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A Question from Our Board

Here’s a recent conversation that may help shed some light on selecting persons at your organization to serve on your retirement plan oversight committee —It’s actually a hypothetical, but the professionals at Qualified Plan Advisors provide guidance of this nature to clients on a frequent basis.

“Hello, Bill. My HR Director just asked me to explain why our Board Chair cannot serve on the 401(k) committee. I mentioned our prior discussions, along with the conclusion that she would not devote her time to overseeing the retirement plan, which we made last year. But I could use a few reminders about what we discussed.”

“Sarah, I appreciate you calling me about this. Here’s some helpful points:

  • Your Board Chair is certainly free to serve on the committee.
  • The caution is because your Board of Directors, including the Chair, make choices as to how ABC Construction operates. In the event that a lawsuit is brought by the shareholders, unless a decision is clearly unreasonable under the circumstances, the law will not second guess or attach liability for that corporate decision making. This is generally referred to as the Business Judgement Rule, or “BJR.” And the protection applies to your Board’s fiduciary duties to shareholders and even when a decision may turn out to be a mistake, in hindsight, from that perspective of the shareholders.
  • The liability for serving on the 401(k) oversight committee is different. If your Chair serves on this committee, she will have a fiduciary duty to adhere to the legal requirements applied by ERISA. The fiduciary standard is rigorous and has been called the highest known to law by the U.S. Supreme Court.

 

And here’s the other thing. When she serves on the committee, she must take off her “business hat” and put on her “fiduciary hat,” making decisions that are exclusively in the best interest of the plan’s participants and their beneficiaries, not the business. Many of our executives struggle with the notion of putting on that fiduciary hat, taking the risk that their knowledge of the business would be scrutinized as somehow influencing their decision making on the committee. And that’s disregarding the risk of potential personal liability that ERISA imposes, as you and I have discussed many times.”

“Thanks, Bill. That helps. And I remember the insurance conversation from last year, when you worked through the D&O coverage discussion to confirm that it doesn’t apply to claims for breach of fiduciary duty under ERISA. Our subsequent decision to add the fiduciary liability coverage helped everyone on the committee feel much more comfortable.”

“You’re welcome, Sarah, I’m happy to talk more with the Director, committee members, or you. And if we need to get one of our ERISA attorneys on the phone, I will make that happen.”

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Reimagining Financial Wellness in a New Normal

Much of the talk about financial security tends to focus on long-term investing and accumulating sufficient wealth to retire comfortably. But the pandemic has shown us that when a current financial crisis must be navigated, simply having a well-funded retirement account can offer little consolation. 

If an individual has been laid off or seen their hours reduced at work due to the far-reaching economic effects of COVID-19, they may suffer immediate and severe anxiety no matter the size of their retirement nest egg. Additionally, the pandemic uncovered that many Americans lack a basic understanding of their expenses and corresponding cash-flow needs.

The clear message to employers? If employees are to achieve true financial wellness, they must have more than just a solid long-term plan. Adequate savings to draw from in an emergency are just as important, as well as the knowledge and confidence to handle adverse economic issues as they arise.

The importance of financial wellness programs for the employer & employee 

Financial wellness is critical because, without it, employees can become preoccupied with money burdens. The greatest source of stress across the country is financial, significantly outpacing any other category. The logical extension of that is if employees feel financially stressed and preoccupied with money concerns, they’re going to be less focused on work and therefore less productive and efficient. As a result, the productivity of the organization is driven down and profitability suffers.

On the flip side, financially fit employees are more relaxed, comfortable, and confident. They’re mentally and physically healthier, which means they show up for work more often, are better motivated and contribute to a greater extent, benefiting their employer from a bottom-line perspective.

As I stated earlier, when promoting a financial wellness program, offering a 401(k) plan alone is not enough. Yes, it’s a great first step since it can greatly benefit employees when they eventually retire, but it doesn’t go far enough because it only addresses the long-term planning aspects of a person’s overall financial picture. It does not address the short- and intermediate-term planning that should also be emphasized. A financial wellness program should cover all aspects of an individual’s financial goals.

What should the curriculum look like?

Traditionally, much of the education offered by employers about their 401(k) plans could be considered modular, with topics addressed independently and little attention paid to their interrelation. A legitimate financial wellness program is more likely to be a comprehensive curriculum, where employees learn how the company retirement plan works, but also how it fits into their overall financial picture and how to achieve financial goals that come up before retirement. 

Regardless of the format or content of the program, employers should ensure they include a strong emphasis on budgeting. This would entail employees taking a hard look at their income and expenses, and being taught how to better handle money, including ways to save that instill more comfort and confidence.

Employees would also benefit from education about investment options beyond the company 401(k) plan, such as the use of a 529 plan to save toward college education for their children. Employers should consider delving into family protection, including short- and long-term disability coverage and whether a life insurance policy might make sense.

For older employees who are closer to retirement, education around Social Security is key. This could include details about the ages of eligibility to receive partial and full Social Security benefits, as well as how much reliance should be placed on these funds. When you pull all of that education together, it becomes a much more comprehensive assessment of an employee’s financial picture than merely a number that rests in a 401(k) or 403(b) account.

Financial wellness is here to stay

A much more widespread and genuine motivation has now emerged among employers. Many truly want to foster and facilitate financial wellness rather than just implement a program that can be touted in an employee handbook or recruitment brochure. The bottom line is that companies are directly and adversely impacted when their employees aren’t financially well. The drastic impact of the pandemic has ensured that the level of employer commitment to financial wellness will increase significantly.

 

Advisory services offered through Prime Capital Investment Advisors, LLC. (“PCIA”), a Registered Investment Adviser. PCIA: 6201 College Blvd., 7th Floor, Overland Park, KS 66211. PCIA doing business as Qualified Plan Advisors (“QPA”).