Most business owners didn’t start companies to learn about fiduciary rules, and they aren’t necessarily knowledgeable about identifying good 401(k) providers, either. No, owners simply want to hire the best people to create high-quality products or services.
But a 401(k) plan is one of the best incentives entrepreneurs can offer employees. These plans help workers establish a foundation for retirement by automating savings and requiring little employee input after the setup is complete.
Given that nearly 72 percent of small enterprise staffers lack access to a retirement plan, any company providing 401(k)s can gain a competitive edge.
Still, there may be some potholes along the way. That's why, as an advisor, I educate entrepreneurs and employees on what to look for in a 401(k). As an entreprenur, you need to ask the following questions to help you find the right fit for your company.
1. Will the provider serve as a discretionary trustee?
Most owners of closely held businesses underestimate the extent of their fiduciary obligations, in regard to 401(k)s. Trustees hold discretionary authority over the plans; they must act prudently and with loyalty, as they make diversification calls on their investments and oversee compliance with ERISA and IRS standards. Finding a provider willing to be named a plan fiduciary alleviates a good deal of stress and day-to-day responsibility for the owner, but most companies neglect to pursue this option.
I encourage my clients to ask providers if they can assist with the fiduciary liability, and also ask how much they’re willing to shoulder. I also inform owners of their trustee responsibilities -- including information on which ones they can delegate to discretionary trustees if the provider doesn’t offer that support.
As plan sponsors, owners are free to find other fiduciary partners to manage their 401(k) plans so they can focus on running their companies.
2. How will the provider help my employees?
As companies grow, entrepreneurs must increase their incentives to retain their top employees. After medical coverage, a 401(k) is one of the most attractive benefits business owners can offer. I advise my clients to ask, “What tangible action will you take to help my employees retire on time? What types of financial education will you provide?”
Many workers don’t understand the importance of a diverse investment portfolio, and 50 percent of employers say their plans are underutilized due to employees’ lack of knowledge of 401(k)s.
Instead, entrepreneurs should offer dynamic plans through companies that not only administer the program, but also support participants planning for retirement.
3. What are the total costs?
The Department of Labor instituted regulations in 2012 regarding qualified plan sponsors and service providers. The rules, under 408(b)(2), require service providers to disclose fees and services provided for a qualified plan. DOL's move was prudent; entrepreneurs new to 401(k)s often find themselves caught off guard by the amount they'll pay.
Proposed new regulations by the DOL may help; they'll require providers to further break down and provide disclosures on all potential expenses, including underlying mutual fund costs, provider fees and management rates.
When my own company requests proposals from 401(k) providers on behalf of our clients, we create a spreadsheet to compare the benefits offered by each. We review the fee structures and dig for hidden costs buried in the terms. Side-by-side comparisons provide a comprehensive view of each option, and include an analysis of whether the services justify the costs.
Giving diligence its due
Carefully vetting providers creates a useful framework for tracking important plan data. Due diligence is necessary during the selection process, but employers also must document decisions about funds, investments, education events and any meetings related to the 401(k) plan.
If the Department of Labor asks for a company’s due diligence binder, the owner is required to produce records on how often educational programs have been held, what topics have been covered and who has attended. Entrepreneurs will also be expected to describe their plan selection and monitoring processes and identify who has signed off on particular funds. The U.S. Supreme Court mandated in Tibble v. Edison that companies hold ongoing reviews of their policies. Those that fail to comply risk lawsuits being brought against them.
Entrepreneurs bear the ultimate responsibility for their fiduciary decisions, so it’s crucial that they understand the fiduciary roles and responsibilities they’re taking on before starting 401(k)s. Asking the right questions will help you select a provider whose principals understand the regulations and are willing to help administer the plan and share the risk.