The Frugal Fiduciary Small Business 401(k) Blog
Get the latest industry news, deadlines and tips you need to know to help tackle your fiduciary responsibility needs.
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.
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The most expensive thing most people will buy in their lifetime is retirement. Perhaps you’ve never thought of “buying” retirement, but that’s exactly what you do when you contribute to a 401(k) plan – you’re saving today to afford income in retirement. When you consider that income may need to last 10, 20, even 30 years, it’s easy to understand why retirement is not cheap.
Safe harbor 401(k) plans are the most popular type of 401(k) used by small businesses today. Unlike a traditional 401(k) plan, they automatically pass the ADP/ACP and top heavy nondiscrimination tests when certain contribution and participant disclosure requirements are met. This trade-off is well worth the cost for many business owners, who often bear the brunt of the consequences when their 401(k) plan fails testing.
When an employer is looking to hire a financial advisor for their 401(k) plan, my advice to them is always the same – only consider financial advisors subject to a fiduciary standard of care. My reason is simple - only fiduciary-grade advisors are obligated by law to give impartial advice. In contrast, non-fiduciary advisors can give conflicted advice that favors investments with high commissions – making it harder for employers to keep their 401(k) fees in check. Generally, investment advisers are subject to a fiduciary standard of care, while brokers and insurance agents are not.
All 401(k) plans require three basic administration services – asset custody, participant recordkeeping and Third-Party Administration (TPA). A 401(k) provider can be paid “direct” or “indirect” fees from plan assets to deliver these services. Direct fees are deducted from participant accounts, while indirect fees are paid by plan investments. The most common form of indirect fee is revenue sharing. Below are five reasons why employers should pay direct fees for 401(k) administration services instead.