4 most common retirement plan errors
From its humble beginnings more than 40 years ago in the United States Revenue Act of 1978, the 401(k) has become a staple retirement savings plan for many Americans.
From a business owner’s perspective, company retirement plans can help attract and retain quality employees and demonstrate commitment to their financial health. Since it can be a stagnant part of your business, it’s common to assume your retirement plan is operating as originally intended with the same efficiency and cost. However, that’s rarely the case. Our team regularly works with businesses operating with retirement plans that were set up many years ago, often by different leadership teams, and sometimes by providers who only dabble in retirement plans. Here are some of the most common errors.
- Conflicts of interest. Some retirement plan providers offer proprietary funds that may offer appealing cost structures at first, but are they the best funds for your employees? On some platforms, proprietary funds might reduce your all-in costs, but the provider makes up those fees from the internal expense ratios. Furthermore, offering proprietary funds might conflict with your investment policy statement and/or your fee policy statement. Don’t let the overall cost structure impede you from offering a better fund choice for your employees. A conflict-free evaluation is in your best interest for recommendation, review, and replacement of the funds in your plan. Dedicated retirement plan experts who value transparency and provide third-party fee benchmarking data are your best choice.
- Bearing all the responsibility. If you hire a professional plan expert to monitor and provide advice, that provider should elevate their fiduciary responsibility. Nondiscretionary investment advisors will show you problem funds but won’t take action without the plan sponsor sign-off to direct the change. Work with experts who not only identify the fund but also take discretion over its replacement. Providers offering 3(38) services or working as discretionary trustees stand by their investment process by sharing in the fiduciary responsibility with you.
- Delaying payroll remittance. Each payroll includes 401(k) contributions and matches, so delayed payroll potentially means that gains or losses in the account aren’t exactly correct. If your business doesn't make timely employee elective deferral deposits, the failure may constitute both an operational mistake, causing plan disqualification (if the plan specifies a date by which the employer must deposit elective deferrals) and a prohibited transaction.
- Adoption agreement concerns. The adoption agreement, the foundation of a 401(k) plan, outlines how the plan will act; however, it’s often interpreted incorrectly. The resulting errors cause critical liability issues for which plan sponsors can be held responsible. Revisit your adoption agreement during the mandatory restatement period, which is required for preapproved, qualified plans. Ask your 401(k) provider to verify that you’re operating according to your plan, and invite a third party to review. Too many businesses don’t take this chance to thoroughly review the plan to make sure it’s correct, is competitive for current market standards, and a good fit for the company and employees.
Protecting the interests of your business and your employees is equally as important as offering a plan optimized for them. In a tight labor market, you need every competitive advantage you can leverage to acquire high-performing talent. It’s essential to work with experts you trust to represent your best interests.
Aaron Osten is vice president of First Business Trust & Investments.
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