As a fiduciary, choosing a 401(k) plan may sound like an easy task, but there are a few key decisions that need to be made before you can put the right plan in place.
When setting up any sort of retirement plan, you must first figure out which group of employees you intend to provide this benefit for. Why? Well, the federal government has mandated certain regulations and discrimination testing practices that require you to provide the opportunity for all employees to participate. The IRS gives companies and employees tax breaks for sponsoring and contributing to retirement plans – and it wants to know that these tax breaks are being distributed fairly and evenly – so regulations like DOL and ERISA, for example, prevent employers from offering plans that can only be used by the most highly compensated and key employees. If you believe this is the case with your plan, you will need to adjust your plan so that it provides a match that entices all employees to contribute; or you can offer a safe harbor match, which requires you to contribute at least 3 percent of pay to all participant accounts regardless of whether the employee contributes, and which will eliminate all testing for your plan.
Once you have decided on the appropriate type of plan for your employees – regardless of whether the plan is a start-up or already established – the next decision is to choose the recordkeeper or provider for your plan. And when requesting quotes from various recordkeepers, you are going to want to make sure that there are no gimmicks involved in the pricing. As a fiduciary, you want to make sure you are getting your employees the best pricing while remaining free of any conflicts of interest.
For example – Many providers will quote plans that use proprietary funds in their lineups, which is done to show you a lower required cost due to the fact they are making significantly more revenue off the money invested in their mutual funds (i.e. Fidelity is your recordkeeper, and your available funds come mostly from Fidelity). Another pricing tactic we generally see revolves around the fixed account or money market fund. With this fund, providers can either raise or lower the pay-out rate to control how much revenue they make from that fund (i.e. the fixed account or money market might currently yield 3%, but if they reduce the rate to 1.5%, it may reduce the overall plan cost by 0.25%). On the surface, both of these items may seem nominal, but when you are acting as a fiduciary you have to make sure you are doing what is in the best interest of all your employees.
The final part is selecting the right advisor or consultant for your 401(k). Many advisors in the market will claim they can handle retirement plans, but the reality is they can’t. Most advisors are unable to act in a fiduciary capacity, which puts all of the plan responsibility on the company’s fiduciaries (any one who makes decisions on the plan). The right consultant, however, is going to not only act as a 3(38) fiduciary, but will also make sure that your plan is always up from a pricing, recordkeeper, and fund aspect, and will keep you up to date on retirement plan regulations.
At Key Client Fiduciary Advisors, we act as a 3(38) fiduciary for our retirement plan clients, and we provide ongoing plan pricing and recordkeeper benchmarking to make sure the plan is always up to date and ahead of the curve. We are also constantly monitoring the mutual funds in our plans and making adjustments to funds based on 13 different metrics, and we are heavily involved in the retirement plan space, which affords us to stay current on any new regulations out of Washington.
If you’d like to have us evaluate your retirement plan, please feel free to reach out to us. We’d love to help.
Key Client Fiduciary Advisors, LLC (“KCFA”) is an SEC-registered investment adviser located in Fairfield, New Jersey. This blog post is limited to the dissemination of general information pertaining to KCFA’s investment advisory services. The information in this blog post should not be construed as personalized individual advice. A copy of our KCFA’s written disclosure statement as set forth on Form ADV, discussing KCFA’s business operations, services and fees is available upon written request.