The Frugal Fiduciary Small Business 401(k) Blog
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401(k) plans that only cover business owners - and their spouses – are commonly called “solo” 401(k) plans. Because they don’t cover non-owners, solo 401(k) plans aren’t subject to many of the most complex 401(k) plan qualification requirements – including annual nondiscrimination testing. That makes these 401(k) plans easy to administer while allowing plan participants to receive large annual contributions - up to the 415 limit ($55,000 + $6,000 catch-up for 2018) – without restriction. These benefits have made solo 401(k) plans a popular retirement plan choice for business owners that want to save more than personal IRAs allow.
On March 15, 2018, the Fifth Circuit Court of Appeals invalidated the Department of Labor’s (“DOL”) Fiduciary Rule in a 2-1 decision. If the DOL does not request a rehearing within 45 days, the regulation will die. If that happens, the rules for 401(k) investment advice that existed before the Fiduciary Rule will return. That means some financial advisors – basically, brokers and insurance agents - will once again be able to give conflicted investment advice by recommending high-priced 401(k) investments that pay them rich commissions over less expensive - but comparable - alternatives on May 7, 2018.
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To retain their tax-qualified status, 401(k) plans must undergo extensive IRS testing each year to prove they don’t discriminate in favor of Highly-Compensated Employees (HCEs). One of these tests is the IRC section 410(b) “coverage” test. The purpose of this test is to ensure a 401(k) plan covers a sufficient number of Non-Highly Compensated Employees (NHCEs).
One of the most common questions I get from 401(k) plan sponsors is “What 401(k) fees can I pay from plan assets?” This confusion is hardly surprising when you consider the broad range of 401(k) fees a plan can incur.
In a small business 401(k) fee study, we found that 7 of the top 10 most expensive 401(k) providers were insurance companies. I can’t say I was too surprised by this finding due to the complex web of 401(k) fees charged by these companies – which can include hidden 401(k) fees that other 401(k) providers can’t charge legally and additional fees for unrelated service partners. So how do insurance companies with high 401(k) fees get away with it?
To meet ERISA reporting requirements, most 401(k) plans must file a Form 5500 annually. This form is designed to disclose certain plan-related information to the Federal government and plan participants. There are three versions of the Form 5500, each with different filing requirements. In general, the largest 401(k) plans have the most detailed - and costly – filing requirements.