Are you unhappy with your existing 401(k) provider and want a better option for your employees? Perhaps you’re wondering if there are better investment options out there — or if your 401(k) fees are too high. Maybe you’ve even found yourself dealing with the fallout from a poorly administered plan, and you’re looking to avoid future issues.
Education and a well-administered plan are critical to employee adoption. In fact, Sixty-three percent of Americans find investing complex and confusing and on average Americans give themselves a “C” in retirement preparation[i]. Whether you’re actively shopping or just asking questions, I’ve prepared the top nine tips for choosing the best 401(k) plan for your employees.
Tip #1: Understand Your Fiduciary Responsibilities
A 401(k) plan plays a valuable role in your benefit package by helping employees take care of their retirement needs. In today’s competitive climate, an attractive plan is critical to retain employees. The Pew Charitable Trusts found that thirty-five percent of private sector workers over the age of twenty-two work for companies that don’t offer a plan[ii]. Offering a 401(k) is a valuable recruiting bargaining chip. However, the 401(k) landscape is complex, and as the employer, you have fiduciary responsibilities.
By “fiduciary,” we mean you are obligated to provide a plan that’s in the best interests of your employees. This is a personal liability — not a business one — meaning you and anyone in the business who serves as a plan fiduciary are on the hook if your responsibilities aren’t met. As a fiduciary, you have obligations regarding investments, costs, recordkeeping and plan administration. Carrying out these responsibilities can be onerous, with many potential pitfalls, if not managed properly.
Tip #2: Get the Right Quarterback
If you were a football coach, you wouldn’t play a championship game without your star quarterback. And when it comes to 401(k) planning, the person you want at the core of your 401(k)-planning team is a fiduciary advisor.
A fiduciary advisor is a financial professional who sits on your side of the table, obligated to act in your best interests and help you meet your obligations. Since you have a fiduciary responsibility to your employees as the plan sponsor, it only makes sense that you’d want to choose a fiduciary to support you.
But not all professionals in the 401(k) business are fiduciaries. When you’re evaluating a 401k plan, make sure you’re getting good advice from independent people who aren’t being financially compensated for what they’re recommending. The very first question you should ask any 401(k) professional is, “Are you a fiduciary?”
Tip #3: Objectively Assess Your Current 401(k) Plan
The best 401(k) plans share these attributes:
The best way to assess your plan is to have it benchmarked against industry standards. Using screening and scoring software, a fiduciary advisor can give you an objective assessment and recommend next steps.
Tip #4: Set Your Employees Up for Retirement Planning Success
There are two ways you’ll want to do this. First, you need good investment options for your employees to choose from. Your financial or investment advisor can help you assemble an array of quality options.
Because a 401(k) is a “participant-directed plan,” meaning participants are responsible for the decisions that they make, it’s equally important to educate employees about how to save for retirement, choose investment options, and build wealth. Without this advice, you’ve only given them the ingredients for success without the recipe. The lack of quality participant education is the most common pitfall we encounter.
Tip #5: Ensure Plan Costs Are Reasonable
As the plan fiduciary, you’re responsible for providing a plan that has reasonable costs relative to the services provided. This is challenging because expenses are difficult to understand. There are multiple categories, and often, mutual funds will bundle expenses, making them even more difficult to assess. A fiduciary advisor can help you understand your plan’s costs, whether they’re reasonable, and how they align with other industry options.
Tip #6: The Devil Is in the Details
Administering a 401(k) plan is complex, with many tasks and requirements, from reaching out to eligible participants to ensuring your payroll upload is done on time — and you’re obligated to ensure it’s done correctly.
A common pitfall is business owners who don’t understand the details and/or haven’t hired the right people for the job. It’s important to work with high-quality professionals who ensure all tasks are completed and record-keeping is done.
Tip #7: Enlist Other Fiduciaries for Your Team
You have two main areas of fiduciary responsibility as a business owner — to administer the plan as a fiduciary and to select investment options for plan participants. One way to reduce this risk is to have other fiduciaries on your team. We recommend having your plan investments managed by a section 3(38) fiduciary. This type of advisor takes full responsibility for investment decisions, essentially removing this portion of the fiduciary role from your plate.
On the record-keeping side, you can reduce your fiduciary burden by choosing a section 3(16) administrator, who acts as your co-fiduciary, essentially sharing the fiduciary responsibilities of administering the plan.
Tip #8: Have the Right Liability Protection
Even with fiduciaries on your side, you still have core responsibilities as the employer, such as setting up the payroll file and getting new employee information into the system. Working with the best plan administrators will mitigate this risk. However, as a business owner, you’ll want to get a fidelity bond, which protects plan assets against fraud by anyone who has access to them, as well as fiduciary liability insurance.
The U.S. Small Business Administration defines a “fidelity bond” as an insurance plan that protects “against loss from employee misconduct, such as theft or embezzlement, which is not otherwise covered by a company’s regular insurance coverage. A bond can provide blanket coverage for the actions of all employees or can be tailored to cover one or more specific employees.”[iii] You should also have fiduciary liability protection to cover you and other individuals who are personally liable.
Tip #9: The Benefits Far Outweigh the Pain of Switching
When you find a better plan, make the switch! There’s a routine process for moving to a new 401(k), and most of the work is done by others on the conversion team. While this isn’t something you’d want to do every day, it’s well worth the short-term work to gain something that provides so much long-term value for your employees.
As a business owner, your 401(k) plan comes with weighty obligations. But by surrounding yourself with fiduciaries who can advise you and share the risks, you can provide your employees with the best 401(k) plan to help them reach their retirement savings goals.
We got into the 401(k) business because, after extensive shopping for a plan for our own employees, we couldn’t find one that was affordable with plenty of good investment options. So, we designed our own and now make it available to small to mid-sized companies across the South that are seeking a better alternative. For more details, contact Julia Butler at firstname.lastname@example.org. For more financial tips, check out our blog.
This article does not represent a specific investment recommendation. No client or prospective client should assume that the above information serves as the receipt of, or a substitute for, personalized individual advice from The Fiduciary Group which can only be provided through a formal advisory relationship. Clients of the firm who have specific questions should contact theirThe Fiduciary Group advisor. All other inquiries, including a potential advisory relationship with The Fiduciary Group, can be directed here.