By Ed McClure, CFP®, PPC®
While sponsoring a workplace retirement plan is a worthy endeavor, it also requires vigilant oversight. Plan sponsors must grapple with many challenges, including adhering to ERISA regulations, discerning fiduciary responsibilities, and staying on top of constantly evolving tax laws.
Given these complexities, it’s not uncommon for many plan sponsors to unintentionally make mistakes. However, at McClure Wealth Management, we understand that even minor mistakes made by sponsors of qualified retirement plans can ultimately lead to big consequences, such as penalties, fees, or even jeopardizing the plan’s qualified status.
In a comprehensive two-part guide, we will dive into the most common mistakes made by retirement plan sponsors and provide valuable insights on how to steer clear of them. This Part 1 article focuses on the primary investment management mistakes; Part 2 (to be released in January) will address plan administration and operational errors.
Let’s get started!
1. Not Having a Defined Prudent Process
Amid all the decisions that have to be made as a qualified retirement plan sponsor, sometimes it’s hard to stay organized or nail down a specific process for how things should be handled. This is a big mistake that plan sponsors should try to avoid at all costs.
As a fiduciary in charge of handling your employees’ hard-earned retirement assets, the Department of Labor wants to see that you are operating like a well-oiled machine, with a defined process for:
- Organization
- Formalization
- Implementation
- Monitoring
The DOL doesn’t expect you to necessarily choose the lowest cost or highest performing investments of the moment, but you have to maintain a cohesive process so that your reasoning for important decisions like investment choices is clearly identifiable and easy to follow. Not only does this protect you as a plan sponsor in case of an audit, but it also protects the plan participants by reducing your odds of making a costly investment mistake.
Be sure to define and implement a prudent process for selecting and monitoring both service providers and plan investments. Plan sponsors have an obligation to keep their plan expenses reasonable, which means they are required to evaluate the performance and fees of their service providers. Make it a habit to review annual updates from your service providers to ensure their performance and fees are in the best interest of your participants. This will help you stay compliant and maintain your fiduciary duty as a retirement plan sponsor.
2. Not Having an Investment Plan Policy
The goal of a retirement plan is to help participants save for retirement through investments. Plan sponsors have a significant responsibility to work with an advisor to select appropriate investments, replace poor performers, and verify that the fees are reasonable. It’s critical to create and follow an Investment Policy Statement (IPS) to keep your plan’s investments up to date and within DOL guidelines. While an IPS is not legally required for retirement plans, most qualified retirement plan advisors agree it is essential.
Revising the IPS periodically is important to ensure it maintains compliance with changing laws. Also, be sure that the IPS aligns with your plan’s documentation and does not conflict in any way. A well-structured, well-followed IPS does more harm than good if it conflicts with the plan document.
3. Not Maintaining Proper Plan Documentation
Retirement plan sponsors are required by law to keep extensive books and records both for the IRS and EBSA. Maintaining proper documentation will not only keep you prepared in case of an audit but will also help you avoid mistakes in other areas of plan administration.
For example, proper documentation can help you make the right decisions about investments and service providers because you have the records to back up your reasoning, including assessments of performance, risk level, and fees.
Plan documentation usually starts out very organized because it has to be in order for the retirement plan to be qualified and approved by the government in the first place. Over time, however, it can be hard to maintain, especially if there are a lot of participants or if there are changes to the plan’s structure. Avoid this pitfall by prioritizing proper documentation and ongoing organization, periodically reviewing when you can.
We Are Here to Help
Creating and overseeing an employer-sponsored retirement plan can be a complex task. Don’t allow these common investment mistakes to derail your strategy and plans.
At McClure Wealth Management, we are here to assist plan sponsors in confidently managing their responsibilities. If you are looking for guidance on how to avoid or rebound from any of these mistakes, feel free to give me a call at (760) 607-0611 or email [email protected] to set up a consultation.
And keep an eye out for the second part of this guide, scheduled for release in January 2024!
About Ed
Ed McClure is a CERTIFIED FINANCIAL PLANNER™ practitioner, Professional Plan Consultant® (PPC®), and founder of McClure Wealth Management. With over 25 years of experience, Ed works with business owners who want to maximize their retirement plan benefits, businesses that need help setting up and managing a 401(k) for their employees, and families who want guidance while planning their futures. He is known for simplifying complicated and intimidating topics and making wealth management concepts easy for others to remember and understand.
Ed has established himself as a trusted resource for business owners and individuals, and his mission is to help his clients achieve the financial independence and well-being they deserve so they can give their time and energy to the people and things they love. He has a bachelor’s degree in finance from the University of Illinois. In his spare time, Ed conducts financial workshops for the Just In Time for Foster Youth organization, which helps equip young men and women as they come out of the foster care system. He also loves to travel and spend time with his favorite people. To learn more about Ed, connect with him on LinkedIn.