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Top Mistakes Made by 401(k) Plan Sponsors

Join Josh Brown, CEO of Ritholtz Wealth Management, and Aaron Schumm, CEO of Vestwell, as they discuss the top mistakes made by 401(k) plan sponsors.


Josh Brown: Hi, I’m Josh Brown from Ritholtz Wealth Management.

Aaron Schumm: I’m Aaron Schumm, founder & CEO of Vestwell.

Aaron: Alright, great so as we’re talking about the retirement landscape and you’re working with these plan sponsors, what mistakes have you come across that someone may have either made with an advisor or not made if they’ve established a plan on their own?

Josh: So, two very big ones and to some extent they’re connected. The first is not understanding the level of fiduciary responsibility that they’ve taken on, either because the way they initially set up a plan, they just assumed “okay this is all done.” Not really understanding that changes happen and sponsors have to keep up with these changes whether they want to or not. So, I think that’s a big one. But then the other one is a little bit more insidious because it’s hard to see—which is inertia. And it kind of goes along with that—where you know the plan is set, the paperwork arrives on schedule, the point of contact is the point of contact. And the sponsor is just kind of like “Yeah I guess it’s working, everything’s fine.” And as we know, it never works out that way, when in hindsight somebody looks back and says, “You’re telling me for the last 10 years we were in A-shares, paying 150 basis points, when we should have been switched—because we qualified on a breakpoint to the institutional share class. And when you put that in front of a lawyer, the lawyer says, “Do yourself a favor: sell this as quickly as possible. Don’t even waste your time. You are done.” And there are probably 10 issues like that. So, these are things that you come across and they’re really easily avoidable, just by having guidance, having an advisor in the process, letting you know that these things exist and that they are problematic.

Aaron: Yes, people think it’s just running in the background as it should and you’re getting the best advice possible and it’s all there and it’s being invested appropriately, but there is oversight that needs to happen. And we see a broad range of things that come across.

Josh: What’s the craziest thing you’ve seen, without naming names?

Aaron: Crazy…I don’t know if I want to go to the craziest things but some of the things that are kind of eye-catching are: we were converting a plan that hadn’t made a contribution via their payroll in over a year and no one noticed.

Josh: A matching contribution?

Aaron: No-

Josh: Oh, their employees?

Aaron: Their employees. It just wasn’t being deducted and there were supposed to be in this Safe Harbor plan. And you’re looking at it like holy shoot, you guys haven’t done anything.

Josh: And the markets probably gone up 20% that year because that’s just the odds.

Aaron: And it’s tough to convert that, right?

Josh: Right, right.

Aaron: Because you can’t convert it. Because we’re going to assume a lot of this responsibility then if we do so. So you have to work to get that all cleaned up, get the correction, have those conversations, make the actual adjustment there.

Josh: Wait, what’s the solution to that? Is it technical or is it a people skill that would prevent something like that from happening? Or a combination?

Aaron: It’s usually a combination. The technical aspect catches it. You know, if you go back and you’re designing the plan and you’re looking at how the plan was actually put together—the plan adoption agreement. And then tallying it off to the 5500 and so on. Then [realizing] whoa, we got a problem here. So you have to make sure that’s in place.

Josh: Right.

Aaron: We have people not file 5500 for years. So you have to go back and clean that up.

Josh: Yeah, you definitely want to not do that.

Aaron: Yes. It’s not done intentionally, just people don’t know. They assume someone else has got it, the TPA is doing it. Or the TPA may have sent it over and said “sign this,” but it never got signed.

Josh: That’s a good point. One of the things with the nature of these things is that there are so many people involved, there so many chefs. And there can be a tendency when you have an outside person doing this, someone else doing that. There can be a tendency to say, “They’re probably handling that.”

Aaron: Sure.

Josh: Or maybe they are handling it, and they stop, and you’re not double-checking. So it’s like an integrated approach, combined with an advisor, combined with a sponsor who actually gives cares, seems to me like that is the right answer.

Aaron: Absolutely. You have to know where to go and who to talk to. We’ve gotten calls where people are like, “Hey, I’m trying to move this from here, from a previous provider. I don’t know who to call. Can you track them down?” We’ll step in generally and try to help them out as much as possible, but the more you have—that one point of contact, that one person to go to, and say “This is where I can get my questions answered,” and make sure that everything is actually be processed as it should—is important and it eliminates the risk of you not getting sued at some point unbeknownst, till it’s too late.