Could Your 401(k) Plan Come Back to Bite You?

April 6th, 2016

401k-4-6-16.pngMost every banking survey I have seen in the last five years includes a question about the ways banks could improve non-interest income fees with the answer of wealth management being the overwhelming number one response. Wealth management is fraught with increased regulation, execution risk, a lack of expertise and culture integration issues. However, it is a wonderful tool to build cross-selling opportunities, customer loyalty and fee income, if done correctly. What is the best direction to begin for a community bank? One of the best ways is to not reinvent the wheel, yet try to do something that differentiates you from others and is easy to implement. How about considering the 401(k) business? But before you decide to market 401(k)s, you might consider reviewing your own 401(k) program.

401(k)s have an inherent risk that many bankers haven’t considered and it is fast becoming a nationwide problem for those worried about Enterprise Risk Management.

  • Did you know there are 38 cases of ongoing lawsuits where employers are being sued by employees for issues related to employer-provided 401(k) programs? Did you know this includes employers such as The Boeing Co., Walmart Stores, Lockheed Martin as well as 401(k) providers like MassMutual Financial Group, which are being sued or have been sued by their own employees over 401(k) programs?
  • Do you know if your provider is or has been sued by its employees or others?
  • Do you know what your fiduciary risk is as a plan sponsor?
  • Do you know if your provider is a fiduciary or whether you, as a sponsor, bear that risk exclusively?

So what’s all the fuss about? 401(k)s have been around for about 40 years. Yet, providers have been more focused on making money and pushing product than providing the best portfolio and overall solutions for employers and their employees.

Most plans contain many issues:

  • Provider companies don’t act as a fiduciary alongside the employer plan sponsor.
  • There is no investment advisor fiduciary to assist the plan sponsor (i.e. the employer).
  • The provider is pushing its own funds, which represents a conflict of interest.
  • High fees look egregious, especially in a market that has a poor outlook for stocks, bonds and cash.
  • There is a lack of disclosure of all fees involved, although recent legislation is improving the level of disclosure.
  • Many plans offer poor structure and poor performance. Recent studies over the past 20 years show the average stock and bond mutual fund investor has under-performed the S&P 500 and the Barclays Aggregate U.S. Bond Index by a whopping 4 percent to 5 percent per year.
  • Even plans with stable value and target-date funds have issues of fees, structure and poor performance.

The recent Supreme Court ruling in May, 2015, requires plan sponsors to “monitor trust investments and remove imprudent ones. This continuing duty exists separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset.”

An independent review of your plan can have the following benefits for you:

  • Reduce enterprise risk management issues
  • Lower fees, improve structure
  • Improve performance
  • Lessen fiduciary risk exposure
  • Lessen other liability risk
  • Improve employee morale
  • Provide a competitive hiring edge
  • Satisfy ongoing monitoring obligations

Despite the risks, 401(k)s are a great way to enter or enhance wealth management divisions and add interest income to the bank. It’s a fairly easy way to compete given the large problems in the industry that are loaded with many poorly structured and under-performing 401(k) plans. We know many banks with large trust departments and wealth management businesses where 401(k) sales are the biggest profit center in that line of business. Designing a great 401(k) can help shape your employees’ future and make a long-lasting impact on their lives. Don’t settle for a mediocre plan. When your employees and your customer’s employees deserve a really great plan that helps them meet their financial goals.

Do you want a chance to impact your employees’ well-being, reduce your enterprise risk, improve performance for employees, the bank and the bank’s customers? Consider learning more about 401(k)s.

dwiley

Dory A. Wiley is president and CEO of Commerce Street Holdings, LLC, the holding company for Commerce Street Capital, LLC, and Commerce Street Investment Management, LLC.