The #1 401(k) Problem for Small Business Owners

The business and economic cycles have a major impact on how you make decisions.

So knowing that the yield curve inverted, what the stock market is doing and what the 3-month average for the non-farm payrolls says is very important.

However, generating profits is the main goal and that takes up probably 90% of your time if not more.

By the way, there’s that 401(k) plan you’re responsible for as well.  Larger firms can staff themselves with the specialists to handle the many duties of the 401(k) plan, but as a small business owner it can be overwhelming.

As a 401(k) plan sponsor, you definitely have the option to hire certain professionals to help with some of the duties like delegating the record keeping duties to an outside firm.

However, the greatest potential financial liability is the investment area.  Hiring an investment manager for selecting, managing, monitoring, benchmarking the investment offerings within your 401(k) plan and has full discretion to make investment decisions can help mitigate the financial liability.

The two most common types of investment fiduciaries are referred to as “3(21)” or “3(38)” advisers. The difference can be explained by using an example of 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.  It then becomes the decision of the employer to either accept or reject the advice.

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.  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, choosing a 3(38) investment manager is the best option.  This choice accomplishes more than just reducing (albeit not eliminating) potential fiduciary liability.

The 4 Main Areas of Focus Are:

  • Investment Analysis
  • Cost Analysis
  • Compliance Analysis
  • Key Deadlines

With a 3(38) provider, you no longer have to devote as much time to selecting, monitoring, and deciding on investment options. Also, your fiduciary advisor can help you navigate your fees, understand your fees, and negotiate on your behalf to lower your fees. And as your advisor is flying the plane they can help the passengers aka employees with education of the 401(k) plan, as well as, achieve their retirement readiness goals. 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.  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.

Now you and your employees can focus on what matters the most which is generating profits for the company.

If you’re not working with a 3(38) advisor or running your 401(k), 403(b), 457, Profit Sharing or other corporate retirement plan seems to take more of your time, then maybe it’s time to switch.

Until Next Time….

Related: 11 Money Habits to Follow for Millennials and Gen X, Y, Z’s