Business Retirement Plans: Are You On The Hook?

By Todd Hughes, J.D.

As of 2020, 67% of employees in the private industry workforce had access to a retirement plan. We know that in many cases, outside of an individual’s homeownership, their retirement plan tends to be their largest financial asset. This makes it an important retirement vehicle for all employees, including business owners. While business owners tend to offer a retirement to support employee retention and talent attraction, the retirement plan is not revenue generating so even if they’re responsible for continued oversight of the plan, conducting those reviews is out of sight, out of mind.

As a business owner or executive, you are most likely the fiduciary of your company’s retirement plan. As the plan’s fiduciary, you are responsible and liable for oversight of the plan’s administration, investments and fees. Unfortunately, the financial industry does not arm business owners with the tools they need to easily monitor the plan on an ongoing basis. Sure, there may be the typical annual meeting where a colorful PowerPoint packet is reviewed, but frankly, that isn’t enough.

The common thread in recent court cases and settlements against plan fiduciaries is three pronged: plan administration costs are excessive, the plan’s investment share class is not the lowest available, and/or the plan’s investments are underperforming. The business owner is not to blame— analyzing a retirement plan is not in their wheelhouse, and honestly, shouldn’t be.. Business owners should be confident that whoever they hire can help them understand the intricacies of retirement plans. In most cases, there are 2-3 providers involved in a retirement plan, each offering different services with their own fee schedules which business owners need to understand so they can determine if the providers’ fees are reasonable in comparison to plans of similar size in a similar industry. Every business owner knows how to find this out, right? Wrong.

Fiduciary oversight means that the business owner has to understand what types of investments are available while deciding as a fiduciary or co-fiduciary on potential changes to the investment line up and what share class those investments are. This is done because some advisors are actually paid through these investments rather than a fee based on the size of the plan. Monitoring performance is also important when it comes to the investment options which can seem simple. Because, a fund with a 3-year performance of 10% is better than a fund having a return of 5% over the same period of time, right? Again, it seems simple, but depending on the providers you are working with, you might be limited to certain mutual fund families which prevents you from swapping a fund out. Or maybe the plan has proprietary investments in the fund line up. Proprietary investments are a significant red flag.

The other part of plan oversight, which isn’t a fiduciary matter but a business decision, is plan design. Many times these plans started 5-10 years ago almost out of necessity to provide benefits to employees. However, as the business grows, the plan needs to evolve as the goals may change. Retirement plans can be fairly simple or have a number of bells and whistles included which can offer more benefit to the employees, and can allow the business owner(s) and other highly compensated employees, the opportunity to defer more funds into retirement. This is where it helps to have an expert that understands the regulations surrounding retirement plans.

At Central Trust Company, our retirement plan group is led by Todd Hughes, J.D. Todd is an ERISA attorney (Employee Retirement Income Security Act). His expertise is typically only available to corporate retirement plans with significant assets, approximately $20 million or more. Todd joined our firm years ago to help us bring that expertise to small and medium sized businesses throughout the Midwest that truly need a partner like Central Trust Company. Couple Todd’s expertise with our extensive investment management capabilities (currently over $8 billion in assets under management), allows us to offer investment options without any conflict of interest and the lowest share class possible. Our firm can take on more of the fiduciary liability than most of our competitors, allowing the business owner to focus on what they do best—running the business. And we will even provide plan sponsors with a third party benchmarking report that shows them fees for all their providers in comparison to plans of similar size and industry, so the business owner knows exactly where the fees should be. We truly enjoy working with business owners to evaluate their plan and help them understand all the details.

We take an objective approach and if there are areas of the plan that can be improved, whether it’s fees, investments, or plan design, we can then work with the owner(s) to map out options. We bring a high level of expertise to even the smallest of businesses.

Contact us to schedule a meeting or to ask additional questions.