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Eric Droblyen

By: Eric Droblyen on July 13th, 2016

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The Myth of the 15 Minute 401k Plan Setup

Plan Design | Plan Setup

Over the past year, several new Internet-based 401k 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 401k plan using new technology. One says they can deliver a 401k 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 401k fiduciaries must supply a new 401k provider or guide 401k fiduciaries when picking 401k administration and investment options for their plan – the most time consuming steps in the 401k plan establishment process.

The simple truth is that any 401k provider – regardless of their technology – has the potential to deliver a super-fast 401k plan. All they need is a 401k fiduciary willing to sign on the dotted line for a cookie-cutter (decision-less) 401k plan without any questions.

I find that approach to establishing a new 401k plan reckless. Why? The consequences of a poorly-designed or misunderstood 401k plan are great. Making poor 401k administration and investment choices can unnecessarily reduce a plan sponsor’s bottom line while not understanding the fiduciary responsibilities of 401k choices can increase the personal liability of plan fiduciaries.

I think it’s better when 401k providers take the time to help 401k 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 401k plan establishment?

When a small business decides to establish a new 401k plan, the 401k fiduciaries must supply a lot of company and employee information to their 401k provider. Unfortunately, there is no way around it – 401k 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 401k 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, 401k 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 401k’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 401k 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 401k fiduciaries.

Spending a little extra time is well worth it

Provider technology doesn’t fuel a 15 minute 401k plan establishment, fiduciary apathy does. Experienced 401k providers know that – which is why they don’t promote such reckless 401k establishment times. The decisions made during the plan establishment process often dictate the success or failure of a 401k plan. That said, it’s worth spending more than 15 minutes on the process.

 

 

About Eric Droblyen

Eric Droblyen began his career as an ERISA compliance specialist with Charles Schwab in the mid-1990s. His keen grasp on 401k plan administration and compliance matters has made Eric a sought after speaker. He has delivered presentations at a number of events, including the American Society of Pension Professionals and Actuaries (ASPPA) Annual Conference. As President and CEO of Employee Fiduciary, Eric is responsible for all aspects of the company’s operations and service delivery.

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