Great 401k plans tend to be a given in today’s workplaces. Your best recruits ask about them, your employees demand them, and you care about your own financial safety. Those are excellent reasons to seek one for your business. But is it a risk-free endeavor?
If you guessed yes, guess again. Like all long-term business decisions, you’ll need to think and act strategically. Don’t overlook the importance of the process. Doing so could cost you, and your employees, substantially.
Here are five important steps to take to help minimize business risk when establishing a 401(k) for your business.
Most business owners don’t have the time or the expertise to run their company’s 401(k) plan. Opting to hire a third-party provider to operate the plan can reduce the time and expertise needed on your end. Under ERISA (Employee Retirement Income Security Act), fiduciary standards are defined for those who exercise any authority or responsibility with regard to retirement plans. You must act in good faith such that the plan operates for the benefit of the participants and beneficiaries.
You’re accountable to your employees for oversight of providers and contracting a plan that’s appropriately priced and functions in their best interests.
There will be business expenses associated with hiring a service provider. But if you don’t have the capacity to convey all the appropriate disclosures required under ERISA — such as properly diversifying investments, mitigating the risk of large investment losses within the plan, avoiding conflicts of interest, and more — it’s advisable to seek a plan provider that can effectively assume those responsibilities.
Chances are you will outsource those obligations, but that does not completely absolve your company from its fiduciary duty. Even if plan operations are under the purview of a provider, you’re still accountable to your employees for oversight of providers and contracting a plan that’s appropriately priced and functions in their best interests. Since you’ll likely be one of the participants, it’s also in your favor to rigorously evaluate proposals in terms of the cost to the business, the services provided, and the expenses paid by plan participants.
Related Article: 4 Reasons To Offer A 401(k) At Your Company
401(k)s can contain many types of investments, each of which has its own fee structure. For example, plans are often comprised of a selection of mutual funds.
Mutual funds are professionally managed investments that are funded by shareholders (your plan participants = employees) and generally consist of a mixture of stocks, bonds, and cash or cash equivalents. Mutual fund prices vary depending on their composition, how they are managed, and who manages them, all of which makes evaluating them difficult. Of course, mutual funds are just one type of investments available in 401(k) plans, and there are others to explore.
One way to determine if your overall plan is competitive is to calculate its expense ratio.
If you have a plan provider, some assessment responsibility falls to them. However, one way to determine if your overall plan is competitive is to calculate its expense ratio. Take the total annual investment fees paid by all participants, and divide that amount by the annual average dollar balance of all the assets in the plan. From there, shop around. If your expense ratio is relatively high, it may be time to find a new provider.
Though some fiduciary responsibilities are borne by the provider, failing to identify an overpriced, underperforming plan can create legal risks for your company. Design a robust process to evaluate your plan and provider.
When it comes to selecting a 401(k), it isn’t as simple as “set it and forget it.” Nor should you pick a plan just because it happened to come with an exhilarating proposal. Be as systematic as you would be with any other business decision. Meanwhile, document the reasons why you chose it, and keep track of its performance on a regular basis. If your employees have concerns, document their concerns and pursue a resolution. Protect your business; maintain effective, disciplined, and orderly records to show that you’ve acted in good faith as a fiduciary.
This may seem obvious but, as a rule, do not provide any investment advice to your employees, ever. It may be flattering for an employee to defer to you for help, but giving any investment recommendations to employees opens the door to potential lawsuits.
By giving investment advice, you may create a serious legal liability if your suggestion leads its recipient to lose a portion of their retirement savings due to a rough day in the market, for example. Recommend that employees seek a financial advisor, and find out if your provider offers investment advisory services for your employees.
Establishing a 401(k) is an important step towards growing your business. Benefits like a 401(k) will help retain and attract top talent, and will contribute to an organizational culture of dedication. Don’t let the business risks and required effort deter you from properly vetting a retirement savings option as soon as possible. Talk to your business’ attorney and tax advisor about your goals, and educate yourself about the risks so that you can make the best choice for your business, and for your employees.
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