One of the great things about 401(k) plans is that they are highly customizable to the objectives of the plan sponsor. That’s powerful; customization can ensure that small businesses get a great fit to serve their needs and benefit their employees. But customization can also make setting plans up somewhat complex, and, consequently, intimidating. A 401(k) consultant helps to reduce the complexity that business owners face and ensures that they get the right solution for their company.
A good 401(k) consultant listens to the small business’s needs, and then navigates the client through some critical topics:
- Identifying plan objectives
- Setting up plan operations
- Maintaining and optimizing plans
Here’s what that entails.
What Are the Plan Objectives?
Small business owners may have multiple objectives in mind when setting up a 401(k) plan. Here are examples of two:
Objective: Employee Recruitment & Retention
Many industries don’t have 401(k) benefits; offering them differentiates the employer versus other potential workplaces. If the owner is primarily interested in creating incentives to reduce employee turnover, they can structure a 401(k) plan with corporate employee contributions that slowly vest over time (up to 6-years for 100% vesting). These benefits are held in the employees’ names, and after an employee has worked at the company over 2 years, the benefits will “vest” each year.
The company can make the vesting schedules faster or slower depending on the business objectives. If the employee doesn’t stay employed at the company for the entire vesting period, that employee will not “earn” the benefit and it is subject to forfeiture. The downside to this type of retirement plan is that it’s subject to various testing provisions which may restrict the amounts that Highly Compensated Employees (HCEs) and Key Employees (owners, relatives) can put into the plan. If a testing provision is violated, the “cure” involves additional fees and contributions to the plan for the employees.
Objective: Build Personal Retirement Wealth
If the owner doesn’t want to have contribution restrictions on any employees (including themselves) they may consider a Safe Harbor Plan. Safe Harbor plans have richer benefit features that require minimum levels of corporate matching which vests 100% immediately.
The tradeoff for this more generous employee benefit is that the government waives the requirement to comply with certain testing provisions that can restrict amounts that HCEs and Key employees can put into the plan. Therefore, all Individuals can defer $19,000 of their own income into these accounts, and if you are over 50 years old, you can put another $6,000 in the plan.
If the 401(k) plan has a corporate match or profit sharing, the total can reach $56,000 ($62,000 if you are over 50). This compares very favorably to an IRA, which has contribution limits up to $6,000 (add another $1,000 if you are over age 50). Essentially, this is deliberate public policy to offer large tax incentives to business owners to help pay for richer retirement benefits for their employees.
How Does a 401(k) Consultant Help Set Up Plan Operations?
Each 401(k) plan is required to follow the rules outlined in an adoption agreement, which specifies the plan features.
Craft Plan Design
Plans can be customized to suit the business owners’ objectives by making changes to the plan’s adoption agreement. The key areas that can be changed include:
- Eligibility Criteria
- Contributions – Deferrals, Corporate Matching, Profit Sharing
- Vesting & Forfeitures
- Distributions & Loans
- Compliance & Other
As you can imagine, there are a myriad of ways to tweak a plan to match a plan sponsor’s needs. For instance, a plan can be set up to restrict an employee from participating for up to one year (to see if the new employee works out), or to allow immediate entry (recruitment tool). There is wide variability in the types of corporate matches available (discretionary, non-discretionary), and they’re subject to various vesting schedules. The selection of a certain profit-sharing methodology can dramatically change how a profit-sharing contribution is divided among plan participants.
Navigate Compliance Issues
A key concept plan sponsors must understand is that the company and nominated trustee are plan fiduciaries, which means they are taking on legal responsibility to carry out fiduciary functions solely in the interest of plan participants and beneficiaries.
For instance, if they don’t have the skills or knowledge to properly evaluate or monitor investment options, they have an obligation to engage a third-party expert to provide this advice on behalf of the plan. Fiduciaries can be held personally liable for breaches.
A small business doesn’t have the resources of a Fortune 500 corporation; therefore, it makes sense to understand what is available to the business and dial into the level of service required to run the plan efficiently.
For instance, some major payroll providers offer 401(k) recordkeeping that is linked to payroll. While this service may appear to be more expensive, it also eliminates a huge number of tasks for a company with lean resources. Companies that run payroll in-house may find it advantageous to avoid redundant services and find a more streamlined solution.
Generally, it makes sense to review operations about once every 3 years.
How Does a 401(k) Consultant Help to Maintain and Optimize Plans?
Finally, after setup, there are a variety of ways that 401(k) consultants help to maintain and optimize plans for improved benefits.
Most 401(k) plans are subject to section 404c regulations, which state that there must be a minimum of three different investment alternatives.
While this is relatively easy to satisfy, there also must by a process to select and monitor these investments. For instance, almost all mutual funds have multiple share classes, and each share class has a different fee structure. Most plan sponsors do not have a process to satisfy this important requirement – but a consultant can help to ensure proper selection and monitoring.
Reduces Plan Costs
Consultants can also reduce plan costs. I come across plans that were set up 5 or more years ago that have used features that cost the plan money, but the plan sponsor doesn’t know it.
For instance, certain profit-sharing methodologies require testing provisions that can cost $800-1,000 per year. If the profit-sharing feature is not even funded, it does not make sense to spend money testing a feature that is not used.
Reviewing which features are used and then removing unnecessary costs over time can greatly benefit the business.
Don’t Let Complexity Keep Your Business From a 401(k)
Yes, the levels of customization available in 401(k) plans can make them intimidating for small business owners to set up. But the benefits are great. And business owners don’t have to go it alone.
A good 401(k) consultant will take all of this information in and figure out a plan to coordinate all of the relevant stakeholders – Plan Sponsor/Plan Administrator, Recordkeepers, TPA, & Investment Adviser – and get the benefits small businesses deserve.
Here’s the bottom line: a 401(k) consultant helps small businesses to maximize the value and fit of 401(k)s, then seamlessly administrates plans for better results.
If you want to learn more about what an ideal plan might look like for your business (and how consulting can help), let’s talk.