A 401(k) is a valued employer benefit because it has features and characteristics that you cannot get in other retirement plans. But many small business owners are hesitant to offer the benefit, due to fear of the cost or administrative complexities.
While these issues bear watching, the truth is that it’s never been easier to start setting up a 401(k) plan that has reasonable fees and great service.
If you know what you want, you – or any small business owner – can craft a plan that is specific to your objectives. Therefore, you should view a well-constructed 401(k) plan as a piece of capital equipment rather than a human resource cost center. Like a piece of machinery, it needs good mechanics to run smoothly.
The key is in knowing what to look for.
With that said, when setting up a 401(k) for your small business, I recommend looking for these six factors:
- A cost-competitive plan
- A good sponsor experience
- A good participant experience
- Options for employee education and encouragement
- The right investment selection
- A customized plan design
Let’s dive into each factor in an effort to make the process a little less intimidating. And, if you’re still intimidated, remember that working with an investment advisor can help to make the process easier (we’ll touch on exactly how as we go along).
All right: here’s how to start setting up a small business 401(k).
A Guide to Setting Up a 401(k) for a Small Business
1. Look for a Cost Competitive Plan (But Be Realistic)
You can defer significantly more money into setting up a 401(k) than you can into other types retirement plans (such as an IRA), in part because the government requires these plans to have more checks and balances. By definition, 401(k) plans must have a minimum administrative burden to be in compliance.
Administrative fees for small plans can range from $800-2,500/year to manage day-to-day tasks and prepare the 5500 filing. Recordkeepers also typically charge a per-participant fee ($15-60/year) and may have fees for optional services (open platform, specialized profit-sharing plan testing, etc.).
I believe that many well-known financial service companies (Fidelity, Schwab, Vanguard) are not competitive in the small business 401(k) arena, because they have higher fixed administrative costs than other options.
How an Investment Adviser Helps: Unique User Perspective
Investment advisers offer an interesting, independent, third-party perspective on recordkeepers. Investment advisers with many 401(k) clients will integrate with several platforms; the investment adviser simply “plugs” in and is given the appropriate rights and privileges. These platforms may have key features, such as payroll integration, low price, or plan customization.
In a short interview with a business owner, an investment adviser will be able to figure out which services the plan should have and will know the best value for the ideal configuration.
2. Look for a Good Plan Sponsor Experience
If the recordkeeper does not have good plan sponsor support, you’ll spend valuable time learning the process. Resolving compliance issues can be extremely time-consuming and complex. If you spend $400/year less on administrative costs but take an extra 45 minutes to deal with every administrative nuance, the chances are that you didn’t save any money.
How an Investment Adviser Helps: Knowing the System
If a specific recordkeeper is not user-friendly, the plan sponsor’s next call is usually to the investment adviser. The investment adviser is familiar with the system and will know how to navigate the process quickly and efficiently.
3. Look for a Good Participant Experience
If the participant doesn’t find the system easy to use, it isn’t a good value. For instance, choosing a recordkeeping option that is low-priced can sometimes translate into a frustratingly low level of service. Easy-to-use participant interfaces, responsive 800 customer service numbers, and strong online technologies are all important features to look for on behalf of your employees.
How an Investment Adviser Helps: Participant Advocate
The participant needs to know that there is someone in their corner looking after their interests. Investment advisers are plan fiduciaries, which means they have an obligation to look after the best interests of the participants. There is a whole language that recordkeepers speak that’s foreign to the average participant. Investment advisers can help participants to translate obscurity into clarity.
4. Look for Avenues Toward Employee Education and Encouragement
Financial services and investing are complicated. Unless there is quality educational support, many employees will fear making a mistake and will choose to take no action. Plans that aren’t used are not valued.
How an Investment Adviser Helps: High-Touch Service
In my professional experience, employees value face-to-face participant support more than any other support service. That’s why, at Sapling Wealth, I always start out my plans with a heavy degree of personal contact.
Most advisers may utilize financial technology tools to help participants gauge their investment risk tolerance and make basic retirement strategy projections. As trust builds between the participants, the adviser, and their plan, they will utilize the plan more fully and value it as a human resource benefit. This is particularly important with auto-enrollment plans.
5. Look for the Right Investment Selection
More than anything, participants want an investment selection that matches their wealth creation strategies. For instance, if a high percentage of employees are reaching retirement age, the plan should offer more investment options catering to those investment preferences. The plan sponsor has a fiduciary obligation to carefully select and monitor the investment line-up in the plan.
How an Investment Adviser Helps: Select, Monitor, and Organize
Investment advisers study the company’s employee demographic and will handpick funds that offer the best value for the participants. Investment selection will vary due to the degree of financial sophistication of the employees, age, and investment risk profile.
Monitoring investments is a fiduciary obligation (and potential liability), which most plan sponsors prefer to offload onto the investment adviser. Investment advisers also should complete an Investment Policy Statement (IPS) outlining the objectives of the trust and conduct annual investment committee reviews.
6. Look for Customized Plan Design
401(k) plans are incredibly flexible and one of their major benefits is that they can be customized to the objectives of the small business. Is the objective of the small business to recruit and retain employees or to build retirement wealth? Or both?
Plan design can be changed to accommodate a wide range of small business owner interests.
How an Investment Adviser Helps: Review Plan Structure
A periodic plan review that updates the plan to include (or eliminate) features is an important component of good plan design. When these plans are set up, they reflect the objectives of the plan sponsor at that time; that means that they’ll often include features that don’t get used but still cost money. I frequently see plans that can reduce their administrative fees by $800/year by eliminating features that are not used.
The Bottom Line: Setting Up a 401(k) for a Small Business is Worth It
If you know what to look for, setting up a small business 401(k) can be a great decision that benefits your employees and, ultimately, your business. If you consider these six factors, you’ll be on the right track.
And if you’re still a bit intimidated, let’s talk.
At Sapling Wealth, I work closely with plan sponsors and strategic vendors to design thoughtfully structured retirement benefit plans for your small business and help you minimize fiduciary risk. Together, we can take into consideration the objectives of your company – employee retention, personal retirement wealth creation, profit sharing methodologies – in selecting from the myriad of choices available in a state-of-the-art 401(k) plan.
In fact, I can set up a plan for a small business with 10 employees that is lower cost and higher performing than my 401(k) was 15 years ago at a Fortune 500 company.
Don’t let intimidation keep you from setting up the 401(k) that you and your employees deserve. Get in touch for a free consultation, and let’s review your needs today.
