The day to day grind of running a business means things get overlooked. One of the most commonly overlooked items is a 401(k) and profit sharing plan. For my business owner friends, when was the last time you looked at your company sponsored plan and determined if it was up to snuff?
If you are like most, it’s possible you begrudgingly implemented a retirement plan years ago, and haven’t looked at it since. If that is the case, now is the time for a review.
The world changes, the market changes, your business changes, and its likely your 401(k) needs to change. Today may be the time to reconsider.
Why reevaluate your plan?
There are a number of reasons to reevaluate a retirement plan. Most notably, because you haven’t done it in a long time. It’s not uncommon for years to pass without a thorough due diligence of an employer sponsored retirement plan.
The passage of time isn’t the only time you may want to consider sending out a request for proposal. Here are a few other changes that could affect your plan.
- Have I got more employees? Do you have more employees, different salaries, changes in contribution and participation rates? All of these items can impact how much owners and other highly compensated employees can contribute. Additionally, changes in employees can affect the total costs of the plan.
- How old are my employees? If all of your employees are under 30 or they are all over 50, you may need a very different plan than you currently have. Those over 50 are far more concerned about retirement income and your plan may not be meeting their investment needs. How about employee education? Are you providing any to your employees? Should you be?
- What is the status of my business? If your business has grown significantly, recently suffered a substantial business slowdown, or any number of factors including whether you purchased a business, sold off a business unit or added new partners, it may be time to reevaluate your plan.
Your retirement plan should be structured in a manner that allows some flexibility for investment choices, especially if your employees are of various age groups. While some employees in their 30’s may be happy with more risky investment options, those in their 40’s and 50’s are going to look for more stable choices.
What to look for in a new proposal?
Picking a 401(k) plan is not easy. With so many moving parts, it is difficult to adequately compare the advantages and disadvantages of each proposal. More often than not, it takes the help of a retirement plan expert to assist during the evaluation process. Some of the factors that you should consider include:
- The Fees– when reviewing new proposals, make sure the fees are not going to bury your employees. Fees include payments made to the investment company, the record-keeper, the custodian, the mutual funds, and the advisor. Sometimes these fees are “bundled” (i.e. hidden) and sometimes they are itemized (i.e. transparent).
- The Funds – Good funds are important to a good retirement plan. Generally, your objective should be to provide enough funds that your employees can create a diversified portfolio. Additionally, it’s common to have asset-allocation or target date funds for an employee who doesn’t feel comfortable selecting their own investments.
- The Design – Plan design is all about how much the owners and highly compensated employees can contribute each year. As a business owner, are you limited in how much you can defer each year? If so, you may want to consider a safe harbor plan. How about your profit sharing allocation; do you feel as though too much is going to your employees? It’s possible you should change your allocation from a traditional profit share to a new comparability allocation.
- The Details – 401(k) plans can be very specific. How often do you want your employees making changes, when are they eligible to enroll, are your employees eligible for a loan, when do they vest in the employer contributions?. A well thought out 401(k) plan will address these questions.
In most cases, it is a good idea to reevaluate your plan about every three years. No retirement plan should be considered a “one-size-fits-all” and while the plan you chose when you first started may have been the best plan upfront, it may not work as well today.
A good 401(k) plan should have followed a dual mandate. First, it should attract and retain your employees. Second, a 401(k) and profit sharing plan should allow for the business owners to address their needs to save for retirement, save on taxes, and create liquidity outside the business.
A well constructed plan can address both parties’ interests in a way that is mutually beneficial and cost appropriate.