Time for a Defined Contribution Plan Checkup?

By Jeff Chang

Many public sector employers maintain various defined contributions plans (either 401(a) or 457(b)) in addition to their participation in a large, public-defined benefit system, such as CalPERS, CalSTRS or a ’37 Act county plan. There are a number of reasons that these plans get little attention from their sponsors. But, there also are a number of very good reasons why the public agencies that maintain them should give them a “checkup” from time-to-time. 

Often, these plans, particularly the 457(b) plans, are funded solely with employee pre-tax contributions. Furthermore, all of the fees and expenses of such plans are usually paid by the participants’ accounts. As a result, the sponsoring employer has little or no “skin in the game” – that is, a reason to carefully evaluate or monitor whether the fees and expenses are reasonable and appropriate.

However, a careful review of the plan document will usually reveal that the sponsoring employer (which could be interpreted as the entity’s governing body) is the “plan administrator,” with responsibility under the California Constitution and Government Code for making sure that the plan documents are followed, that the investments offered are appropriate and diversified, and that the fees and expenses charged are reasonable and appropriate. To the extent that the plan allows participants to “direct” the investment of their accounts, California’s Government Code requires that ERISA-like rules be followed to protect participants’ interests.

Unfortunately, most public agencies that adopt these plans rely almost exclusively on the advice of the insurance company-record keeper they selected to help “record keep” their plans with respect to:

  • which investments to offer,
  • what fees/expenses to pass through to participants and
  • which features to include in the plan document.

This process is much like asking a car salesmen to tell you what features and accessories they think you should have on your new car. As mentioned in an earlier post on fee issues, the fee structure and arrangement for most of these plans is based on the value of plan assets at the time the relationship is established. As, and when, plan assets grow through contributions and investment gains, the fees paid by participant accounts increase and grow as an absolute dollar amount, even though the cost of actually recordkeeping the plan has not. Since it generally costs no more for your bank to keep track of $50,000 than $5,000, why pay an “accounting” fee that is based on the value of the account?

To properly administer your defined contribution plans, you need to make sure that you have all of the necessary plan documents, related agreements, plan policies and administrative forms (e.g., beneficiary designations, deferral elections) available. You need to have your plan document reviewed to make sure that it is up to date and that you are aware of the plan’s features and fiduciary structure you have put in place.

A good place to start is to have your employee benefits counsel perform a simple baseline checkup — like the one that your doctor would perform — to ensure you have all the basic information and documentation needed to properly operate and administer you plans. Remember, in almost all cases, you or someone within your agency has overall legal responsibility as the “plan administrator.” Most insurance company-recordkeepers go out of their ways to clarify that they are not the plan administrator.

Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at jeff.chang@bbklaw.com or (916) 329-3685.

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