The Frugal Fiduciary Small Business 401(k) Blog
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We’re fast approaching the end of another calendar year, and for many older Americans, that means it’s time to take a Required Minimum Distribution (RMD) from their 401(k) account. If you participate in a 401(k) plan, you want to understand the RMD rules. Failing to take a RMD can mean stiff tax penalties from the IRS. Understanding the RMD rules can also help you avoid required distributions altogether.
Index funds not only offer 401(k) participants superior returns to comparable actively-managed funds net of fees, they are a clear and simple way for 401(k) sponsors to meet their investment-related fiduciary responsibilities. Sponsors need only select three or more prudent investments that allow plan participants to sufficiently diversify their accounts. Index funds are indisputably “prudent” by meeting their investment objective for market-correlated returns at reasonable fees.
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401(k) plans offer significant tax benefits to both employers and participants. Employers can deduct plan contributions and expenses, while participants can defer the taxation of their contributions and earnings until they withdraw their account. To offer these benefits, a 401(k) must satisfy certain plan qualification requirements under ERISA. These requirements are enforced by the IRS.
Last year, we studied the plan designs of 2,767 small business 401(k) plans that averaged approximately 25 participants and $1M in assets. We found only 8.71% of these plans automatically enroll eligible employees who fail to make their own affirmative enrollment election. In contrast, a 2014 Willis Towers Watson study found 68% of 457 larger 401(k) plans include an automatic enrollment feature.
Two weeks ago, Equifax – one of the country’s biggest credit reporting agencies – announced that its systems were hacked by cybercriminals, exposing the Social Security numbers, birth dates, addresses, and driver's license numbers of 143 million Americans. Unfortunately, this huge data breach was not unprecedented. The personal information for 1 billion Yahoo users and 145 million eBay users was exposed in 2013 and 2014, respectively.
When I started my 401(k) career in the mid-1990’s, employers who sponsored a 401(k) plan with little to no assets had few 401(k) provider options. The options they had – generally, brokerage and insurance companies – treated 401(k) plans like a one-size-fits-all product by restricting fund options to expensive funds (usually proprietary) that charged a minimum amount of hidden 401(k) fees and plan designs to basic options that could be administered cheaply. Because of their hidden fees, the value of these high-profit products was rarely scrutinized by 401(k) plan sponsors. Today, small 401(k) plans have much better provider options available. Thanks to DOL fee disclosure rules and some high-profile 401(k) fee lawsuits, employers are scrutinizing 401(k) fees now more than ever and that’s forcing 401(k) providers to deliver more valuable services for lower fees. This trend has made providers that treat 401(k) plans like a service - not a product - affordable to 401(k) plans of any size. Instead of restrictions, these providers offer impartial fund advice, consultative plan design expertise and personalized customer service – often for lower fees!