Yes, we know life isn’t easy for the casual 401(k) plan sponsor, and, face it, the vast majority of them are “casual.”
Not by choice, but by the nature of the real world. Many company executives, especially those in smaller firms, need to keep their focus on their business. Quite simply, they don’t have time to become 401(k) plan experts. That’s why they hire the vendors they hire.
It’s like many of us. We don’t have time to become car experts, so we bring our vehicles to mechanics when we require expert work. Unfortunately, when it comes to gauging the effectiveness of operation, 401(k) plans are not intuitive like cars.
For one thing, we drive our car every day. We can tell when the smallest thing goes wrong, or, as we laymen put it “something doesn’t feel right.” We may not know what it is, but at least we know what we don’t know.
The same can’t be said for plan sponsors. For them, their “everyday car” is their business, not the company’s 401(k) plan they oversee. They may easily find themselves in that bad place known as “not knowing what they don’t know.” That place is a gateway to worse places.
If you want to see what I mean, ask any typical plan sponsor to explain all the fees in their plan. You’re a pro. You’re likely to cringe in disbelief when you hear their answers. Take heart, though, this fee naivete situation is not irreparable, (see “What Plan Sponsors Must Do To Avoid Fiduciary Liability From These 3 Fee Blunders,” FiduciaryNews.com, June 7, 2018).
The broader problem of “not knowing what you don’t know” can be addressed, but it requires three elements. First, as in any good 12-step program, plan sponsors need to admit they have a problem.
This isn’t as easy as it sounds. Plan sponsors tend to exhibit “alpha” traits. They don’t like admitting they are wrong, and they don’t like admitting they don’t know. All this means is that they represent the perfect fiduciary client.
Fiduciary. That’s the second item on our checklist. Given all the hubbub about the fiduciary rule and the need for fiduciary advice, it’s rare today that 401(k) plan sponsors will expose themselves to the liability of not hiring a fiduciary. (Mind you, just because they hire a fiduciary doesn’t mean it’s a guarantee of anything. It merely reduces some risks that might not be otherwise reduced).
A (good) fiduciary, besides being accustomed to dealing with alpha types, comes with the aura of “always looking out for the best interest of the plan sponsor.” At least the way we used to understand the term “best interest,” before the SEC went and blew it all to toothpicks.
In either case, because fiduciaries don’t have a stake in the game, plan sponsors will logically view their advice as being credible. Fiduciaries might therefore help coax these beleaguered business owners and executive to admit they might know everything; thus, checking off item #1 on our list. Fiduciaries might therefore also have the credibility to convince plan sponsors to check off item #3, which is…
Systemize the solution. As mentioned in the “Fee Blunder” article referenced above, developing a set of procedures that can be consistently applied provides a template even a monkey can use.
Nothing is worse than not knowing what you don’t know. Experts can alleviate this, but experts can’t be there all the time.
Having a template at the ready helps mitigate some of the “not knowing what you don’t know.” But it doesn’t eliminate it, for two reasons – no matter how sincere they are, sometimes people just can’t work a template the way it’s designed. In addition, over time, templates grow stale and need updating.
For both these reasons, a fiduciary is a handy service provider to have around.
As if we needed another reason.
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