Employers Must Offer Sound Investment Options
GRAND RAPIDS — Helping employees responsibly save money for their retirement falls on the shoulders of many, including their employers, the 401(k) trustee and the financial institution that holds the accounts.
Heidi Lyon, an attorney with Mika Meyers Beckett & Jones, said there are several options when it comes to who can serve as a trustee for a 401(k), including an individual, an institution or a group of individuals such as a representative from the company or a bank.
The trustee has three fiduciary duties: loyalty, prudence and care, Lyon said.
“Loyalty refers to the need to act solely in the interest of the persons whose assets they hold in trust,” she said. “If a plan participant wants to invest in something that’s highly irresponsible or illegal, it would be up to the trustee to make sure that would not be done. That isn’t to say they have to interfere with bad investment choices. It is a common arrangement with retirement plans that the trustees work with a financial adviser to find funds.”
After funds are selected, it is up to the participant to choose between them.
Lyon said the trustee’s second duty, prudence, describes the need to behave responsibly, making reasonable and informed decisions. The third duty, care, pertains to issues such as checking the accuracy of bank statements and following up on the status of the account.
“When a trustee does not exercise one of these duties, there can be participant lawsuits against the trustees,” she said. “Basically, the law says that if you violate any fiduciary responsibility, there are consequences.”
The duties also pertain to those who hold the assets, such as a financial institution and a third-party administrator that may help administer the plan.
To help ensure that these parties are doing their best to grow employees’ savings, companies such as Actium LLC, which has offices in Grand Rapids and Birmingham, offer their services as account managers. Actium seeks to help employees better manage their accounts while showing that the employers are giving their employees adequate resources for their retirement account investments, said Chad Griffeth, principal and founding member. Employees pay for the service out of their 401(k) accounts.
“The theory is that it will help (employers) with their liability,” said John Whaley, principal with Actium.
Actium’s “BeManaged” program is meant to provide account management with personal and corporate reviews and a high level of communication with the employee. As the independent third-party advisory industry is only five years old, Whaley said the BeManaged program is a new product in a relatively new industry.
It previously was commonplace for people to work for the same company for the majority of their working life and then retire and receive their pension check from that company, Griffeth said.
“Those types of plans are ceasing to exist,” he said.
Instead, many employers now use 401(k)s to help their employees save for retirement.
Larry Titley, head of employee benefits at Varnum, Riddering, Schmidt & Howlett, said companies need to not only give their employees investment choices for their 401(k) accounts, but also follow up on the choices and make sure they are performing well.
“That’s a process they need to follow up — twice a year, four times a year, at least annually — to make sure the choices remain competitive. And if not, they need to switch those choices,” he said.
Titley said if the employer fails to give employees proper choices and does not follow up on the options, they are liable for the poor choices. But if the employee makes poor choices despite the efforts of the company, the employer is not liable.
“If (employees) have the information they need, then if they make poor choices … they retain the loss and they retain the responsibility,” he said. “What the employer needs to do is set up a well-qualified set of investment choices, educate, and then monitor the choices.”
Griffeth said Actium’s BeManaged program can help employees make good choices and also show that the employer has taken the proper steps of fiduciary responsibility.
“Ultimately, it’s changing that experience of the 401(k),” he added. “We actually manage the account for them.”
Griffeth said the feedback his year-old company has received so far has been positive.