Most plan administrators I talked to didn't decide to be the administrator of the 401K. Often the plan sponsor or administrator is assigned that duty with no formal training.
What's So Scary?
Some plan sponsors have heard of the fines and fees from the mismanagement of a 401K plan. Their fears are justified since there can be some pretty hefty fines that come from not following through with fiduciary responsibilities. Some of the penalties accrue daily. So what's the first step in making sure you have a good process of managing your companies 401K?
What's My Role?
It can be complicated to play a sport when you don't know what position you're playing or what role others are playing. Are you supposed to throw the ball? Are you supposed to catch the ball? Are you supposed to block for the runner? You need to know your role, like playing sports or being involved in any other type of team-based approach or activity.
When it comes to 401K's, there are generally two types of plan fiduciaries. There are named fiduciaries, and there are unnamed fiduciaries. A named fiduciary will appear in the plan document. An unnamed fiduciary takes on fiduciary responsibilities because of the role they play in managing a plan.
Many plan fiduciaries don't know they are plan fiduciary. The most common misconceptions I come across with plan sponsors and plan administrators is they believe the record keeper is the plan fiduciary or the advisor is the only fiduciary on the 401k plan. It's essential for those involved in managing the 401k plan to understand the roles of those involved in the retirement plan. It's critical for people involved in the 401K plan to know if they are a fiduciary or not.
What’s the First Step?
A great starting place for those managing their company's 401K is taking an inventory of those involved in the 401K, whether they act in a fiduciary capacity, and receive an acknowledgment that they know their status in the management of the 401K. A competent 401k advisor can help you do this.