When you are running your small business, no two days are the same. But do you have the time and the staff to keep up with the evolving 401(k) market as well?
Regulatory changes are presenting new risks for sponsors of retirement plans at small and mid-sized businesses. And new entrants into the 401(k) provider market are presenting opportunities to reduce plan costs and pare the administrative burden long associated with offering a tax-deferred savings plan.
Unless you have a human resources department devoted to managing the company’s plan you could probably use some help staying abreast of these regulatory and market changes. In this blog post, we summarize five broad ways to optimize your small business retirement plan in today’s environment. The bottom line is that if you run a more efficient and less costly plan, more money stays in the 401(k) plan. And that greatly improves the odds that you and your employees will be able to fund a successful retirement.
So let’s get started. Here are five things you need to do when optimizing your small business retirement plan:
1. Stay up to date on compliance
The Department of Labor’s proposed Fiduciary Rule has garnered a lot of attention over the past couple of years. The rule is designed to raise advice standards for investment advisers and ensure investment costs are transparent. But the regulatory burden for 401(k) plan sponsors has been increasing since 2012 when the Department of Labor required improved disclosure of investment fees and plan expenses to participants. Meanwhile, government oversight and fines have been on the rise. So even if your plan has been deemed “compliant” in the past, thanks to new regulations, that may no longer be the case.
With these new regulations, it’s more important than ever for companies to accurately perform their 401(k) administrative duties. Here are some high-level things you may want to implement:
- Automate manual tasks to reduce the risk of error. Make sure to work with a provider who can integrate payroll with your 401(k) recordkeeper. This can free up staff time and reduce the risk of errors.
- Automate error checks. Use an advisor that automatically runs error checks after payroll is run. This can allow you to correct any discrepancies quickly.
- Comply with employee communications requirements. New DOL rules require plan sponsors to regularly contact employees regarding plan enrollment, investment performance, and to alert them of any changes. A good advisor can track eligibility for you and send the appropriate notices and disclosures to participants.
- Run appropriate discrimination tests. A good advisor will run these tests often enough and early enough to allow the plan to seek corrections should there be a problem.
- Prepare for special circumstances. Follow the rules regarding loan tracking, distributions, and make sure payments are remitted to 401(k) accounts on a timely basis.
If administering your small business retirement plan is getting in the way of running your small business, you may want to consider outsourcing much of the administration and the associated liability by hiring a quality 3(16) fiduciary. They assume the liability for reviewing and signing the Form 5500 on your behalf, take on day to day administrative tasks, make sure your own plan documents are being followed, and handle special items like hardship withdrawal requests and distributions.
2. Increase plan effectiveness by lowering fees.
Understanding your 401(k) plan’s fees is not just a good idea, it’s a requirement. Specifically, you must be able to understand and document the fee structure of the plan. You should have sufficient understanding to defend various expenses should the plan be audited. And you must select providers with “reasonable” fees.
The good news is that 401(k) fees have been coming down. If your fees haven’t reflected this trend, then you either were already running a low-cost plan, or your plan expenses are too high. It’s a great idea to double-check.
3. Improve the monitoring of investment options
Offering appropriate investment options is one of the key responsibilities of 401(k) plan sponsors. To ensure the options remain appropriate, the investments must be actively monitored — by comparing fund performance to relevant benchmarks, for example.
Is someone at your business the resident investment expert? If not, you may want to consider hiring a 3(21) or 3(38) fiduciary. Remember, if you have not hired an investment fiduciary, you are the investment fiduciary, and the Department of Labor requires you to follow certain best practices. These include formulating an investment policy statement, holding regular investment committee meetings, compiling investment watch lists, and periodic benchmarking.
Even with the new DOL fiduciary rule, there remains confusion regarding fiduciary responsibilities. A 3(21) fiduciary will help you analyze, select and monitor investments, but you must make the final investment decisions, and you still retain fiduciary responsibilities. A 3(38) fiduciary, however, actually handles the investing responsibilities for you. They should indemnify you in writing for their investment decisions and should keep you aware of any changes made.
4. Drive better employee participation and engagement
Who’s in? That’s one way to measure the effectiveness of your company’s 401(k) plan. A high participation rate means that most employees are socking away money for retirement. Not only that, it means the plan is more likely to pass IRS nondiscrimination testing without a hitch.
Your small business 401(k) provider should be able to provide you with information on your participation rate, and how that rate compares with other plans of a similar size. At ForUsAll, we consider ourselves experts in employee engagement thanks to our proprietary onboarding technology and plan design. It’s a combination that delivers high participation rates. In fact, ForUsAll drove participation rates of 89.2% across our clients.
To make sure employees are engaged with their 401(k) it usually takes more than a single email and a stack of mutual fund flyers. Here are three questions that are bright red flags that plan communication could be improved: When am I eligible to enroll? How do I enroll? How much am I paying for my 401(k)?
If you are surprised at how few employees are taking advantage of the 401(k), ask your current advisor how many times they have spoken to employees in the past year. If you are not working with an advisor, consider adding one to make sure your employees understand the investments that are driving their retirement savings. In fact, a good adviser can do much more than explain the plan’s investment options. They can address a variety of personal finance topics that affect your employees’ financial health. This universal approach to investment advice has become known as “financial wellness.” Make sure your employees’ finances have the best chance to stay healthy by bringing on a quality investment advisor.
5. Make your plan even more tax efficient.
Given the uncertainties surrounding Social Security, we think it is reasonable to assume that defined contribution plans will only increase in importance. If you are already offering a 401(k) – congratulations! You and your employees have increased the odds of a financially successful retirement. But additional steps can further improve the tax efficiency of retirement savings.
One simple way is to include a Roth 401(k) option. Adding a Roth option means that employees can choose to have their retirement savings taxed on the front end, earn tax-free investment returns, and then take distributions tax-free in retirement.
While the Roth can be an important retirement plan feature, a profit sharing plan can turbo charge tax efficiency. Profit sharing can steer more compensation toward select employees in a tax efficient manner, allow the business to pay less in taxes, and boost the ability for employees to save for retirement.