Referencing the features of 401(k) plan
Management of fiduciary responsibility is a must for business owners who sponsor plans, including plan management, hiring and monitoring service providers, employee education, participant communication, administrative support, and plan design. It should come as no surprise that of all the parts of a retirement plan, the biggest area to come under intense focus recently is cost.
These key points that can be used to benchmark a plan and offer important features of a retirement plan.
· The process of reviewing plan investment options against guidelines and benchmarks outlined in the statement is critical.
· Some retirement plan vendors offer warranties at no cost that promise to restore any losses to the plan and pay litigation costs related to the suitability of the investment process and fund lineup. Some vendors offer plan sponsors co-fiduciary services at little or no cost.
· Education is essential if you wish to comply with Employee Retirement Income Security Act Section 404(c) regulations. Section 404(c) allows plans to permit participants to exercise control over the assets in their accounts, but the plan must provide participants with an opportunity to obtain sufficient information to make informed investment decisions.
· In addition to performance, low investment cost is a benefit. Participants therefore like index funds and ETFs. Most plans offer an S&P 500 Index option, and many offer other index funds as well.
· Many participants are overwhelmed with the investment options in their plan and feel ill-equipped to select and then monitor their choices. Asset allocation models make the process easier.
· Many plan sponsors may be unaware that small balances for terminated participants can be “forced out” of the plan, which can help reduce administrative costs. Balances below $1,000 can be sent directly to terminated participants, and balances between $1,000 and $5,000 can be transferred to an individual retirement account.
· Annual disclosures are generally completed by third party administrators and plan vendors and need to be distributed to all eligible employees, and active and terminated participants. Investment changes need to be communicated to all eligible employees and participants as well, in advance of the changes.
· Administration costs come in different varieties. Some retirement plan vendors or third-party administrators charge a fee based on the number of participants or the number of eligible employees; others base the fees on the average participant’s balance. Some even charge a flat fee. Based on your demographics, which method is most favorable?
· Investment management fees can vary greatly from plan to plan and are often based on “class share.” These class shares come in many varieties and are identified with a letter following the investment option. An asset fee is another layer of investment costs and, like investment management fees, is deducted from investment returns and can therefore be difficult to monitor. Asset fees are generally based on the level of plan assets and should tier down as plan assets increase.
· If you haven’t reviewed how plan costs are assessed, you may not know if they are equitably distributed among participants or whether some pay a proportionately larger portion of the plan’s administrative costs.