The Solution To Small Business Owners’ Biggest 401(k) Problem

uncaptioned

As a small business owner, you might be most interested in knowing if and when an inverted yield curve predicts a recession. Economic cycles can have a major impact on your company.

Generating revenues in your business is what your world is all about. This is the challenge that consumes your day. No doubt it takes up most of your time.

But you know what you probably don’t have time for? It’s something near and dear to your employees’ hearts. Because you’re a long-term thinker, it’s also near and dear to your heart.

It’s your company’s 401(k) plan. Larger firms can afford to staff themselves with specialists to handle this all-but-mandatory corporate benefit. As a small business owner, you’re both responsible for the plan and responsible for making sure your business remains sustainable.

Many small business owners are aware of these equally important responsibilities. Are they also aware there’s a way to handle both and still get a good night’s sleep?

While it probably makes sense to keep your nose to the grindstone when it comes to actual business operations, you can delegate a significant chunk of your 401(k) duties to a competent third party.

Granted, the best way to do this may be through a 401(k) MEP. Unfortunately, even with the DOL’s new advice becoming effective at the end of September, you and your firm may still not qualify for this opportunity.

There is still another way. It’s what many plan sponsors have been using for some time. It’s a tried and true solution.

As a 401(k) plan sponsor, you have the option to hire certain professionals to handle specific portions of the plan. For example, most plan sponsors will delegate recordkeeping duties to an outside firm. It’s the investment area, however, that presents the greatest potential fiduciary liability.

Depending on the type of contractual agreement a plan sponsor enters into, a portion—sometimes a very large portion—of this fiduciary liability can be either shared or mitigated.

Plan sponsors can hire a wide variety of professionals to handle the selection and monitoring process of investments on the plan’s menu. By hiring a professional fiduciary, you can begin to offload some of the fiduciary liability associated with this area.

The two most common types of investment fiduciaries are referred to as “3(21)” or “3(38)” advisers. The difference can be likened to piloting an airplane.

A 3(21) adviser acts as a co-pilot. You share the responsibility (and retain your fiduciary liability). “A 3(21) is an investment adviser, but one who retains co-fiduciary roles and advises an employer of various funds as related to 401(k) investments,” says Daniel R. Hill, president of Richmond, Virginia-based investment advisory firm D.R. Hill Wealth Strategies, LLC. “It then becomes the decision of the employer to either accept or reject the advice. Typically, there are several parties involved with a 3(21) agreement.”

When you hire a 3(38) advisor, you’re turning over the keys of the plane to a third party who then pilots the craft while you sit in the cabin. In ceding control, you also fully transfer a big portion of your fiduciary liability. “A 3(38) is a designated investment fiduciary on a given retirement plan,” says Hill. “This investment manager is accountable for selecting, managing, monitoring and benchmarking the investment offerings within your 401(k) plan and has full discretion to make investment decisions.”

As a small business owner, you probably already see the advantage of going with the 3(38) option. This choice accomplishes more than just reducing (albeit not eliminating) potential fiduciary liability.

With a 3(38) provider, you no longer have to devote as much time to selecting, monitoring, and deciding on investment options. Chances are, the tasks associated with these duties are far removed from your day-to-day activities and from your actual experience. Your 3(38) adviser takes on the fiduciary responsibilities for these tasks.

Please note, you’ll still have the fiduciary responsibility to monitor how well the 3(38) adviser executes these tasks, which is why this option doesn’t totally eliminate your potential fiduciary liability. Despite this, you’re bringing on a level of fiduciary expertise that would take you years to learn. In this way, you are more likely to avoid the mistakes that can generate fiduciary liabilities in the first place.

There’s a still bigger benefit offered by a 3(38).

By delegating the most arduous tasks to experienced professionals, you’ll be freeing up your time to concentrate on the one thing that matters most to you and your employees: keeping your business making money no matter which phase of the economic cycle your industry happens to be in.

If it seems like running your 401(k) plan is taking more time than it should, maybe it’s time to check the nature of your third-party relationships.

Do you have a 3(38) adviser? If not, ask your current investment adviser if that’s a service they offer. Chances are they do.

[“source=forbes”]