Selecting a 401k Plan Provider for Your Business: Things You Must Know

When a person starts a business, they do not give much thought to procedures such as getting a reliable 401k provider. Of course, for an entrepreneur, the focus is on increasing the value of the company by getting the right people on board, focusing on the right selling point, and identifying trends in the market to take advantage of rising opportunities.

Offering a 401k has its own benefits

As all entrepreneurs understand, the key to success is retaining quality employees, and employees demand benefits in addition to their basic salary. One such benefit which most employers offer is a 401k plan, a retirement plan that promises to pay a lumpsum to the employee upon retiring from the company. The plan requires little input by the employees, and provides security to employees who are concerned about their finances after retirement.

According to statistics, around 72% of Small enterprise companies usually do not offer 401k plans to their employees. Hence, any small company offering such a plan is better in the eyes of employees than those who do not.

Questions to ask when selecting a 401k Plan Provider

Now that it’s established that companies are better off having a 401k plan than not, the next step is to choose a plan that fits your company. The following factors need to be considered while choosing the perfect plan for your company:

Does the provider act as discretionary trustee?

The 401k provider must act as a discretionary trustee

Since the fund empowering 401k plans must be invested to generate enough cash flows to fund claims in any given year, the plan provider must make prudent investment decisions that benefit the plan. A company that subscribes to a 401k plan provider does not have either the skill or the time to manage the plan, hence the provider must act as a discretionary trustee, meaning to act in the best interest of the company and its employees while handling the fund.

The plan must remain compliant with ERISA as well as IRS standards, which is a hectic task in itself. Hence, companies must choose a provider that agrees to act as a discretionary trustee as well. A point to note is that owners who fund the plan have the liberty to choose other parties as to handle such fiduciary matters, and do not necessarily have to rely on plan service providers to perform all fiduciary duties.

How the service provider aids the employees?

In order to retain top employees, companies must offer benefits. Offering medical benefits is almost a requirement now, but offering a 401k is an incentive to work for long term in a company as it offers a secure future to employees. Companies should aim for service providers that also provide education regarding financial planning to employees.

This is important because most companies say that their 401k plans are underutilized by employees simply because they do not fully grasp how to take advantage of it, or how to diversify their investment portfolio. Hence, a dynamic program that offers insight to employees on planning their retirement, should be sought with plan providers.

Plan providers should offer dynamic programs that offer insight to employees on planning their retirement

How much will it cost the business?

There is no grey area as far as plan costs are concerned, thanks to new regulations set by the Department of Labor. The DOL requires all plan providers to clearly list down all service charges and management fees while providing quotes to companies. This includes all possible expenses, such as mutual fund costs, management fees, and provider fees.

This disclosure makes it easier for companies to compare rates from different plan providers to select the one which costs the lowest while providing the maximum benefit to the company’s employees. Of course, there may still be a few hidden costs with plans, so, a careful analysis of each individual plan is recommended.

Due Diligence is Key to Successful 401k provision

After selecting the best plan provider, companies must ensure that they continue to employ due diligence when it comes to decisions about funds, education events, the investments being made, and any further meetings regarding the 401k plan.

It is possible that the DOL may require every company to provide a due diligence binder

It is possible that the DOL may require companies to provide a due diligence binder, which would essentially require companies to provide data regarding the frequency with which educational programs are held, the topics which are covered, and the names of those who attended. Companies are required to disclose the process employed with the selection and monitoring of the plan, and identify the signatory of funds. After the historic ruling of Tibble v. Edison by the US Supreme Court, it is also required that companies review their policies on an ongoing basis. Failure to comply with the above-mentioned requirements may result in lawsuits.

As the ultimate responsibility lies with the entrepreneurs themselves, it is imperative that all decisions are taken with utmost prudence and careful attention is given to the risks that the plan provider is willing to bear alongside the company.