10 Ways to Improve Your 401(k) Plan
- Greater employee participation: Frequent and effective communication with participants empowers them to take ownership of their own retirement. Do you wish your plan had greater participation rates? The best plans often include plan features involving automatic enrollment with opt-out as well as stepped up contributions. Additionally, plans with active investment advisers who are committed to educating your workforce will often have much higher participation rates.
- Hire an expert: Company executives and administrators are busy and pulled in many directions. The Department of Labor (DOL) recognizes the need for plans to hire experts if they do not possess the needed expertise. Great plans know that financial incentives influence behavior and ultimately the advice rendered, so understand how your adviser is paid (fee vs. commission).
- Improved performance through reduced fees: The historical lack of fee transparency has enabled many financial institutions to monetarily capitalize on the 401(k) market. Every basis point of fee reduction is redirected into the employees’ accounts and is compounded year after year. With recent changes in rules requiring more transparency, plan sponsors are able to more easily compare their plans’ fees to potential other providers. Furthermore, nearly every fee is negotiable and most businesses can obtain the exact same plan with reduced fees.
- Decreased staff time: Administrative expenses are a hidden cost some companies overlook when evaluating their 401(k) plan. Great plans reduce the time administrators spend keeping up with compliance and plan management by the use of a third-party administrator (TPA). While a TPA has a cost, it may be less than the hidden costs of utilization of internal resources. And because they are experts, oftentimes, they will be able to identify compliance issues and provide you with solutions to such challenges.
- Reduce plan sponsor liability: Obtain in writing a third party investment fiduciary. A written third party investment fiduciary can significantly reduce the plan sponsor’s liability. The fiduciary will monitor the plan, provide employee education, and evaluate overall performance among the funds. Staying abreast of the rules and regulations that govern employee benefit plans is difficult in an ever-changing environment. Outsourcing this aspect to an expert will inevitably lower risk and liability that would otherwise be present. Additionally, if your plan has more than 120 participants and requires an audit, select a firm with a deep level of employee benefit plan audit expertise. 1/3 of all employee benefit plans are audited by accounting firms that audit 2 or fewer plans per year. Even if you have your plan audited by an accounting firm, if the DOL takes issue with the work that your auditor does or if they find issues with the operation of your plan, they can assesses fines to the plan sponsor, NOT the accounting firm.
- Reduce plan overhead: Many of the 401(k) services are based upon number of eligible or participating plan participants. As the number of participants and plan assets grow, companies can negotiate a reduced fee per employee. Furthermore, great plans have a process to aid terminated employees with rolling over 401(k) funds into their new plan or an IRA.
- Periodic course corrections: Great plans are constantly being evaluated, occasionally there will be opportunities to improve fund performance and administration. The top employer 401(k) plans are willing to make the needed changes to ensure their employees are best served despite the status quo being the easiest option.
- Lower your 401(k) fees: Being aware of aspects of your 401(k) plan that are subject to lower fees could save you money. Funds that are passively managed, investments offered through a bundled program and funds with greater total assets are all associated with lower fees. How does this relate to your 401(k)? Find smart investments that do not require in depth research or maintenance, offer bundled investment programs to employees, and if you have greater assets, utilize them by using special funds or classes of stock in funds.
- Avoid unnecessary fees: What if you could avoid potential fees associated with your 401(k) plan? Without compromising the value of your 401(k) plan, consider the following ways to avoid higher fees. Choose funds that do not require active management by an investment adviser, steer away from offering optional features such as participant loan programs or insurance benefits under variable annuity contracts. These aspects create additional fees that could otherwise be avoided.
- Get an audit: Why should you audit your employee benefit plan? Beyond simply compliance, the process is a smart way to “cleanse” your plan to improve its quality, and relevance. As a good rule of thumb, look for a firm that is registered with the AICPA’s audit quality center, and has a dedicated team of professionals focused on benefit plan audits.
The US Department of Labor provides ten questions to ask yourself about your 401(k) plan:
- What investment options are offered under your company’s 401(k) plan?
- Do you have all available documentation about the investment choices under your plan and the fees charged to your plan?
- What types of investment education are available under your plan?
- What arrangement is used to provide services under your plan (i.e., are any or all of the services or investment alternatives provided by a single provider)?
- Do you and other participants use most or all of the optional services offered under your 401(k) plan, such as a participant loan program and insurance coverage?
- If administrative services are paid separately from investment management fees, are they paid for by the plan, your employer or are they shared?
- Are the investment options tracking an established market index or is there a higher level of investment management services being provided?
- Do any of the investment options under your plan include sales charges (such as loads or commissions)?
- Do any of the investment options under your plan include any fees related to specific investments, such as 12b-1 fees, insurance charges, or surrender fees, and what do they cover?
- Does your plan offer any special funds or special classes of stock (generally sold to larger group investors)?
*”A Look at 401(k) Plan Fees”. October 2010. United States Department of Labor. Retrieved from http://www.dol.gov/ebsa/publications/401k_employee.html#salescharges
Still have more questions? Reach out to your CPA to learn more.
Delap LLP is one of Portland’s largest local tax, audit, and consulting accounting firms, located in Lake Oswego, Oregon.