The majority of dealers are in the category of those who understand that they have fiduciary responsibility for their 401k plan, but are uncertain how it affects them.
If you're a fiduciary of a defined contribution plan, which most dealership owners are, then it is important for you to understand the ERISA 404(c) compliance rules and how they affect you.
What is 404(c)? This legislation shifts responsibility for investment results, education, and administration, from the employer to the participant. If properly followed, 404(c) compliance takes the plan sponsor out of the investment business, and gives investment choice to the employees. This limits the potential liability of the trustee.
It seems to me that every dealer would want to take the simple steps necessary to comply. But how?
There are a few common sense strategies that a plan sponsor can use to ensure that their liability should be covered. This strategy includes selecting a plan with broad investment choices, strong educational opportunities for the employees, ongoing performance evaluations, and yearly assessment of the plan's goals and objectives.
Compliance with 404(c) mandates that you offer five investment choices with materially different risk and return characteristics. A plan sponsor must allow a participant to create a portfolio with risk and return characteristics suitable to their objectives. Once you've chosen the categories, you need to pick specific mutual funds or investment managers for each slot. The selection of a manager is itself a fiduciary responsibility. Any of the major 401k vendors take this responsibility off your shoulders by doing the manager searches for you. It is important that the fund has name recognition with participants.
You also must conduct ongoing performance evaluations. Plan sponsors need to regularly review the performance of each of the investments and how they compare to the major indices. Any of the plans from the major 401k vendors will do this for you.
Most importantly, don't forget the communication. You are required to give information to participants about their choices. Take this opportunity to remind your employees that your company provides a substantial benefit by offering the plan. If your plan is lacking, use this as an opportunity to bring in a new plan that will bring benefit to your employees. In the communication category of 404(c) compliance, you should incorporate a broker of record who will conduct quarterly educational meetings and individual enrollment meetings with the employees. The broker of record should be readily available for any questions the employees might have considering their assets.
The primary reason you must offer a plan with self-direction of assets is that each employee can "customize" an investment program unique to their specific objectives and risk tolerance. There is no way a single, commingled fund with a particular asset mix could be the appropriate retirement planning vehicle for each and every participant.
As a third-generation member of family owned automobile dealership, and a full-service retirement planner, I can tell you how useful a quality 401k plan can be for your dealership. A quality 401k plan can be used as a great recruiting tool for new employees, can enhance the administrative capabilities of the individuals in your back-office and give great synergy within your employees. Furthermore, a quality 401k plan should give your employees the best chance to achieve comfort in their golden years. These simple strategies will take the liability off your shoulders and make your employees ecstatic. A great 401k plan makes for happy employees, which will make you a happy employer.