Broker Check

The 401k Advantage

April 17, 2020
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As business owners, providing your employees with a 401k plan is both a labor of love, and a way to stay competitive for attracting great new hires. We care about your employees, but with the 401k plan comes increased administrative expenses, employee salaries (if your plan has a company match), administrative time and burden, and most scarily – increased risks.

Those risks can range from your Human Resource department manager becoming repeatedly frustrated with the software at hand, an employee complaint, or even copious fines from the Department of Labor (DOL)… fines that averaged $600,000 per company audited in the United States in 20141. Not to mention, DOL fines increased by a whopping 72% in 20172. Those penalties adjusted upward once again in 20193.

The best way to avoid risk is to create a system of checks and balances, and to recruit a team that can supercharge that system… but, it’s easier said than done.

So, how you do you it? Or, better yet, how do you do it the right way the first time?

The first thing you’ll want to do is form a 401k committee within your company. If you’re a small company, your 401k committee might consist of everyone you’ve got. Ideally, we recommend asking 4-7 of your “go-to” employees to be on your committee. Understanding who belongs on a committee like this is important, and will save you stress and money in the long run. You can find more about how to build your 401k committee here.

Once you’ve got the committee together, it’s time to get to work. Set up a meeting and create a list of company retirement plan objectives as a team. Take the time to allow each committee member to express the things they like and don’t like about the current plan. What’s cool here is that you’re getting input from both the company’s, and the participant’s viewpoint of the plan. Making sure that you’re asking each other the right questions during this phase is the most crucial part to ensuring that you don’t end up having to restart this process two, three or four years down the road. In light of keeping things palpable for you now, we’ve written in detail about what questions you should be addressing (and how to address them) in this separate article.

Now, it’s the time for the rubber to meet the road… the Request for Proposal (RFP for short). Fair warning, this part is the easiest, but it can get sticky, unorganized and downright frustrating very quickly. Remember that each platform vendors’ only goal is to sell you their 401k plan. For this reason we highly recommend hiring an experienced financial advisory team to do this for you. Or, if you already have a financial advisor for your plan, making sure they’re the right one for the job. Hiring the wrong financial advisory team (or choosing not to hire one at all) can lead to a lot of headaches, expenses, and unknown risks for your company. Choosing the right financial advisor is an RFP in and of itself. Here are the things you should be looking for when hiring an advisor to help you run your company’s plan.

To begin the RFP, you’ll want to reach out to at least 5-6 plan providers and provide them with a list of the company objectives you’ve written down together, and your 401k plan’s makeup:

  • Name of your company (we recommend keeping this anonymous, though you may not be able to do this without having an advisor run this process for you).
  • Current plan asset size
  • Estimated annual cash flows into the plan
  • Number of participants, eligible vs. participating

Each of the plan providers will respond by providing you with their preliminary proposals. Proposals will contain a layout of the plan platform fees, investment expenses, third-party administrator profit sharing agreement costs, and any built-in financial advisory team fee agreements. The proposals provided by each company are often laid out very differently from one another. Be aware of the fact that they are designed to decrease the visibility of the fees and increase the visibility of the platform’s strengths. That’s where the next part of the RFP comes into play…

If you’ve done this correctly, you’ve already spent your first meeting mulling through the list of questions we referenced earlier here. Now, it’s time to set up phone calls with each of the plan providers you’ve received proposals from and vet them through those same questions. Through the phone call interviews, you may be able to choose just one vendor… but if not, the next step is to set up meetings with the two or three top choices.

Remember, you’re dealing with well-trained sales people that are very good at their job. They like to control the flow of the conversation. I said it once, but I’ll stress it again… having a financial advisor with the experience to keep the answers from plan providers straightforward during this process is very helpful and could save you a lot of headaches and confusion.

Congratulations! You’ve made your choice. It’s time to notify the vendor in writing and set up a meeting with them to walk you through the next steps to move your plan from your old, unsatisfactory platform, to the new one.

But wait, it’s not over yet… After the grueling process of moving your 401k is done (something a well-vetted financial advisory team can also help to make easy), it’s important to make sure that your company stays satisfied with your new 401k plan. That means, making the administrative, compliance and overall ‘feel’ of your 401k evermore stress-free every year going forward. To do this, you’ll need a process to systematize and maximize annual plan review meetings.

Annual plan review meetings should be a time for all members of your 401k committee to sit together, and discuss things they’ve been happy with, and things they’ve been unsatisfied with since moving to the new 401k platform. It’s a great time for employees to bring up features or services they’d like to see added to the 401k plan too. Plan reviews should also adhere to the Department of Labor’s (DOL) fiduciary guidelines4 and should be recorded and documented in an organized fashion. We recommend making sure to hit on these points no less than once a year and documenting it in an electronic or hard copy 401k compliance binder.

Remember that your company’s 401k plan is a driving factor in hiring A players for your team in the future, and keeping those A players content. It’s also an employee benefit that comes with a lot of responsibility, and a lot of risk. That means that staying competitive, and up-to-date in this area is crucial to attracting and hiring those individuals.

Want to experience what a systematic 401k RFP and plan monitoring process looks like? Get a walk-through of our 401k Advantage by scheduling a phone call or meeting with the Family, Wealth & Legacy team here.

Sources:

1. http://marketing.cpsinsurance.com/top-news/knock-knock-dol/

2. https://www.compliancebug.com/2017-erisa-dol-fines-penalties/

3. https://tax.thomsonreuters.com/blog/after-delay-dol-issues-2019-adjusted-penalty-amounts/

4. https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/publications/meeting-your-fiduciary-responsibilities.pdf