As a small business owner, running the business can at times be a bit overwhelming. There is the actual business of what you are doing, but there are also the many details of running a business that need to be addressed. You have to deal with payroll, marketing, employee scheduling, and so much more. With all that on your agenda, when is the last time you had a checkup of your company’s 401(k) plan?
If you’re like many business owners, it has probably been quite some time. This is unfortunate as one of the most important benefits a small business owner can give to employees is access to a solid 401(k) plan. For most Americans, the 401(k) plan is the only retirement savings vehicle they have. In an age where the pension plan is becoming increasingly rare, most all of us will enter retirement with only our social security benefits and whatever we have managed to save in the 401(k).
A plan checkup can and should be done with the help of your plan advisor. A proper review will address four areas of importance – Investments, Plan Document, Employee Education and Fees.
Investments: As a plan sponsor, it is your responsibility to make sure you have a high quality suite of investments available to employees within the company plan. In the current environment a plan sponsor should be looking at not just the investment menu, but also the target date investments.
- Investment Menu – A balanced investment menu will combine active and passive options, include both equity and fixed income choices, and give the employees a “do it for me” option with balanced investments and target-date (or life-cycle) investments. More choices are not necessarily better for employees. Your plan advisor can help you determine the correct investments for your employees.
- Target Date Investments – There are many choices available in the marketplace today, all of which are constructed differently. It is important to understand the “glide path” your plan’s options take into retirement age as it makes a big difference in how it will perform. There is a difference between the option which “glides to” retirement and the option that “glides through” retirement.
Plan Document: Plan design is important as it gives the plan sponsor the ability to help employees make better long-term decisions. Over the past few years there have been a number of required changes to 401(k) documents as well as enhanced options available. Thus, if you haven’t reviewed your plan’s document in a few years there is a chance it may not be fully up to date. Two key changes:
- Default Choices / Default Rates – The Pension Protection Act of 2006 gave greater flexibility to plan sponsors in the choice of employee default investment, known as Qualified Default Investment Alternatives (QDIA). Prior to its enactment, a cash option was the likely default choice; now, the appropriate target date fund is considered the best QDIA option.
- Auto Enrollment / Auto Escalation – One of the more recent upgrades to defined contribution plans, auto enrollment is a powerful tool to help your employees save for retirement. Traditionally employees have been required to opt in to the plan. With auto enrollment, employees are in the plan unless they to say they elect otherwise. Auto escalation is designed to increase employee contribution rates within plan guidelines over the course of time. According to the Society for Human Resource Management (SHRM), a majority of participants favor automatic increases. (Source).
Employee Education: Great investment options and a well-designed plan are important, but a truly effective plan will be one in which the employees receive enough advice to make good investing decisions. Are your employees receiving advice from the plan advisor on a regular basis? Group meetings should be arranged at least on an annual basis, if not quarterly. For employees who cannot attend meetings, is the plan advisor available for consultation away from the scheduled meetings?
Fees: There are two forms of fees associated with a 401k plan, investment expenses and recordkeeping costs. With a “bundled” plan it can become confusing to determine the costs associated with each as the costs will all be a part of the fund expenses paid by participants. Once you have a breakdown of the specific costs, you can determine if the fess paid are reasonable for the services provided. The lowest costs provider is not always the best provider.
Magellan Financial, Inc. is a leading provider of retirement plan solutions for businesses of all size in the greater Lehigh Valley and surrounding communities. For more information or a free checkup on your current retirement plan, we can be contacted via email or by calling Jon Soden at 610-437-5650.
Wells Fargo Advisors Financial Network/Magellan Financial, Inc. and its financial advisors provide non-fiduciary services only. They do not provide investment advice [as defined under the Employee Retirement Income Security Act of 1974 as amended (“ERISA”)], have any discretionary authority with respect to the plan, make any investment or other decisions on behalf of the plan, or otherwise take any action that would make them fiduciaries to the plan under ERISA.“
Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC, a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company. Magellan Financial, Inc. is a separate entity from WFAFN.