Deciding whether to implement a company retirement plan can be a major decision. Not only are there the associated “hard” costs like admin fees, setup fees, and fund expenses. But there are also the “soft” costs related to the time that it takes to set up and administer the plan.
As a business leader, you might ask yourself: “Where do I even start?” Maybe you call your banker or insurance broker. Or you might take the path of least resistance and reach out to your payroll provider or PEO thinking that they can help you hit the 401k “Easy Button”. Regardless of what you decide to do, getting unbiased advice that isn’t influenced by a potential commission, bonus, or referral reward is always the best option.
We’ve detailed 9 things to look out for when considering a retirement plan, and we’ve tried to explain everything as simply as possible, so that you don’t need to be a retirement plan expert in order to understand them:
1. Type of Account:
Business leaders usually have access to a few different types of company retirement accounts. These are the 401k or 403b, the Simple IRA and the SEP IRA. In this post, we will focus on the 401k account since it tends to be the most advantageous for growing companies. That’s because it’s ubiquitous, it allows for the highest contribution limits, and it the type of retirement plan that most professional employees are familiar with. Ask a professional which plan you’re eligible for and which one would be the best for your company.
2. Cost to start a 401k
Next up are the costs of putting a plan into place. First, be aware that there are fees associated fees with every plan – there’s really no escaping that. These fees include set up and implementation fees, record keeping fees, and similar administrative fees. These fall under the umbrella of plan sponsor (employer) fees. Some of these fees may be transparent and included on a menu of costs and others may be baked into the investment options themselves. Pay special attention to setup AND termination fees whenever you are getting involved with a 401k vendor. Request a fee disclosure and make sure to review it for any transaction fees and asset fees charged to employees, above and beyond what the company is already paying (these may be called expense ratios, wrap fees, or 12b-1 fees). Ask whoever is pitching you what your “All In” fees are, including employee AND employer fees.
Any plans that are considered qualified or tax advantageous typically require that they do not discriminate between highly paid employees and those who are not highly compensated. There are all sorts of testing requirements that need to take place in order to make sure that the plan you put in place is not discriminatory. Some providers will outsource this work, which adds cost to you, the plan sponsor. Consider that when calculating your overall costs and comparing plans. If you want to avoid testing and and the potential disqualification of your plan you should consider making your 401k plan a “Safe Harbor” plan (anytime you see the term “Safe Harbor” it tends to mean that the government is offering you a “get out of jail free” card as long as you play by the rules”). Ask yourself if you have the time and interest to administer a 401k yourself.
4. Compliance (again)
A section so good, we included it twice! You’ll want to make sure that you purchase a Fidelity Bond when your plan starts. These relatively inexpensive insurance policies cover individuals on the employer side that are dealing with the management and administration of the plan. You will also need to make sure that you submit a Form 5500 to the IRS and US Department of Labor each year that provides detail on the plan itself. And if you are over 100 employees you must have your retirement plan audited each year. Lastly, if you offer company contributions like a match or a profit share, you’ll need to make sure that you’re not giving more money to highly paid employees than lower paid employees at the expense of the U.S. taxpayer. Ask yourself whether you’d rather outsource the administration of your retirement plan.
5. Administration of retirement plan
We’re assuming that most business leaders didn’t start their company wanting to manage the whole process of administering a retirement plan. It’s important to note that retirement plans can be administratively burdensome. This burden usually comes in the form of time spent dealing with the 401K vendor, employees, systems, and management. There can be a lot of time spent on payroll integration, reviewing investments offered, assessing loan availability, and fulfilling compliance requirements. Very rarely is there an easy button to start and manage 401k plans, and if you are using a plan with an easy button, you may not have the best available plan. Ask your payroll provider if they sync up with the 401k provider you’re interested in, and vice versa.
Some retirement plan vendors are more highly regarded than others. Some retirement plan vendors focus on growing companies, others focus on mature companies, and so on. Look around before you commit to one, and see what others say about customer service, hidden fees, etc. If you are using a PEO, your retirement vendor may already be chosen for you. Depending on who your payroll provider is, they may steer you towards specific 401K vendors that integrate directly with their system. Remember that choosing a vendor which integrates with your payroll system can actually save you a lot of time and money by not having to migrate data manually. Ask some other business leaders what they (specifically) like or don’t like about their 401k provider.
Some companies operate without a 401k advisor. Some choose to engage a 401k advisor. Advisors can vary: some are helpful and hands off, others try to interact directly with your employees so that they can bolster their book of business. Some advisors get paid through the 401K plan itself and some get paid by sending you a bill. A good advisor should review investments with you at least quarterly. It’s also important to note that not all investment advisors advise on retirement plans (this is different from assisting individuals with their financial plans). Ask your advisor what they charge, how it’s charged, how often you’ll meet, and what their investment philosophy is.
8. Helpfulness to start and manage a 401k plan
When looking at a 401k vendor, you want to see how much assistance they provide you. Do you dial into a call center? Do you interact with them directly via email, or a dashboard, or chatbot only? Can they provide any sort of education to your newly eligible employees? All of these things cost money for the vendor, but can end up saving you money in the long run. Ask your vendor or potential vendor(s) everything in this section.
You might say to yourself now: “But we just started talking about putting the 401k in place!” Yet it’s possible after a year that you might not like your 401k vendor and want to switch. Make sure that you keep an eye out for any “gotchas” in the contract, specifically in the form of termination fees. If you decide to terminate your relationship with a large 401k vendor, plan on falling into a queue with strict timelines and deadlines. There are also strict compliance requirements related to notifying plan participants about the change. Make sure this is considered before you engage with a vendor, so that you are not put in a costly and complicated situation when you want to make a change.
This post looks at one type of retirement plan option that many small to medium size businesses choose. It can be more complex than it sounds, and oftentimes you don’t get the whole story in the sales pitch. Use these tips to make sure you ask the right questions, gather enough information, and make the best decision for your business and your employees. If you are using a PEO and are unhappy with the 401k option, or need further assistance, see our blog on Choosing a PEO or contact us at firstname.lastname@example.org.