Plan Sponsors Ask...Q1 2021

Q: The ups and downs in the stock market have made some of our 401(k) plan participants very nervous, to the point that some have moved their entire accounts into money market funds. Is that a good strategy for retirement savings? 

A: First, be aware that you cannot offer investment advice to participants; doing so could violate your fiduciary duties. You can, however, offer general investment education. Your nervous participants are correct that 2020 has stimulated a lot of market volatility, and it may continue. But over the years, dollars that stay invested in the stock market have historically done better than dollars that come and go based upon the emotional response of the investor. One recent blog post commented on research from DALBAR, showing that investors’ desire to “do something” in turbulent times may have resulted in underperforming the S&P 500 by 4% per year between 2009 and 2019. Similar results came in the bond market, in which the average non-index investor lagged behind the Bloomberg-Barclays Aggregate Bond Index by 3% during the same time period. Sadly, those investors did not manage to beat the inflation rate during that decade. Learn more at https://tinyurl.com/nationwide-markets-economy.¹

Q: We’d like to make some changes in our plan investment menu. There are participants with money invested in the funds we have identified to eliminate. Is it a good idea to grandfather these participants, allowing them to remain in those funds while closing them to new investors?

A: This should be a discussion with your plan’s investment professional. In fact, you may want to cover the topic with the plan’s attorney, just as a housekeeping matter. But as you make the decision, consider that even when the decision is made with the best of intentions, grandfathering may not achieve the desired outcome. When you make a change to plan provisions, investment options or even your other benefits, non-grandfathered employees will likely find out about it. Whether new employees or those who are established come out “better off,” you can be sure the word will spread, and that could be disruptive. And don’t forget the compliance aspect of making changes for one group over another, says Cammack Retirement. They cite the potential for failing future nondiscrimination tests that may result from grandfathering employees in certain situations. While that may not be the case when changing a plan investment, it underscores the need to think through potential outcomes when considering grandfathering in the plan. Read here for more information: https://cammackretirement.com/knowledge-center/topofmind/why-grandfathering-can-backfire.

Q: With two options for paying 401(k) plan expenses — either from company assets or plan assets — we wonder if there is a fiduciary argument for one over the other.

A: One fiduciary argument springs immediately to mind: there is no risk of excessive fees being charged to participant accounts if the company is footing the bill. Still, it’s a good question to ask when structuring a new plan, or re-examining an existing one. Besides the fiduciary liability benefit, there are several other reasons paying plan fees with company assets could benefit both the company and plan participants, according to Capital Group. First, because plan fees are tax-deductible, paying from company assets may result in tax savings. Second, it can improve transparency to participants, which may contribute to employee relations efforts. Paying from company assets may also mean more investable assets. Not only could that result in better pricing, it may lead to higher account balances for participants down the road. Take a look at the article here: https://www.capitalgroup.com/advisor/pdf/shareholder/RPGEFL-408-617981.pdf.

¹ Past performance is no guarantee of future results. Individual results may vary; investors may not invest directly in an index.

©2021 Kmotion, Inc. This newsletter is a publication of Kmotion, Inc., whose role is solely that of publisher. The articles and opinions in this publication are for general information only and are not intended to provide tax or legal advice or recommendations for any particular situation or type of retirement plan. Nothing in this publication should be construed as legal or tax guidance; nor as the sole authority on any regulation, law or ruling as it applies to a specific plan or situation. Plan sponsors should consult the plan’s legal counsel or tax advisor for advice regarding plan-specific issues.