The Frugal Fiduciary Small Business 401(k) Blog
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As a business owner, you want to understand the basic fiduciary hierarchy applicable to all 401(k) plans and the responsibilities of each role within it. This understanding can make the oversight of your 401(k) plan – basically ensuring that your fiduciary responsibilities are met – much more straightforward.
There are few industries where the phrase “you get what you pay for” is less applicable than the 401(k) industry. Equally competent 401(k) providers can charge dramatically different fees for comparable administration services and investments. This variability is a big problem for employers – who have a fiduciary responsibility to protect the interests of plan participants by paying only “reasonable” 401(k) fees. Employers that fail to meet their responsibility can be personally liable for restoring participant losses due to excessive fees.
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Employers have a fiduciary responsibility to ensure the fees paid by their 401(k) plan are “reasonable” – so excessive fees do not reduce the investment returns of plan participants needlessly. To do that job, employers should ”benchmark” their 401(k) fees periodically by comparing them to industry averages and/or the fees charged by competing 401(k) providers. Sounds straightforward, but this information is hard to find and often harder to compare on an apples-to apples basis.
401(k) plans must define a 12-month “plan year” for annual administration purposes. Most plans choose a calendar year for administrative ease. A new plan can specify a period that’s shorter than a full 12-months for its initial plan year by choosing a mid-year effective date. However, establishing a short plan year with a mid-year effective date is often a bad idea. Most plans are better off making their effective date retroactive to the first day of the normal plan year - January 1 in the case of a calendar-based plan – to establish a 12-month initial plan year.
Small businesses can have dramatically different goals for their 401(k) plan. The process of matching business goals to available 401(k) plan options is called plan design. Expert plan design can help a business minimize contribution expenses, improve employee participation, and/or avoid nondiscrimination test failures. As a business owner, you should settle for no less than expert plan design guidance from your 401(k) provider. The entire process can take 30 minutes or less.
When a small business offers a 401(k) plan, it’s often a win-win for business owners and employees. A 401(k) plan can help businesses attract and retain talent, incentivize performance, and lower taxes, while helping employees – including the business owner – meet their retirement goals. If you're a business owner, you've probably asked yourself at some point what you and your employees stand to gain by offering a 401(k) plan. The answer is probably a lot. Here are some of the top benefits.