The Frugal Fiduciary Small Business 401(k) Blog
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It’s impossible to complete annual 401(k) plan testing accurately without a clear understanding of the plan sponsor’s ownership structure. This information is used to determine the company’s controlled or affiliated service group status as well as the Highly Compensated Employee (HCE) and key employee status of plan participants. To make these determinations properly, certain “family attribution” rules must be applied correctly. These IRS rules exist to thwart ownership structures that would otherwise permit a 401(k) plan to discriminate in favor of business owners.
On October 22, 2019, the Department of Labor (DOL) proposed new regulations that would supplement the agency’s current rules for the electronic distribution of 401(k) disclosure notices to plan participants. Specifically, the proposal would add a new “notice and access” rule that permits employers to post notices to a website when certain requirements are met. This common-sense 401(k) plan reform is long overdue.
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According to AARP, Americans are 15 times more likely to save for retirement when they are covered by a workplace retirement plan. However, while most large businesses – companies with more than 100 employees – sponsor a retirement plan, 51 to 71 percent of small businesses don’t. Causing many small business owners to steer clear of 401(k) plans, in my view, is a perception that plan sponsorship is too expensive, time-consuming, and/or fraught with liability – in short, not worth the trouble. To help overcome this perception – and close the small business coverage gap – I think we need more straightforward and transparent 401(k) plans.
Would you buy a product if you didn’t know its cost? I doubt it. What if overpaying for that product could lead to serious consequences like being sued or postponing retirement? I know you’re not buying then. And yet, I see business owners do something similar all the time. They’ll hire a 401(k) provider without fully understanding their fees. Even when they know that paying excessive 401(k) fees could get them sued or force plan participants - including themselves - to work longer than necessary to afford retirement.
The Department of Labor (DOL) divides 401(k) fees into two categories – administrative fees that can be paid from plan assets, and settlor fees that can't. It’s up to the 401(k) plan sponsor to decide whether to pay administrative fees from plan assets or a corporate bank account. If they choose plan assets, they have a fiduciary responsibility to allocate the fee among plan participants in an equitable manner.
The day-to-day operation of all 401(k) plans must be governed by a written plan document that meets Internal Revenue Code requirements. Occasionally, 401(k) plan documents will require an amendment to reflect law changes or employer intentions. The Internal Revenue Service (IRS) has strict rules for plan amendments. It’s important for employers to understand them. Otherwise, they could miss the chance to make discretionary plan changes, accidentally cut back protected benefits, or face punishment for document non-compliance.