Is your organization ready to offer a 401(k) plan for the first time—or are you in the market for a new provider? Either way, there are many factors to consider as you weigh the features of various plans.
401(k) salary deferral plans are the most popular retirement plans today. Nearly every type of financial institution—banks, insurance companies, brokerage firms—offer 401(k) plan services.
If your organization is considering offering a 401(k) plan for the first time—or it has a plan and you are reviewing its performance—there are several things to consider. Here is a quick checklist.
Be sure the plan you're looking at offers flexibility as to plan design. Most service providers offer an IRS-approved prototype plan, which can save big money over an individually designed plan. But a prototype plan can be inflexible. Make sure that any prototype plan you adopt is adaptable enough to meet your organization's overall needs.
Similarly, make sure the plan offers a broad range of investment options. Nearly all 401(k) plans allow employees to choose their own investments—usually from among several specified alternatives. The service provider you're considering likely offers its own investment options. But what if these investment choices regularly underperform similar investments? You might want to consider hiring a service provider that allows you to use outside investments for at least some of the plan's assets.
Evaluate plan fees. Be sure to evaluate and/or compare the various plan-related fees. The DOL requires disclosure of investment-related fees, plan administrative expenses, and individual participant expenses, including details of fees charged for services such as loans and investment advice.
As a result of these disclosures:
- Plan participants can determine the reasonableness of the costs they're being charged to save for retirement and compare the costs associated with different investments.
- Plan sponsors can make better decisions about the service providers they select and the investments they offer under the plan. Better employer decisions can lead to more efficient pricing and lower costs to retirement plan participants.
Look carefully at the administrative capabilities of the service provider. Some providers offer terrific investment returns or broad investment flexibility, but are lacking in administrative ability. Remember: From an employer's and an employee's perspective, the administration of a 401(k) plan is one of its most important elements.
Check around to gauge the provider's reputation for plan administration. Call some local customers of the provider for a referral. Ask, for example, if they've received late or incorrect statements. If so, find out how the provider handled the problem. Make sure that any problems were handled quickly and accurately.
Finally, find out whether the service provider helps you on a continuing basis with employee communication. Communicating the plan's features and benefits is essential to broad participation. And broad participation is essential to a successful 401(k) plan.
Most service providers will meet with employees when the plan is first set up to help "sell" the plan to them. Often, though, explaining the plan to new employees is left to you. A service provider should be available to come in from time to time and reinforce the plan's value to employees—both existing and new.
Choosing a 401(k) plan and a service provider can be difficult, but by doing your due diligence and taking the time to ask the right questions to prospective plan providers, you can choose the right plan for your organization.
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