How Small Business Owners Can Fine Tune Their Company 401(k) Plans

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The 401(k) plan has become the sole source of retirement for most Americans. The quality of plan you provide your employees directly affects their ability to retirein the future. Many 401(k) plans have been used as a speculation vehicle and not a retirement tool. This must change to providing a more pension fund like 401(k) plan. Your company will become more competitive for top talented employees by offering a top quality plan.

Prune an Excessive Fund Line-UpWhen it comes to having investment options for participant directed 401(k) plans, many advisors and plan sponsors believe that more is more. Studies suggest that less is actually more because plan participation for salary deferrals is depressed with participant directed plans with large fund menus because it overwhelms participants. I have seen plans with 28 and even 50 different mutual fund options on a single plan menu, which has to confuse plan participants. There should be no reason why a plan has 3 large cap growth funds. Too many fund choices have also been shown to spur participants to invest more in less riskier investments which may negatively affect their asset allocation and their retirement savings. Why have 28 mutual funds in the fund lineup when 12 can do the trick?

Review Plan Fees
It is a breach of a plan fiduciarys duty of prudence to pay fees that are unreasonable for plan administration and investments. It is required for plan sponsors to understand the fees that plan participants pay and determine whether those fees are reasonable for the services involved and what is available in the marketplace. With fee disclosure regulations coming into effect in July 2011, all plan sponsors will be advised by their plan providers as to what fees are being charged and what compensation that these providers will receive. Therefore, plan sponsors have no excuse not to review plan fees and inquire with competing plan providers to determine whether the fees are reasonable. This past year, a Federal District Court in California determined that a plan sponsor breached their duty of prudence by using retail share classes of mutual funds, when less expensive institutional share classes of the very same funds were available. Plan costs have been an important discussion over the last few years because of the demands for required disclosure and because so many plan sponsors have been sued by participants for excessive fees.

Complete an Annual Review of the Plan

Retirement plans are like automobiles (another car reference), they need constant maintenance to run to its optimum capability. Too many plan sponsors have a “drawer” mentality when they take their plan, put it in the back of the drawer and forget about it. A 401(k) plan should be reviewed annually to determine whether the fees being charges are reasonable, whether the investments are still proper according to the IPS, whether the plan still fits the needs of the sponsor and participants, as well as determining whether the plan documents and the plan’s administration is compliant with ERISA and the Internal Revenue Code. While plan sponsors may consider this review cost prohibitive, there are many financial advisors,TPAs, retirement plan consultants, and ERISA attorneys (including this one) who can perform that service at a reasonable fee.

It is required for a plan sponsor to keep their 401(k) plan in tip-top shape. They should consistently review and update their plan as needed. 401(k) plans are an employee benefitand one of the ways to improve that benefit is to rev up the plan with some of the new amenities and features available today at low or no cost. A plan sponsor with a 1985 Oldsmobile Delta 88 of a 401(k) plan in 2011 will find out thehard way why their plan should have been like a 2011 Ford Mustang by paying large lawsuit settlements to plan participants.

This is just a few important items that need the attention of the plan sponsor. Many small plan sponsors have neither the time nor staff to sufficiently deal this this. These sponsors should out source these functions to independent fiduciaries.

Please comment or call to discuss how this could affect your ability to attarct and retain top talent.

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