Today, more than 42 million Americans hold assets worth $1.8 trillion dollars in 401(k) plans. Employees are concerned about what companies are doing to protect their retirement assets and ensure that they are safe. According to the Department of Labor, a recent poll indicates that a majority of companies in America don't understand their fiduciary responsibilities related to their 401(k) plans. In addition, the courts, Congress and the Federal Government are actively defining the role of companies as fiduciaries that would protect the assets of employee pension plans.
With this backdrop, CPAs have an opportunity to talk to the business community about fundamental steps small companies can take to mitigate risk and reduce liability by creating a sound fiduciary process.
Media Audience: Small Business Owners
Message Point: With the current stock market, under-funding issues involving pension plans, scandals on Wall Street, companies more than ever need to turn to trusted independent advisors to help them understand their responsibilities. As business advisors, CPAs encourage companies to take five fundamental steps to manage liability and pension risk more effectively.
1. Identify pension plan fiduciaries within the company and consider forming an investment oversight committee. According to the Employee Retirement Income Security Act (ERISA), a fiduciary is defined as any person so named in a retirement plan and any person who exercises any discretionary authority or control with respect to the management or administration of the retirement plan or its assets. Examples of fiduciaries include: plan sponsor, plan administrator, trustees, investment managers, and any other persons, including employees, who are involved with any aspect of handling the plan or its assets.
Small businesses may not have identified such a person with fiduciary responsibility, but that does not mean that someone in the company is not responsible for the pension plan. Small businesses need to identify their fiduciaries and make sure they know what their duties and responsibilities are. Small companies also need set up formal lines of communication for the pension plan, informing senior officials as well as rank and file employees who the contact person is and channeling all communications through that person. Small businesses should consider forming an Investment Committee Oversight Committee to ensure governance and oversight investment selection.
2. Write an investment policy statement. The policy statement defines the goal of the investments of a company’s pension plan and how it should manage retirement assets, including the selection of funds under its control. Putting down in writing an investment policy statement can help a company minimize the possibility of missteps due to a lack of clear guidelines. It creates a reasonable basis for measuring compliance and establishes reasonable and clear expectations with management, employees and outside vendors regarding the investment philosophy of the pension plan. To help you create an investment policy statement, consider hiring an outside expert such as a pension or investment consultant or a CPA trained in this area.
3. Understand all fees and investment expenses. Companies need to look at finders' fees, 12(b) (1) fees, and expense ratios and examine them very closely to see if they are reasonable and complete. For example, investments might look good to the investment committee but hidden expenses can eat away at the investment returns. To reduce legal liability, companies also need to review the advice provided and also consider other options.
4. Diversify and periodically rebalance assets to manage risk. Rebalancing is inherent to the element of diversification, where the goal is to create a portfolio that balances appropriate levels of risk and return. That balance can only be maintained by periodically rebalancing the portfolio to maintain the appropriate diversification. Failure to diversify the pension assets puts the pension plan at risk and increases the company's legal exposure to allegations of mismanagement of the plan assets.
5. Understand conflicts of interest. If the owner or company manager thinks he or she may have a conflict of interest, they probably do. The best advice is end it, or avoid it. It is that simple. Companies can't use the retirement plan as collateral for a line of credit, or use it to buy real estate for corporate use or receive a benefit simply because they are a friend, business associate or relative of the fiduciary. A question every company should ask regarding the management of the pension plan is: Who benefits the most from this decision? If the answer is any other party than the plan participant or his or beneficiary/ies, the likelihood is the company is about to breach their responsibility and is open to potential legal liability.
For additional information please go to the AICPA Web site.