Selecting a Plan
By gaining a solid understanding of basic plan design principles and parameters, you will be better positioned to offer up ideas on ways to effectively manage plan costs. For example, the matching contribution formula under a 401(k) plan can often be modified in a manner that will increase plan participation without incurring greater out-of-pocket funding costs for the employer.
Any overview of cost-control measures would be incomplete without a discussion of competitive bidding. You should consistently look to get the best bang for their buck. And, since various plan providers excel in distinct products and market segments, it is possible that you will need to develop relationships with more than one primary plan provider. When seeking out bids, you will learn about the strengths and weaknesses of various plan providers while also helping employers shop for the best possible solution.
Most effective advisors in the 401(k) arena consider it part of their role to help employers get the best bang for their buck. And, since various plan providers excel in distinct products and market segments, you'll want to ensure you get the opinions of more than one primary plan provider. By exploring your options, you will learn about the strengths and weaknesses of various plan providers while also helping employers shop for the best possible solution for your business.
- Learn about provider strengths and weaknesses
- Ask pointed questions about services and related costs
Finally, while the world of retirement is complex, as you have seen, technology is making it easier. There has been a tremendous shift toward automated plan features in recent years. Automatic plan features leave participants with ultimate control, but realign traditional “defaults.” This includes:
- Auto-Enrollment: Participant is enrolled in retirement savings plan unless participant “opts out.”
- Auto-Escalation: Incremental savings increases unless participant elects otherwise.
- Auto-Rebalancing: rebalancing of investments unless participant elects otherwise
The adopting employer can typically elect whether to implement various automatic plan features.
Automation can lead to:
- Greater levels of participation
- Higher deferral rates
- Better investment decisions
However, it’s important to remember automated features are only as good as the plan design features
- Too low of a default deferral rate can result in employees contributing less than they would have voluntarily contributed
- Too high of a default deferral rate can result in employees simply opting out of participation
Plan Design Considerations
There are several factors to take into account when considering your plan options.
- Participation criteria: In most cases, you must offer participation if the employee at least 21 or has worked for you for more than a year.
- Contribution allocation formulas: Some plans give equal allocation to all employees participating in the plan, while other plans will allow for higher allocations for the owner and other senior management employees.
- Potential use of “Safe Harbor” design options: Safe harbor designs will allow you to avoid certain types of compliance testing. Generally, safe harbor design includes:
- Nonelective contributions: The employer makes nonelective contributions on behalf of each employee, regardless of whether the employee is participating in the plan.
- Matching contributions: Generally, the employer makes matching contributions of 3% of employees' eligible contributions.
- Automatic enrollment: This design includes an auto enrollment feature for new eligible employees in which a predetermined amount of their salary is deferred to the plan unless they opt out.
It's good to have an understanding of all the costs that could be involved in setting up a plan. Costs will vary based on the type of plan you select, and not all listed below will be included.
- Explicit costs
- Recordkeeping and plan administration
- Trustee/custodian fees
- Consulting services
- “Imbedded” costs
- Investment-related fees/expenses
- Human resources