The Frugal Fiduciary Small Business 401(k) Blog
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On December 20, 2019, the President signed the Further Consolidated Appropriations Act, 2020 into law. This year-end spending package included the most extensive retirement plan legislation in over a decade - the Setting Every Community Up for Retirement Enhancement (SECURE) Act. After the SECURE Act was passed by the House, I judged the bill a mixed bag of good, bad, and ugly – the good representing welcome reform, the bad representing undue complexity, and the ugly representing handouts to the financial industry. That view has not changed now that the bill is law.
401(k) plans are popular today because they offer generous tax benefits to employers and employees. However, to qualify for these benefits, 401(k) plans must complete a myriad of plan administration tasks each year. It’s ultimately up to employers to ensure each task is completed timely. Meeting this important fiduciary responsibility can seem overwhelming, but it doesn’t need to be. The key is hiring a 401(k) provider willing and able to do three things - 1) summarize all required tasks, 2) complete the more difficult and time-consuming ones, and 3) provide simple direction for the rest.
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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 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.
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.