Selecting a Retirement Plan
By gaining a solid understanding of basic plan design principles and parameters, you will be better positioned to offer up ideas on ways to effectively manage plan costs. For example, you can adjust the matching contribution formula under a 401(k) plan to increase plan participation without incurring greater out-of-pocket costs. Here are some other ways in which you can maximize your and your employers’ retirement savings while limiting your expense:
Any overview of cost-control measures would be incomplete without a discussion of competitive bidding. And, since various plan providers excel in distinct products and market segments, it is possible that you will need to develop relationships with more than one primary plan provider.
Most effective advisors in the 401(k) arena consider it part of their role to help you get the best bang for your buck. And, since various plan providers excel in distinct products and market segments, you'll want to ensure you get the opinions of more than one primary plan provider. By exploring your options, you will learn about the strengths and weaknesses of various plan providers while finding the best possible solution for your business.
- Learn about provider strengths and weaknesses
- Ask pointed questions about services and related costs
While the world of retirement is complex, technology is making it easier. There has been a tremendous shift toward automated plan features in recent years. Automatic plan features include:
- Auto-Enrollment: Each participant is enrolled in the retirement savings plan unless the participant “opts out.”
- Auto-Escalation: The savings amount is incrementally increased unless participant elects otherwise.
- Auto-Rebalancing: The plan automatically rebalances investments unless the participant elects otherwise.
You can typically choose whether to implement various automatic plan features. Implementing some automation features can lead to greater participation rates among your employees, higher deferral rates for yourself, and better investment decisions.
However, it’s important to remember automated features are only as good as the plan design features. For example, too low of a default deferral rate can result in employees contributing less than they would have voluntarily contributed, while too high of a default deferral rate can result in employees simply opting out of the plan.
Plan Design Considerations
There are several factors to take into account when considering your plan options.
- Participation criteria: In most cases, you must offer participation if the employee is at least 21 or has worked for you for more than a year.
- Contribution allocation formulas: Some plans give equal allocation to all employees participating in the plan, while other plans allow for higher allocations for the owner and other senior management employees.
- Potential use of “Safe Harbor” design options: Safe harbor designs will allow you to avoid certain types of compliance testing. Generally, safe harbor design includes:
- Nonelective contributions: The employer makes nonelective contributions on behalf of each employee, regardless of whether the employee is participating in the plan.
- Matching contributions: Generally, the employer makes matching contributions of 3% of employees' eligible contributions.
- Automatic enrollment: This design includes an auto enrollment feature for new eligible employees in which a predetermined amount of their salary is deferred to the plan unless they opt out.
It's good to have an understanding of all the costs that could be involved in setting up a plan. Costs will vary based on the type of plan you select, and not all listed below will be included.
- Explicit costs
- Recordkeeping and plan administration
- Trustee/custodian fees
- Consulting services
- “Imbedded” costs
- Investment-related fees/expenses
- Human resources