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Everything you need to know to choose the right retirement plan for you and your employees

Did you know? 75% of Americans say their company retirement plan is their ONLY source of invested savings.

 

 

While offering a 401(k) confirms your commitment to your employees, supports recruiting and retention, and comes with a number of significant tax benefits, the retirement plan landscape can be quite daunting. There are various stakeholders, a menu of plan options, and a number of administrative and fiduciary responsibilities to bear. However, once you understand how the ecosystem operates, choosing a retirement plan and putting it in place can become quite simple. Especially if you have the right partner by your side. Let’s take a look around.

 

 

Who’s Who

Recordkeeper – Tracks individual account contributions and returns; website where employees log in and engage

 

Third-Party Administrator – Manages most of the plan activities such as compliance testing

 

Custodian (Plan Trustee) – Holds retirement plan assets and moves payroll deductions from the employers’ bank to the participants’ individual accounts

 

Investment Manager – Selects and monitors plan investments and partners with the plan sponsor to support plan success

 

 

Selecting the right partners

While we’ve outlined some of the players, please note that unless you want to keep compliance functions separate from administration (aka an “unbundled” plan), most recordkeepers offer a fully “bundled” solution. This means the recordkeeper will provide the compliance function for your retirement plan, as well as the custodian services. Selecting an investment manager is optional, but if you don’t have one, be sure your recordkeeper has in-house plan design services.

 

 

Selecting the right partner is critical to the success of your plan. In particular, be sure to evaluate their commitment to compliance and security, as well as uncover all aspects of their fees.

  1. Compliance – While you will always have a fiduciary obligation to your company, you can offload a lot of fiduciary oversight to the right partner. Ensure you’re working with a provider who is proactively monitoring your plan and complying with legal and regulatory requirements.
  2. Security – A retirement plan entails a ton of sensitive information (Social Security numbers, salaries, etc.) Make sure your provider has information security protocols in the plan, will stand behind its procedures (ex. pay for mishandles), is able to provide daily incident reports on request, and has cyber coverage.
  3. Fees – It is absolutely critical that you dig into the details of your recordkeeper’s fees. This has been the subject of a number of recent lawsuits, which have worked their way down to the small market. Typically this is due to fees that are disguised or unreasonable. Oftentimes, a provider might also charge for “extra” services that might otherwise have been included. As part of your fiduciary role, it’s your responsibility to ensure your fees are reasonable. Note, that does not mean they have to be the lowest fees, but they must be defensible given the plan you’ve selected.

 

 

Type Match Vesting Benefits Restrictions
Safe Harbor Required Immediate Maximizes owner contributions; reduces nondiscrimination testing requirements Must match
Non-Safe Harbor Optional Flexible No match required Requires annual testing to ensure ADP/ACP is not top-heavy
Profit Sharing Required Flexible Share in successes with employees Must contribute
Cash Balance Required Flexible Employees do not need to contribute Must contribute
403(b) Optional Immediate Do not need to undergo discrimination testing Must maintain “universal availability”
Simple IRA Required Immediate Do not need to undergo discrimination testing, tax credits Must contribute; lower contribution limits
SEP IRA Required Immediate Do not need to undergo discrimination testing; can contribute high amounts Employees cannot access until retirement; lower contribution limits; must contribute

 

 

Choosing the right retirement plan

When determining the right plan for you and your employees, it’s important to work with a trusted partner – be it your financial advisor or even your recordkeeper. However, there are some questions, in particular, you’ll want to consider.

 

Participation – Who should be able to participate? Are there plan features I can use to encourage or require participation?

 

Employer Contributions – Do you want to contribute? If so, how much flexibility do you want around amounts?

 

Provisions – Do you want to permit rollovers, withdrawals, and/or loans?

 

Distributions – When someone terminates or retires, what type of distribution would you like to make available?

 

Testing – Will your plan pass annual compliance tests?

 

Investments – What options are available and what would appeal most to my employees?

 

 

It’s all about execution

While selecting the right plan is critical, if the plan isn’t well executed and adopted, then the value of the benefit disappears. There are two key components to successfully maintaining a plan: administration and compliance. Most modern platforms allow for a great deal of self-service, but the recordkeeper you select will really help determine how easy maintaining your plan will be.

 

 

Administration

Employee Engagement – The most important first step in rolling out a plan is engaging employees. This can be done through:

 

Engaging Open Enrollment Meetings – You know your employees best, so it’s worth determining whether meetings should be virtual, in-person, or otherwise. But in addition to enrollment, it’s important to commit to ongoing education through webinars, collateral, articles, etc. Oftentimes your recordkeeper and/or advisor can assist.

 

Transparent Fees – Make sure your employees know what they’re paying and where to find their fees. If you can’t find them, neither can they, so ensure your recordkeeper makes these clear.

 

Easy-to-Use-Platform – If your team can’t easily access and change their information, they won’t. Make sure the technology is up to snuff.

 

“Plain English” Notices and Plan Documents – Retirement can be confusing. Make it digestible for your team by ensuring they understand what they’re signing up for.

 

Payroll – As the plan sponsor, it’s your responsibility to ensure you’re submitting payroll on time and with accurate information. This can be made a whole lot easier if your recordkeeper and payroll provider have integrated systems, but if they don’t, ensure your recordkeeper has the right procedures in place to make this process as simple as possible.

 

Eligibility – Once again, accuracy is paramount. Part of your responsibility is to maintain clear documentation on newly eligible employees. Some recordkeepers help the plan sponsors calculate who is newly eligible based on the features chosen. However, this calculation is dependent on you maintaining accurate records on hire date, date of birth, re-hire date, and termination dates.

 

 

Plan Compliance

As mentioned, you can offload a good deal of fiduciary responsibility, however, you will always maintain a fiduciary obligation to your plan. That means that while your recordkeeper can often assist with annual reporting and other compliance-related activities, you’re ultimately responsible for ensuring all the i’s are dotted and t’s are crossed. This entails:

 

Annual Reporting – Each year your company will be required to report on the plan’s financial status including your Form 5500. Additionally, you must distribute plan participant disclosures on fees, benefits, and features. Your recordkeeper should assist with both. Lastly, it’s recommended that you have your financial statements audited annually (this is mandatory for plans with more than 100 participants).

 

Plan Committee – All plan sponsors are required to form a plan committee to monitor investments, review insurance and bonds, and keep an eye on the plan’s overall health. This does not need to be an army – some companies may have only one participant on the committee depending on company size. However, it’s important to meet regularly, keep minutes, and save all documentation so all decisions are defensible down the road.

 

Monitoring and Updating Plan – It’s also the responsibility of the plan sponsor to monitor vendors, ensure plans are operating consistently with plan documents, appropriately deploy amendments, and stay updated on regulatory changes. If things within your business change, it’s important to evaluate whether the plan needs to change along with it. Again, your recordkeeper and/or advisor should assist with these tasks, but the final onus remains on the plan sponsor.

 

 

At the end of the day, setting up an effective 401(k) (other employer-sponsored retirement plan) can be an easy way to support the tax, hiring, and retirement needs of you and your employees. However, just how easy depends on the steps you take around creating and implementing a successful plan.

 

 

This content was provided by OnPay’s integrated 401(k) partner, Vestwell. Learn more about OnPay’s payroll software integrations, or see how Vestwell helps small businesses offer a great retirement plan.

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