Most organization have had their 457 plans set up for decades and many organizations don’t realize that these plans may not be serving your organization or its employees very well. In today’s market, there are more retirement plan providers than there used to be and its possible your provider is no longer the best option for your organization and its employees. The goal of reviewing your retirement plan provider is to make sure you have the lowest plan costs and the least fiduciary risk while seeking to increase investment performance for your employees. Reducing fiduciary risk is undoubtedly one of the benefits, but there are more. Different managers in your agency will have varying responsibilities in the review cycle, and even a scheduled “outsider” evaluation ensures compliance and effectiveness for the plan so everyone sleeps better at night.
Reducing Fiduciary Risk
It is vital to understand fiduciary risk. This risk derives from knowingly or unknowingly breaching the fiduciary responsibility provisions of ERISA (Employee Retirement Income Security Act of 1974). Penalties for erring in one’s fiduciary duties can range from removal from that position to civil penalties to criminal prosecution. Frequently reviewing the retirement plan provider can mitigate the risk, as can a third-party review from time to time to get fresh eyes when you’re too close to it. See our post on Most Common ERISA Lawsuits to “encourage” you.
Other Benefits of a Retirement Plan Review
Besides seeking to lower overall plan costs without sacrificing quality, the goal to increase investment performance is often served by:
- Simplifying plan administration—Are there too many people in the department for the amount of work to be done?
- Ensuring education and communication
- Is there a program to educate employees about how your retirement plan can help them achieve their retirement goals?
- Will increased plan communications raise plan enrollment and encourage employees to increase deferral rates for a larger nest egg?
- Knowing your employees.
- Are they participating in the California PEPRA (Public Employees’ Pension Reform Act) members?
- Do they rely on their tax-advantaged 457(b) to supplement their pension?
By regularly looking at each item above, the retirement plan providers help the agency’s employees remain loyal in these decidedly uncertain times. (See our 2022 post on agency turnover and a 2023 discussion of turnover in government agencies here.)
What Managers Are Involved?
In a medium-to-large-sized agency, two job descriptions might include retirement plan responsibilities, while the third might simply have an increased interest in what is happening.
- Manager/HR Director – This position will play an integral part in the provider review.
- Finance Director – This person will worry about the costs and benefits of the plan.
Meanwhile, the General Manager/City Manager would want to know how much the plan’s costs are and encourage the staff to review the plan even though he or she doesn’t administer it. As a manager, they might be one of the more significant contributors at their higher salary level.
When and Why are Third-Party Consultants a Good Idea?
It may not be necessary to have third parties at every review session, but at some point, the distanced overseer should be brought in to make sure the plan provider is handling the plan correctly. While you should be evaluating your plan frequently (maybe quarterly) for the following, an external consultant would be someone who:
- Helps shape the Investment Policy Statement and participates in fund selection.
- Analyzes fund performance.
- Checks investment returns for changes and any new charges that may have crept in.
- Notices and reports when funds fail to meet the plan’s benchmarks.
- Ensures your plan keeps current with policy shifts, technology, and your employees’ expectations, including securing their plan data.
- Wants to see if the agency still runs on paper forms and manual processing or if anything can be automated.
They also may be part of the group that disseminates RFPs and assists the hiring team for outside service providers, keeping track of their fees and performance.
Sometimes, the benefit of the third-party consulting team is in helping with plan design, administration, and plan governance. At the same time, they are expected to ensure that plan fiduciaries understand their fiduciary duties by providing training for this specialization. Let us know if you would like some pointers on hiring third parties.
Reviewing your retirement plan provider should happen regularly to ensure the employees (and you) are invested wisely in your retirement plan. “Seasoned” employees see the effort and are encouraged to continue to add to the plan, and newer, younger employees can actually imagine themselves retiring someday. An older employee with more money in their 457b will be especially happy to know they have a management team looking out for them at all times as they near retirement age.
Regularly reviewing the retirement plan provider is the sign of good controls. It’s comforting to the agency’s employees—both the managers and the worker bee staff.
If your government office has questions regarding protocols you follow for reviewing your retirement plan provider, please don’t hesitate to contact LSL CPAs.