So you are considering upgrading your small businesses’ 401(k). Good thinking! You and your employees will be able to sock away retirement savings and watch the returns accumulate tax-free.
If it’s been awhile since you set up your retirement plan, we suspect much of this 401(k) stuff is a bit rusty. But you’re in luck – improving a 401(k) plan is easier than ever thanks to some clever technology and a bevy of new providers specializing in serving the small business market.
Here are 5 questions to think about when you consider upgrading your company’s 401(k)
1. What investment options should you offer in your 401(k) plan?
The investments available to you and your employees can vary widely depending on your 401(k) provider. If you are going to upgrade your company’s plan, understanding what investment options are offered is a key step in evaluating potential providers. For example, do they offer low cost target date funds? These funds offer a great way for employees with little time, inclination or investment experience to invest their retirement assets. It is also important to know whether the provider offers only their own funds or if they are operating independently from the investments available in the plan. Pay particular attention to fund fees as they can take a big bite out of investment returns over time.
Not many business owners have the time to pick an investment lineup for their company’s plan. And it is important for you to regularly review your investments, document how you monitor and swap out poorly performing investments and more… unless you’ve hired an investment fiduciary who has taken on the burden of monitoring and updating your fund lineup. At ForUsAll, we act as a 3(38) fiduciary, so we take on the work (and liability) for offering prudent investment options, and regularly assess investment performance and appropriateness for the plan’s participants.
If you are improving your plan, consider adding an advisor who will serve as a 3(38) fiduciary.
2. How do you keep your 401(k) from becoming an administrative and compliance headache?
It is now possible to integrate your payroll with your retirement plan. That means there is no need to manually add newly eligible employees or upload payroll files to the 401(k) record keeping system. The right provider will also serve as your plan’s Named Fiduciary, managing day to day plan administration and managing the investments if so desired. The right provider (one providing 3(16) fiduciary services) can even complete and file the IRS Form 5500. That’s the semi-overwhelming form with multiple schedules that explains what benefits are offered to employees.
3. What is this Safe Harbor I keep hearing about?
To abide by the rules that govern 401(k) plans, small business owners must make sure that retirement assets of key employees do not account for too large a portion of total plan assets. A plan where assets of key employees are overrepresented is called “top heavy.” There is an actual top heavy test that must be passed each year to determine if the plan is deemed top heavy. A version of a 401(k) plan called a Safe Harbor 401(k) is exempt from the top heavy rules, and therefore eliminates the risk of non-compliance. But such a plan requires annual company contributions to all employees, so maintaining the plan can be expensive. The alternative to a Safe Harbor plan is a traditional 401(k) that has heavy participation by employees. This lowers the ratio of key employee assets to total plan assets. Finding a provider with a successful track record in getting high participation and contribution rates from their small business employees is a big first step when considering a retirement plan.
4. Why should you re-introduce your plan after you upgrade it?
Speaking of avoiding the safe harbor option by driving high employee participation, if you are changing your provider, you will have the opportunity to re-introduce your team to the plan. While the concept of a 401(k) is simple — allowing you and your employees to divert a portion of earnings toward retirement savings — how you introduce the plan to your team can really impact their engagement with the benefit.
You can announce your plan to your employees and explain to them how they can participate. Or you can set up your plan to automatically enroll each employee with a predetermined amount deducted from their paycheck. Guess which option results in more employees contributing to the plan? At ForUsAll, we are big fans of auto-enrollment.
You can even construct your plan to automatically increase each employee’s contribution each year. This auto-escalation feature is a great way to battle inertia. Most employees need to be saving at least 10% of their paychecks to fund a secure retirement. So even if your plan auto enrolls an employee at a 5% rate, eventually they should divert more funds toward their retirement. An auto-escalate feature that bumps retirement savings by 1% each year is a fairly painless way for employees to regularly increase the size of their nest egg.
With your employees enrolled and saving for retirement, you will also want to consider whether to match a portion of their contributions. You may have more options here than you think. To encourage employees to save more, you might match 50% of employee contributions up to 6% of their salary rather than matching 100% of their contributions up to 3% of employee pay.
If you do decide to implement an employee match, you can decide how quickly you would like your employees to vest. You can provide access to all company contributions immediately, or you may decide that vesting over a three-year period is a great way to boost employee retention.
5. Can I even afford this?
If it sounds like there is a lot going on in a 401(k) plan, well, there is. The all-in cost of a 401(k) is comprised of recordkeeping, custodial, and average fund cost in addition to our advisory fee. Plan costs include hard costs, or money paid by your company, and fees paid by your employees, typically as a percent of assets.