Advisors can help by providing an in-depth plananalysis that helps to ensure previously elected features stillmake sense for the participant base. (Photo: Shutterstock)

The retirement plan landscape is increasinglychallenging for plan sponsors, as regulatory pressure increases and more plansbecome the focus of legal action. In reality, the majority of smallbusiness plans won't find themselves embroiled in a courtroom battle, but they do need to beincreasingly vigilant about applicable rules andresponsibilities.

Plan sponsors' challenges are made more difficult by the law's(ERISA) fundamental mandate that every retirement plan must appointat least one fiduciary in charge and must be operated with a'Prudent Expert' standard of care.

However, the majority of U.S. plans are sponsored by smallcompanies, so the fiduciaries responsible for them tend to be laypeople such as company owners, HR administrators or benefitscoordinators who are not experts.

This Prudent Expert standard of care combines with another rule,the 'Exclusive Purpose Rule' which when combined ensures that allfiduciary actions taken are in the best interests of planparticipants. But ERISA makes no distinction between a legitimateretirement plan expert and a lay person who is trying to managethis role among many other job responsibilities.

Thus, the potential exists for a major disconnect in how plansoperate versus what the law requires, providing a great opportunityfor financial advisors to bring value and solidify theirrelationships with plan sponsors.

Find every opportunity for education

That value starts with educating plan sponsors on thefundamentals of being a fiduciary. This includes three keyfacets:

1. Encourage sponsors to always ask the question, "Iswhat we're trying to achieve in the best interests of planparticipants?" If the answer to that question is yes, thensponsors can proceed to addressing the initiative in greaterdetail. But if the answer is no, they should stop right there andconsider alternate courses of action.

2. Coach your clients to document everything.If a decision must be made on behalf of the plan and itsparticipants, a staff member (or yourself) should take extensiveand detailed notes of any discussions about it. This measure willprotect your client in case a decision turns out poorly, becausethey can at least point to the documentation as evidence that theprocess was sound.

3. Design the plan around retirement readiness.If the goal is to provide sustainable income replacement forparticipants upon their retirement, then all of the decisions thatfollow the establishment of that goal should support it. This isthe essence of acting in the best interests of participants.

Prompt periodic review of plan design choices

Design choices often dictate the success of 401(k) plans fortheir participants. Advisors can help by providing an in-depth plananalysis that helps to ensure previously elected features stillmake sense for the participant base.

Subsequently, you can make technical and practicalrecommendations to plan sponsors about which elements to integrate.This might entail redesigning a plan to provide greater entryflexibility or incorporating aspects like automatic enrollment andautomatic progressive savings escalators that can increaseparticipation and saving rates.

Define what the endpoint should be for participants, such as theage when they can afford to retire, which is unique andcustomizable for each person. Once you understand the fundamentalgoal of the plan, start coaching your client on the steps needed toachieve it.

Emulating the IRS when conducting internal plan reviews

One helpful step would be working with clients to conduct aminiature version of an IRS compliance audit on their plan. Thisentails an extensive accumulation of information, including signedand dated copies of all relevant documents, to identify potentialcompliance risks and immediately resolve them.

Additionally, it is recommended to periodically compare thecensus of the company to the results of the plan. For instance, ifa plan has a low participation rate and the census indicates arecent average date of hire, ask the sponsor if they've beenturning over staff on a regular basis or just went through a majorhiring process. In either case, it would then make sense to discusshow to encourage greater participation and saving rates.

In my experience, like in other areas of business, over timeinstitutional memory of why decisions were made is lost. Inretirement plans for example, plan sponsors may not recall whytheir eligibility and entry requirements are configured a certainway, because those decisions were made a decade or more ago andhaven't been revisited since.

Meanwhile, the company's size and employee demographics mighthave changed significantly. As a solution, advisors can helpsponsors by conducting a review of plan design choicesevery 3 to 5 years to assess whether currentparameters are still appropriate.

Gain a comprehensive understanding of behavioral finance

When considering how to structure a plan, it's also essentialfor advisors to understand behavioral finance. Specifically, ifanything requires plan participants to take action, recognize thatadherence will likely be very low and even lower if it costs themadditional money.

The key is to identify and avoid barriers to success. Twosignificant barriers at the participant level are incremental costand incremental work, meaning a person has to do more or pay more.The reality is that due to inertia or procrastination, many peoplelikely won't take even a simple step like going online to check abox since that requires an action.

Accordingly, plans could implement features that design aroundbarriers to success, including as much automation as possible andemphasizing negative election over affirmative election.

In other words, require a participant to indicate only if theydon't want something done, not if they do want it done. That's thekind of strategy we're seeing the better retirement plan advisorsemploying to generate better results.

Tools of the trade

Service providers in the retirement industry will oftendiscourse about what plan sponsors and participants should dofrequently providing great tools and good advice on how to usethem. However, it doesn't matter how good the tools are if peopleneed to be proactive about using them, because the chances are thatthey won't.

I believe our industry should strive to create an environmentthat allows success to occur naturally, rather than one requiringpeople to take a number of steps in order to possibly succeed.

This shift will need to change across the industry if we wantretirement success to be the normal and natural result rather thanthe exception.

Jason Grantz, QPA, AIFA is the director ofinstitutional retirement consulting at Unified Trust,headquartered in Lexington, Kentucky.