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Even small companies can sponsor 401(k) plans. These attractive employee benefits offer the fastest path to saving more money to build a healthy retirement fund.
You may imagine these vehicles are most appropriate for larger companies. Certainly, these mega-plans get a lot of attention. But did you know owners with just a few employees may find 401(k) plans especially attractive because they offer an easy way to reduce taxes?
Just because they’re popular doesn’t mean they don’t come with strings attached. As you might expect, if you run a modestly sized business with a 401(k) plan, there are plenty of ways to trip up. What are some of the biggest issues facing 401(k) plan sponsors today, and how can they be addressed?
Who is considered a 401(k) plan sponsor?
Technically, the organization that established the retirement plan for its employees is the plan sponsor. However, ERISA requires that entity to name a specific plan administrator. For smaller businesses, this is usually the owner or a high-level executive.
According to the Department of Labor, “there are four initial steps for setting up a 401(k) plan:
- Adopt a written plan document,
- Arrange a trust for the plans assets,
- Develop a recordkeeping system, and
- Provide plan information to employees eligible to participate.”
Once you get your plan up and running, there are issues you need to be cognizant of. These are issues that must be addressed right now if you discover they’re relevant to you, your plan and your firm.
Do plan sponsors have a fiduciary responsibility?
Before you get to the details, however, there’s one thing you must understand and embrace. It impacts all your decisions regarding the plan. You may alleviate it to some extent, but you can never remove it.
You are a fiduciary to the plan. That means you have a legal responsibility (or “duty”) to the plan participants (your employees). Do you know what this really means? If not, you’re not alone.
“There is still a very large percentage of 401(k) plan sponsors who don’t really have a good working knowledge of their responsibilities as fiduciaries or the skillsets internally to prudently evaluate issues, set goals and make decisions for their 401(k) plan,” says Jason Grantz, Managing Director at Integrated Pension Services in Highland Park, New Jersey. “Often, this is a function of the gap between the size of the company that offers the plan and the costs/expertise required to run that plan right.”
What are the responsibilities of a 401(k) plan sponsor?
As you begin to take inventory of the responsibilities outlined above by the DOL, you’re likely to conclude that unless you are in the 401(k) business, you will need help.
“You’ve got to know you are in over your head,” says R.L. “Dick” Billings, Senior Document and Compliance Specialist for PCS Retirement, LLC in Philadelphia. “You need a responsive Third Party Administrator (‘TPA’) who will address issues and questions unique to your plan and your role as the plan sponsor.”
The key takeaway here is that you are not alone. Between other people in your company or outside vendors, you can get help to cover some of the tasks you’re responsible for.
“The biggest issue plan sponsors face within their own company is not delegating and establishing clear procedures for delegated responsibilities,” says Carol Buckmann, Partner at Cohen & Buckmann P.C. in New York City. “You can solve this by setting up a plan committee or committees (separating administrative, investment and sometimes settlor functions) with charters defining their meeting schedule, responsibilities and reporting obligations.”
Oftentimes, small business owners have a hand in multiple businesses, only one of which sponsors a 401(k) plan. Depending on the relationship between the businesses and their ownership structure, this may be problematic. You may think your responsibilities are limited to the sponsoring company, but that might not be the case.
“Plan sponsors should be aware of affiliated service group rules,” says Herman (Tommy) Thompson, Jr., Financial Planner with Innovative Financial Group in Atlanta. “If a company has subsidiaries or sister companies with similar ownership structure, affiliated service group rules can mandate that the plan sponsor match the provisions of each retirement plan among the different companies. Using one recordkeeper and one third party administrator among all the different subsidiaries is the easiest way to avoid affiliated service group issues.”
What is the role of a plan sponsor?
Sure, you have the operational responsibilities alluded to above, but there’s a little bit more to your role. It’s similar to how you run your business. You have the day-to-day activities to keep the cash flow flowing. In addition, however, you also need to keep your eye on broader, more strategic opportunities. The same applies to your 401(k) plan.
“When it comes to plan design, the status quo is code for ‘falling behind,’” says Matthew Eickman, National Retirement Practice Leader at Qualified Plan Advisors in Omaha. “Not enough plan sponsors have reimagined their plan features. This issue had arisen before the pandemic, but the post-pandemic labor market has highlighted the need to start with a fresh perspective. Plan sponsors should work with their consultants to answer this question, ‘If we were launching our plan today, how would we build it?’ The status quo simply isn’t good enough.”
If you’ve been handling your 401(k) plan for some time, you know the biggest source of change, or at least the request for change, comes from your employees. Employees sometimes react to the latest news and do not necessarily consider the long-term ramifications of following the fads of the current day.
“A big issue 401(k) plan sponsors face with their own company is that the plan sponsors get feedback from the employees on things or services they would like to see within the plan, but the company does not want to invest in making those changes,” says Jason Noble, Financial Advisor and Member/Partner at Prime Capital Advisor in Charleston, South Carolina. “Those changes can cost money and time, so having a regularly scheduled meeting to discuss the feedback from the employees between the plan sponsor and their own company’s leadership team would be an important way to address these items on an ongoing basis. Human Resources knows the voice of the employees can get loud, but does that voice get to leadership? These meetings will help with this issue!”
How do smaller businesses operate a 401(k)?
“Small employers don’t have the resources to staff a competent HR team that understands the complexities of the 401(k) ecosystem,” says Peter Nerone, Compliance Officer at MM Ascend Life Investor Services, LLC in Cincinnati. “Small employers also face challenges allowing the key employees to make adequate contributions due to the various coverage and contribution testing protocols.”
But the biggest potential issue for small company plans might come from a source you least expect: you.
If you’ve already demonstrated an aptitude for all things entrepreneurial, that means you’re used to flying solo. You may even prefer to work alone. Once you bring on employees, though, your status changes. You need to be aware of and follow rules that are designed to protect employees. This is most true for retirement plans.
This might not strike your fancy, but don’t worry. As they say, “There’s an app for that.”
“When done right, being a plan sponsor takes a lot of time, from ongoing administrative tasks to 5500 and audit prep to regular retirement committee meetings to new IT security audits,” says Jeff Coons, Chief Risk Officer at High Probability Advisors LLC in Pittsford, New York. “At a time when staffing is tight, the retirement plan can feel like more of a burden than a benefit to the employer. One way to address this growing challenge is for plan sponsors to consider outsourcing plan responsibilities, which has been made easier by the introduction of pooled employer plans into the retirement marketplace. Outsourcing should be a consideration for any non-core business activity, and the retirement plan is no exception!”
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