By Jay Dismukes

Though strong stock performance may be the obvious hallmark of a good 401(k) plan, education and communication about the plan may be the clearest indication that a fiduciary is satisfactorily serving the needs of his company and its employees, some experts believe.

In addition to mitigating the liability to the fiduciary and the plan sponsor, routine education and communication about the plan illustrate the company’s attentiveness to its employees, reaffirming a close relationship between the two, Merrill Lynch representatives said during the June 4 Foundation for Accounting Education’s CPAs in Industry Conference.

“Your responsibility is to make sure that your people are as educated as you can get them to make an informed decision (about their participation in a 401(k) plan),” Merrill Lynch Assistant Vice President Keith J. Kawecki said during a presentation titled “Your Fiduciary Responsibilities for the Company 401(k) Plan.”

Though a company may decide to cover some financial aspects of its plan, Kawecki said the education should focus more on the existence and benefits of the plan rather than attempt to provide investment advice such as whether to pick stocks or bonds. Questions like this are probably best left answered indirectly, but an employee could still be directed to a disinterested third party for any advice he or she seeks, thus outsourcing a company’s liability.

To help ensure that employees are as familiar with their 401(k) plans as possible and take an active interest in them, Kawecki suggested companies consider simple steps such as holding 401(k) meetings on company time so that everyone attends; providing Spanish-language enrollment materials; and, because of turnover, conducting plan orientation meetings every six months. He also said company matches to employees’ plan contributions provide an added incentive for them to participate. The discussion also touched on the practice by some employers of automatically enrolling their employees in the plan, leaving it up to the employees to withdraw from the 401(k). While this is considered a more extreme approach, obviously requiring written disclosure to the employees, it was suggested that this practice could become the industry standard in the next five years.

The Legwork

As with most things, preparation is the key to success, and 401(k) plans are no different.

When choosing a plan, the Merrill representatives suggest forming a 401(k) committee that will solicit proposals from as many as 10 vendors, which will be pared down to three or four. The committee should then determine which vendor best serves their needs by looking at items such as how the plans function, associated expenses, the diversification of funds and the user-friendly quality of the plan provider’s Internet site.

As part of the 401(k) selection process and general upkeep, the representatives strongly advocate detailed documentation. This documentation includes a written investment policy statement that addresses such areas as the selection of investment managers, plan objectives, unique plan items—e.g., company stock—and guidelines for making decisions. Merrill also recommends holding onto other materials including a copy of the fidelity bond, security valuation reports, 5500 forms and vendor proposals.

For Consideration

To ensure that fiduciary responsibilities for the 401(k) plan are fulfilled, Merrill suggests that he or she act with prudence (commonly referred to as the Prudent Man Rule), incurring only reasonable costs, and that the following questions be considered:

• Is the plan currently diversified?
• Is plan documentation adequate?
• Is there a written investment policy statement?
• Is there adequate participant education and advice?
• Are there periodic investment and plan-provider reviews?

On this last issue, the Merrill representatives said that current thinking dictates that the plan sponsor explore the market every two to three years to ensure that it is getting the most value for its dollar.