As a fellow business owner, I recognize the importance of recruiting and retaining great employees. Employees, especially younger ones, routinely rank “benefits” as a key factor when hunting for jobs and in determining whether to retain an existing job. I believe that one of the most important benefits that can be offered to an employee is an employer-sponsored retirement plan. Today we’ll evaluate the benefits of a 401(k) plan and some “best practices” for implementation.
As an investment adviser, one question that I often receive is, “Which retirement plan is right for my business?” The answer depends on certain facts such as the number of employee participants, the income level of the participants and the desired flexibility of the plan. Some plans, such as Simplified Employee Pensions (“SEPs”) and “defined-benefit” pension plans, are often a great option for closely-held businesses where the compensation levels are high. Other plans, like SIMPLE plans, tend to be better suited for businesses that are looking to provide a more typical retirement benefit for up to 100 employees. See my prior blog for more information. Traditional 401(k) plans tend to be the “gold standard” of retirement plans given that they can be offered to an unlimited number of employees and offer the greatest level of flexibility to the company in the implementation.
In the past, the downside of using a 401(k) was that the plan administration was complicated and expensive. Moreover, these plans had the potential to create liability for the company pursuant to certain federal regulations. The good news for the business owner is that, while the plans are still more expensive, there are numerous service providers that make for hassle-free implementation. Moreover, Investment Advisors can be utilized to further benefit employees and minimize potential liability.
Here is an example of how the process can work today assuming a business desires to set up a 401(k) plan from scratch. Please note that existing plans may also be transferred from the current custodian to receive all of the same benefits. The best first step in setting up a plan is to select an investment advisory firm, like Patina Wealth, that services 401(k)s. In this case, Patina Wealth, would be hired as both the “Investment Adviser” to the plan and a “3(38) Fiduciary.” Patina Wealth will then perform the following services:
In recent years, implementation fees have fallen to a degree that it makes sense for businesses to fully outsource all of the required functions. For example, Charles Schwab charges only 3 basis points for custody of the Plan and Professional Capital Services, Inc. charges 15 basis points, along with some fixed fees, for a comprehensive record-keeping solution. Moreover, Patina Wealth’s fee is negotiable but is generally around 50 basis points for Investment Advisory and 3(38) Fiduciary services.
So far, we’ve talked about what good implementation looks like but let’s now take a moment to focus on what to avoid. Here are the five biggest mistakes that I see business owners making in setting up 401(k) plans.
So, in summary, 401(k)s are a wonderful retirement plan option that no longer needs to be feared. A robust stable of service providers have made them accessible to a broad range of businesses and at reasonable prices. Moreover, incorporating an Investment Adviser can lead to happier participants with less liability to the company. As always, if I can help you sort out any questions, please let me know.