Transcript:

[00:00:00] Voiceover: Welcome to the Life Unlimited Podcast with Larry Heller. You deserve complete financial advice so you can confidently live your life your way for life. Now let’s get into this week’s podcast episode.

[00:00:19] Matt Halloran: Hello and welcome to another Life Unlimited podcast with your host Larry Heller. Today is part two of our four part mini series on 401k plans.

[00:00:27] Matt Halloran: Now today. We’re going through fiduciary governance. And Larry, you have so much to cover. Uh, when it comes to fiduciary governance, where do we even begin?

[00:00:39] Larry Heller: well beginning at the beginning because I think most people that are involved with a 401k plan have no idea what they’ve gotten themselves involved with from a fiduciary standpoint.

[00:00:53] Larry Heller: so basically we’ll start really what, what is fiduciary, you know, standpoint, I call it kind of the fiduciary governance where there’s a set of responsibilities and obligations that a plan sponsor and. Other fiduciaries and we’ll talk about what, what, who those are must adhere to when they’re managing and overseeing a, a retirement plan.

[00:01:14] Larry Heller: And those individuals that have discretionary authority or control over the plan’s, management of assets have some key aspects of fiduciary governance. So, we’ll talk about some of those. And really, you know, the first one, let’s [00:01:30] talk about prudent decision making, and who’s really responsible for making these decision making.

[00:01:35] Larry Heller: So company has a 401k plan. The owner, the owner who’s maybe signing the documents, the plan documents, the legal plan documents on this. Is obviously a, a fiduciary, but a lot of times that’s not the person managing the 401k plan. So they hand off those responsibilities to maybe their assistant or somebody else at the plan so they don’t have to be responsible for the day-to-day activities and managing and that, and guess what?

[00:02:05] Larry Heller: That key employee. becomes a fiduciary and is not only liable for this, but they can be personally liable for some of those decisions they’re making. And a lot of times that that’s not explained to, explained to those. So you wanna make sure that if you are plan sponsor or the employee that’s responsible for overseeing and managing the.

[00:02:28] Larry Heller: Plan has got all these steps in place. So they meet their fiduciary responsibilities. And one of the prudent decision making, uh, steps is making sure that they’ve demonstrated an evaluation and documented how they’ve come up to some of these decisions. So let, let’s really start with, you know, the first, and that’s the actual plan document.

[00:02:50] Larry Heller: The, the bible of what the plan says is how does the plan work? Who’s eligible? When can they come into the plan? What type of plan is, and what kind of [00:03:00] match? Is it a safe harbor? All those type of things go into designing that plan and making sure that the plan is done. properly, no. Obviously there are people in firms like myself and third party actuaries that are gonna do the, the details of that.

[00:03:16] Larry Heller: But the actual putting these plan, you know, plan documents together and making sure that you have them, and then I. Clearly communicating that to the plan participants. What are their rights, their benefits, when they are, when they become eligible? I, I can’t tell you how many plans we, see and the plans have been put in place are, uh, you know, years back and no one’s really following that.

[00:03:40] Larry Heller: And sometimes they don’t remember to offer the plan to a. Participant, an employee when they become eligible. Um, and unless the employee, says something, they don’t get the, the ability to enter the, enter the plan when they should be and when their timely should be. So for example, if your plan has, let’s say, a one year waiting period.

[00:04:01] Larry Heller: Mm-hmm. Then you’re eligible the next quarter. You should be getting notified before that timeframe is, and you’re now eligible. Here’s where, here’s where that, where that is. So, uh, making sure that you have the documentation and you have that. And again, some of the things that you can see, we’ll talk about a lot more of these aspects.

[00:04:20] Larry Heller: But, happens if you don’t? Well, there are audits there. We are having a client right now that’s getting got a letter from the IRS. And they, what do they wanna see? [00:04:30] They wanna see all these documentation. They wanna see all the communications. They wanna see your payroll records and compare it to all these plans are in place.

[00:04:38] Larry Heller: And then there’s also the Department of Labor that could also audit your plan. So it’s real important that you have proper documentation and communication, not just specifically on the investments.

[00:04:49] Matt Halloran: It’s also really important because one of the things that we’re finding out as business owners regularly is employee benefits are one of the main reasons why people want to stay with an organization.

[00:05:00] Matt Halloran: And a 401k is pretty much a core benefit. And if you’re not offering this in a timely manner, in the right way with good communication, you could lose employees to a firm that is offering something like what you’re talking about here, Larry, isn’t that correct?

[00:05:15] Larry Heller: That’s correct. I mean, you know, putting a plan in place.

[00:05:17] Larry Heller: Some, there are some employees that put it in place ’cause they just need to have the minimum on this and others that really understand. It helps to attract and retain key employees if you have the plan set up properly. And we’ve talked about some of those in, in the plan design more. So you can go back and listen to the podcast on part one plan design and we’ll cover some more things on, Parts three and four. so, today is really looking at kind of the, the governance of this. So, let’s jump into the, let’s jump right into the investment o oversight, because that’s kind of what the, one of the big decisions are. Okay. Now that we decided we’re gonna have this 401k plan.

[00:05:55] Larry Heller: We’re not gonna have 5,000 different investment options. We need to have some [00:06:00] investment options. And who’s making these decisions? Well, ultimately, the plan sponsor, the employee the fiduciary is making. Now, they may rely on firms like ourselves from the of the investment advisors coming there, but ultimately they’re responsible for signing off on these.

[00:06:18] Larry Heller: So you wanna make sure you have a plan that has proper, diversification in, in the funds, low cost funds. so they need to consider the risk, the fees, the overall diversification, the investment lineups. And one of my, pet peeves here is that, when we look at so many plans, and they, a lot of times they have.

[00:06:37] Larry Heller: 30, 40 different investment options. And guess what? Most participants have no clue what they should be as, as I ask their buddy, what’s, what should I do? and where should, where should they go? So one of the things that we do and we strongly recommend, is that every plan should have these model portfolios.

[00:06:54] Larry Heller: you know, we, we make ’em really simple. Uh, anywhere from conservative to aggressive in five different portfolios with different flavors in between that we are actually managing them. And you know what? For all of our plans, I’ll ask you, Matt, I’ll ask you a question, put you on the spot. What percent do you think of plan participants?

[00:07:13] Larry Heller: select one of the model portfolios, rather than picking the funds themselves.

[00:07:18] Matt Halloran: Oh my God, it’s gotta be like 90%.

[00:07:20] Larry Heller: Okay. So it’s not that high. It’s uh, you know, seven 75%. But yes, I mean, there are some plans where we see almost a hundred percent, but, but [00:07:30] you know, in, in all 75% select one of the model portfolios rather than selecting them themselves.

[00:07:36] Larry Heller: And then they put these plans in place and they put these investments in place and they never touch them again. They never look at them again. They never have somebody else look at, well, the world changes and. funds change and things change, so you need to be able to look at that and review the plans.

[00:07:53] Larry Heller: We call it a benchmarking, and to see how those funds that you have, compare with the industry standards out there so that, that, you know, you’re up. You’re up to date you’re doing that. We’ll talk a little bit more about some lawsuits and things that have come up, a little bit later here on some of the issues here.

[00:08:10] Larry Heller: but you know, making sure that you’re reviewing them and benchmarking them. our practice, we review all the funds every quarter and we have a, a, a system that, that. structure that looks in and see if fund, how that’s performing and whether it needs to be replaced at some point down down the road.

[00:08:26] Larry Heller: You don’t have to do it every quarter, but you need to be reviewing those funds on an ongoing basis. let’s talk about some of the other, you know, responsibilities. you know, some of them are simple, like the, impartial and duty of loyalty. In other words, don’t have your, I.

[00:08:38] Larry Heller: Select your buddy, your friend, just to put the 401k in place without making sure that you’re doing, you doing your due diligence. we talked about the, the, the fees and the reasonableness of the fees, and what has happened over the last few years. There has been numerous. Lawsuits. Um, now they’ve gone after big, bigger plans, obviously, and they’ve, the [00:09:00] attorneys have gone, have filed actions that the fees were excessive and some of these had what’s called rev revenue sharing, or some of them had funds where there’s exactly same fund with lower fees and they’ve sued these big firms and they’ve won.

[00:09:16] Larry Heller: And, and, and they’ve won settlements from that. So you don’t wanna be a fiduciary and be, held responsible if that, if that could happen to you. And it, it, it does happen there. And if you Google it, you can find plenty of firms out there that have gone through that, process. So make sure that your fees are, are reasonable.

[00:09:32] Larry Heller: It’s not just the investment fees. There’s record keeping fees, there’s administration fees, there’s all different types of, fees out out there. and, and then there’s, monitoring all the different providers. Like I said, it’s not just the investments, it’s the record keepers, the administrator, making sure that they’re in compliant, that you’re in compliance with, uh, arisa.

[00:09:51] Larry Heller: And there’s filings that need to be done each year. So, uh, and there’s penalties if you don’t, you know, file on a timely basis. So you make, you want to make sure that you’re kept up, you know, kept. Abreast on what all the different ERISA compliances that your plan needs and make sure that you working with a, an actuarial firm that keeps you ahead of the game.

[00:10:10] Matt Halloran: No, I wanna pause you there something that keeps kind of a, a thread through all of this with, with being a fiduciary and with the whole governance component. Is there are consequences if this is not done correctly. And, and I know these are meant to be just purely educational and I’m not trying to scare [00:10:30] anybody.

[00:10:30] Matt Halloran: but you just said that there were some pretty major lawsuits when it came to fee reasonableness, but we also know that there have also been actions taken against people who are. In the right mindset, like they’re trying to do something nice for their, for their team members, their employees. They just didn’t have all of the T’s crossed and the I’s dotted do.

[00:10:48] Matt Halloran: Do you have anything to add to that?

[00:10:50] Larry Heller: absolutely. So, besides the, some of those lawsuits, you don’t wanna have a disgruntled employee who finds out that they should have been eligible for the plan and they were never told. And now you got a lawsuit from a former employee, you know, former employee as well.

[00:11:06] Larry Heller: So you, you wanna make sure that you’re, you’re on top of, and there are a couple things that you can, you know, that you can do. To help minimize some of your fiduciary exposure. One of them is hire a firm like ours, and we, we we’re what, what’s called a, a three 18, a advisor. So therefore, you’re now kind of delegating 99% of your responsibilities from your investment side to us.

[00:11:32] Larry Heller: You still have the responsibility of doing your due diligence in hiring us versus somebody else, but now they’re the three. The three 18 hiring a three 18 advisor is saying, okay, now it’s our fiduciary responsibility, and since we are a three 18, we have the same fiduciary responsibilities as you would on any of the investments.

[00:11:55] Larry Heller: And there’s also a three 16 that you could hire, which would then take a lot of your [00:12:00] responsibilities off the administration part. So there are, those are two things that you want to consider when you’re looking at risk management, and it can minimize your, your legal, your operational and your investment risks by hiring some of these firms.

[00:12:15] Larry Heller: And again, a lot of people don’t even know that that exists. And when we start talking to, to someone, I ask, well. Do you have a three 18? What’s a three 18? no idea. But if you’re listening to this podcast now, now you know that you should be working with somebody, an advisor that’s a three 18.

[00:12:31] Matt Halloran: And I also love the fact that you know, part of your fiduciary responsibility. Is the review process. So you want to kind of wrap things up today in talking about, you already highlighted a little bit earlier. Uh, what other sort of reviewing sorts of, responsibilities do you have as the three 18 or as the fiduciary to help the people who have the plans?

[00:12:50] Larry Heller: So on the investment side, what we’re doing, I mentioned that on a quarterly, basis, we’re looking at each one of the investments, each one of those funds, and with comparing them to the, their expenses to the industry and their performance to the industry. And if they’re, there’s 10 different.

[00:13:07] Larry Heller: Factors that we kind of put in place here looking at this. And if they kind of drop below, they gotta get pushed on our watch list. And if they’re on the watch list for a while, then we’ll look to replace them. But we have a, process and a way of looking at these funds and managing these funds and making, making decisions.

[00:13:25] Larry Heller: So that’s kind of what we do as the, as the three [00:13:30] 18 and the three 16 would do some of the same things as far your operational side. So what we are suggesting is that every so often you should benchmark your plan. Don’t be afraid to ask your current. Advisor, um, and your current, four oh K administrator.

[00:13:46] Larry Heller: Hey, I wanna run a benchmark. How do I compare against the industry standards just so I can make sure I’m in compliance with my fiduciary due diligence? and of course, I. There are firms like our ourselves, we will offer you a review and a benchmarking review and we’ll compare that ’cause there’s a lot of data out there to show everything.

[00:14:04] Larry Heller: What it, how does your plan compare against everyone else? How does it compare as far as expenses? How does it compare? Pair as far as investment options, how does it compare as far as the type of match that you’re giving to other people, how much your employees are putting away? so there’s a lot of other things that go into that.

[00:14:22] Larry Heller: one thing that I skipped before we kind of wrap this up is just really just. Talking about the education and the communication, because that’s just so important. again, it helps retain and it keeps the employees feeling good about that. And I never understood why some companies won’t allow at least an, annual education meeting for all their planners is.

[00:14:43] Larry Heller: Where firms like us come in and talk about that and talk about the different things. our plans not only do they have access to online calculators, that our plans, we send out emails. The emails to the participants are actually based upon their age. So all the participant [00:15:00] ages are in the system. So if you’re a 25-year-old, you’re gonna get an email.

[00:15:03] Larry Heller: Differently than if you’re a 65-year-old. So all this education helps, you know, is part of the fiduciary responsibility to make sure that all their participants informed about their investments and their retirement planning.

[00:15:17] Matt Halloran: Man, Larry, when we were preparing for this, I was like, man, you have so much to cover and you just covered that like freaking seamlessly.

[00:15:25] Matt Halloran: Dude, that was absolutely fantastic. Alright, so what do, what do people need to know, uh, before we wrap this up?

[00:15:31] Larry Heller: So if anyone wants fiduciary, mean a, benchmarking report, you know, feel free to go onto our website hello wealth management.com, and they can actually click right on there and they can schedule a call desk so we can get you a, get you your own benchmarking report or feel free to call the, the office (631) 248-3600 to, to set one up with us.

[00:15:52] Matt Halloran: Listen, everybody, it is so vitally important that you have all of your T’s crossed and your i’s dotted. With this, it is one thing to have the great intentions to be able to provide wonderful benefits to all of your team members, but if you don’t do it correctly, not only can you lose. Team members, you have disgruntled employees, and more importantly, you can get yourself in a little bit of trouble.

[00:16:13] Matt Halloran: So why not outsource it to somebody who does this for a living, who knows all of the tips, tricks, and techniques that you need to have in order to successfully run a 401k, which is Heller Wealth Management. So for Larry, this is Matt Heller and, and everybody at, Heller Wealth Management. We’ll see on the other side of the mic very soon.

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