Have you ever wondered who is looking after your 401k plan? Who makes sure that your plan is set up properly and that it is working for you? A lot rides on the answers to these questions.
More than 54 million Americans rely on 401k plans to help them prepare for retirement. Unfortunately, many plan participants don’t understand how they work or how to use them properly. I want to change that. Over the next few weeks, I’m going to reveal the inner workings of the 401k universe. By the time we finish, you will be better prepared to get the most out of your 401k plan.
A 401k plan is a special purpose trust set up by your employer to help you save for retirement. Your plan’s activities are overseen by one or more people known as plan trustees. Plan trustees are fiduciaries and are legally responsible to make sure the 401k plan operates for the exclusive benefit of the plan’s participants and the participants’ beneficiaries.
Plan trustees also ensure your 401k plan complies with the requirements of the Employee Retirement Income Security Act, or ERISA. Among other things, ERISA requires that all plan participants are treated fairly. It also prohibits certain transactions within 401k plans so that trustees and other fiduciaries don’t use plan assets for personal gain.
Each 401k plan has a formal written document that describes in detail how the plan operates. There is also a shorter version called the Summary Plan Description, or SPD. Your employer should provide you with an updated copy of your SPD every year. Take time to read your plan’s SPD. It summarizes what you can expect from the fiduciaries who manage your 401k plan. If you read the SPD and feel like you need more information, you can request a copy of the full plan document from your employer.
One of the most important duties of the trustees is to oversee the selection of investment options within the plan. Often, trustees delegate this responsibility to an investment advisor. Trustees then monitor the activities of the investment advisor to make sure that she is fulfilling her duties with skill, prudence and diligence.
Trustees also make sure plan participants are informed regularly about the status of their accounts. If your plan allows you to direct the investments within your account (and most plans do nowadays), the plan must provide you with a statement of the value of your account at least quarterly. Many plans now allow you to go online and check the value of your account whenever you want.
Trustees should also report on the performance of the individual investment options within your plan, as well as the fees associated with each investment option. It is important that you pay attention to the quality of investments offered in your 401k plan. One of the biggest criticisms of 401k plans has been the poor menu of investment options. In a future installment, we will talk about how to evaluate the quality of your investment options.
If you have questions or concerns about your 401k plan, you are entitled to answers. Under ERISA, employers cannot fire or discipline employees as a reprisal for exercising their rights under a retirement plan. Therefore, the best place to start seeking answers is with your employer. However, if that doesn’t work, you can contact a benefits advisor at the U.S. Department of Labor at www.askebsa.dol.gov and click the link to “Ask a Question, Submit a Complaint, Report a Problem.”
Next week: Is my 401k a rip off?
Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to firstname.lastname@example.org