Even small businesses can sponsor 401(k) plans. These attractive employee benefits offer the fastest way to save more money to build a healthy retirement fund.
You can imagine that these vehicles are best suited for larger companies. Certainly, these megaplans get a lot of attention. But did you know that owners with just a few employees may find 401(k) plans particularly appealing because they provide an easy way to reduce taxes?
Just because they’re popular doesn’t mean they don’t come with string. As you might expect, there are plenty of ways to stumble when you run a modest-sized business with a 401(k) plan. What are some of the biggest issues 401(k) plan sponsors face today, and how can they be addressed?
Who is considered a 401(k) plan sponsor?
Technically, the organization that created the retirement plan for its employees is the plan sponsor. However, ERISA requires that entity to name a specific plan administrator. For smaller companies, this is usually the owner or a high-level executive.
According to the Ministry of Labour“there are four first steps to setting up a 401(k) plan:
- approve a written plan document,
- Set up a trust for the assets of the plans,
- Develop a registration system, and
- Provide plan information to employees who are eligible to participate.”
Once you get your plan up and running, there are issues you need to be aware of. These are issues that need to be addressed now as you discover they’re relevant to you, your plan, and your business.
Do plan sponsors have a fiduciary responsibility?
However, before you get to the details, there is one thing you need to understand and embrace. It affects all your decisions regarding the plan. You can lighten it up to a point, but you can never remove it.
You are a confidant of the plan. That means you have a legal responsibility (or “duty”) to plan participants (your employees). Do you know what this really means? If not, then you’re not alone.
“There is still a very large percentage of 401(k) plan sponsors who do not really have a good working knowledge of their responsibilities as fiduciaries or internally have the skills to carefully evaluate problems, set goals and make decisions for their 401 (k) plan,” said Jason Grantz, Managing Director at Integrated Pension Services in Highland Park, New Jersey. “Often this is a function of the gap between the size of the company offering the plan and the cost/expertise required to execute that plan well.”
What are the responsibilities of a 401(k) plan sponsor?
As you begin to inventory the responsibilities outlined above by the DOL, unless you are in the 401(k) business, you will likely conclude that you need help.
“You need to know you’re up to your ears,” says RL “Dick” Billings, Senior Document and Compliance Specialist for PCS Retirement, LLC in Philadelphia. “You need a responsive third-party administrator (“TPA”) that addresses issues and questions that are unique to your plan and your role as a plan sponsor.”
The main takeaway here is that you are not alone. With other people in your company or outside vendors, you can get help performing some of the tasks for which you are responsible.
“The biggest problem sponsors face within their own business is not delegating and establishing clear procedures for delegated responsibilities,” said Carol Buckmann, partner at Cohen & Buckmann PC in New York City. “You can solve this by establishing a planning committee or committees (separating administrative, investing and sometimes settlor functions) with charters that define their meeting schedule, responsibilities and reporting obligations.”
Often, small business owners have their hands in multiple companies, only one of which sponsors a 401(k) plan. Depending on the relationship between the companies and their ownership structure, this can be problematic. You may think that your responsibilities are limited to the sponsoring company, but that may not be the case.
“Plan sponsors should be aware of member service group rules,” said Herman (Tommy) Thompson, Jr., a financial planner at Innovative Financial Group in Atlanta. “If a company has subsidiaries or sister companies with a similar ownership structure, the rules of the affiliated service group may require the plan sponsor to align the provisions of each retirement plan between the different companies. Using one record keeper and one external administrator between all the different subsidiaries is the easiest way to avoid problems with affiliated service groups.”
What is the role of a plan sponsor?
Of course you have the operational responsibilities mentioned above, but there is something more involved. It’s similar to how you run your business. You have the daily work to maintain the cash flow. However, you also need to keep an eye out for broader, more strategic opportunities. The same goes for your 401(k) plan.
“When it comes to designing plans, the status quo is code for ‘falling behind,’” said Matthew Eickman, National Retirement Practice Leader at Qualified Plan Advisors in Omaha. “Not enough plan sponsors have reinvented their plan features. This issue was addressed before the pandemic, but the post-pandemic labor market has emphasized the need to start with a new perspective. Plan sponsors should work with their advisors to answer this question: “If we launched our plan today, how would we build it?” The status quo just isn’t good enough.”
If you’ve been working on your 401(k) plan for a while, you know that the biggest source of change, or at least the change request, comes from your employees. Employees sometimes react to breaking news and don’t necessarily consider the long-term ramifications of following the fads of the present day.
“A major problem that 401(k) plan sponsors face with their own business is that the plan sponsors get feedback from the employees about things or services they would like to see in the plan, but the company doesn’t want to invest in implementing the plan. those changes,” said Jason Noble, financial advisor and member/partner at Prime Capital Advisor in Charleston, South Carolina. “Those changes can cost money and time, so a regularly scheduled meeting to discuss employee feedback between the plan sponsor and their own company’s leadership team would be an important way to address these issues on an ongoing basis. . Human Resources knows that the voice of employees can be loud, but does that voice also extend to leadership? These meetings help with that!”
How do smaller companies operate a 401(k)?
“Small employers don’t have the resources to staff a competent HR team that understands the complexities of the 401(k) ecosystem,” said Peter Nerone, Compliance Officer at MM Ascend Life Investor Services, LLC in Cincinnati. “Small employers also face challenges that allow key employees to make enough contributions because of the different protocols for testing coverage and contributions.”
But the biggest potential problem for small business plans can come from a source you least expect: you.
If you already have an aptitude for all things business, it means that you are used to flying alone. You may even prefer to work alone. However, once you attract employees, your status changes. You must be aware of rules designed to protect and comply with employees. This applies most to pension plans.
You may not like this very much, but don’t worry. As they say, “There’s an app for that.”
“When done right, being a plan sponsor takes a lot of time, from ongoing administrative tasks to 5,500 and audit preparation to regular retirement committee meetings to new IT security audits,” said Jeff Coons, Chief Risk Officer at High Probability Advisors LLC in Pittsford, New York. “At a time when staffing levels are tight, the retirement plan can feel more like a burden than a benefit to the employer. One way to address this growing challenge is for plan sponsors to consider outsourcing plan responsibilities, which has been made easier by the introduction of bundled employer plans into the retirement market. Outsourcing should be a consideration for any non-core business, and the retirement plan is no exception!”