Over the past year, several new Internet-based 401(k) providers have launched in the small business retirement plan market. Led by tech entrepreneurs instead of industry veterans, these providers claim to slash the time it takes to establish a 401(k) plan using new technology. One says they can deliver a 401(k) plan in just 15 minutes!
Here’s the problem. While technology might speed data collection and document delivery, it can’t reduce the amount of information 401(k) fiduciaries must supply a new 401(k) provider or guide 401(k) fiduciaries when picking 401(k) administration and investment options for their plan – the most time consuming steps in the 401(k) plan establishment process.
The simple truth is that any 401(k) provider – regardless of their technology – has the potential to deliver a super-fast 401(k) plan. All they need is a 401(k) fiduciary willing to sign on the dotted line for a cookie-cutter (decision-less) 401(k) plan without any questions.
I find that approach to establishing a new 401(k) plan reckless. Why? The consequences of a poorly-designed or misunderstood 401(k) plan are great. Making poor 401(k) administration and investment choices can unnecessarily reduce a plan sponsor’s bottom line while not understanding the fiduciary responsibilities of 401(k) choices can increase the personal liability of plan fiduciaries.
I think it’s better when 401(k) providers take the time to help 401(k) fiduciaries choose the best administration and investment options for their plan and understand their fiduciary responsibilities based on these choices – even when faced with an apathetic fiduciary – due to the stakes involved.
The good news is that this more consultative approach generally won’t take that much time either – just an hour or two is possible. Let me explain the process.
What happens at 401(k) plan establishment?
When a small business decides to establish a new 401(k) plan, the 401(k) fiduciaries must supply a lot of company and employee information to their 401(k) provider. Unfortunately, there is no way around it – 401(k) plans require a lot of information to operate. They must also pick administration and investment options for their plan – a process called “plan design”.
The plan design process is very important. Why? Employer goals and budget for their 401(k) plan can vary greatly. Some employers want to maximize business owner contributions while others want to offer a bare bones benefit to employees. During the plan design process, 401(k) administration and investment options are selected based on employer goals. Making poorly-matched choices can result in unnecessary expenses for the employer.
The plan establishment process concludes when the 401(k)’s plan design is formalized in a legal plan document. Once this is done, the provider will prepare participant enrollment materials and ready their systems for the first plan contributions.
The stakes are high
I know it can be tempting to plow through your 401(k) decisions during the plan establishment process, but you want to be sure you understand the terms of your new plan and get any questions answered. You don’t want to be surprised down the line by testing issues, mandatory contributions or employee eligibility problems. Addressing these issues after plan establishment can be costly for the employer and/or result in personal liability for 401(k) fiduciaries.
Spending a little extra time is well worth it
Provider technology doesn’t fuel a 15 minute 401(k) plan establishment, fiduciary apathy does. Experienced 401(k) providers know that – which is why they don’t promote such reckless 401(k) establishment times. The decisions made during the plan establishment process often dictate the success or failure of a 401(k) plan. That said, it’s worth spending more than 15 minutes on the process.