Fiduciary Standards for Retirement Plans
Retirement plans are popular benefits. They allow business owners to provide for their own future while helping attract and retain good employees – with tax breaks for everyone. What’s not to like?
There is one catch: They come with strict regulations. The U.S. Department of Labor (DoL), which regulates retirement plans, wants to ensure the benefits employees earned are in place when they retire. The driving principle is what’s known as the fiduciary standard. It means the plan administration has to be done in the best financial interests of those who participate in the plan.
A fiduciary - like a trustee - has personal responsibility, even for a retirement plan offered through an LLC, S Corp, or C Corp. Some companies appoint a human resources or finance employee to serve as plan fiduciary, others assign the role to an outside lawyer or consultant. In day-to-day operations, the overseer rarely gets involved. Most of the rules are common sense, but the IRS takes violations seriously. (One of the biggest violations is withholding money from payroll but not sending it to the investment company.)
While every retirement plan must have at least one fiduciary for the plan beneficiaries, not everyone involved in the operation and administration of the benefit has to hold that status.
New fiduciary rules in 2016
In general, though, people who work in the investment industry have a fiduciary responsibility to their employers, not to their clients. Most financial advisors are able to balance the interests of both, but a few have made recommendations that were for their own benefit instead of the benefits of their clients. Because of that, the Department of Labor has set up new regulations effective in the spring of 2016.
From now on, anyone providing advice on retirement plan investments must make recommendations that are in the best interests of retirement plan participants and any relatives or others the participants have named as beneficiaries. They must disclose any conflicts of interest, too. If an advisor will receive a bigger commission for recommending a change in the lineup of funds offered in a 401(k) plan, then that information will have to be disclosed.
How this affects employers
The biggest change most business owners will see is an increase in paperwork. The employer will need to ask financial advisors providing services about their fiduciary status. Then their responses will be documented. Most providers will offer standard disclosure information, and the employer will need to keep that on file.
Changes to fees
A second change may be to fee structures. Many of those who sell retirement services receive compensation from commissions, and compensation for their services may need to change to flat fees or hourly fees. In general, no particular compensation system is preferred, as long as the employer knows what he or she is paying and receiving. If is the fee structure is not clearly defined, the employer should be sure to ask questions.
Financial advisors are still allowed to provide general advice on the importance of retirement savings and the basics of investing without infringing on fiduciary rules. That’s a good thing – many employees don’t understand the value of having a retirement savings benefit until it’s too late.
The greatest effect of the new system, experts say, will be on advice given to people who are leaving their jobs and want to roll their retirement savings into a new account. Employers purchasing retirement plans usually understand how to research and negotiate services, but not all of their employees do. Now, the employees have a greater likelihood of working with someone who considers their best interests.
Retirement plans are serious business. Small business owners can find the support they need from Nationwide.