Whether you are looking to add a 401k plan for your employees or you already have one in place, there are some important things to consider. In today’s blog post, you will learn about 4 questions that you need to answer when choosing a 401k plan for the first time or managing an existing one. Specifically, these questions revolve around your legal responsibility as a business owner, the fees within the 401k plan, the investment strategy being implemented, and the ease of use for employees.
QUESTION #1: Is there a process in place to help with your legal responsibilities?
In my experience, many business owners are “sold” a 401k plan without an understanding of their legal responsibilities. In fact, I would venture to say that you didn’t even know that you had legal responsibility when setting up or maintaining a 401k for your company.
Some of the responsibilities you have include (1) ensuring fees are reasonable (more on this next), (2) providing a diversified menu of investment options, (3) hiring professional services providers for areas in which you don’t have expertise.
If your legal responsibilities are not handled properly, then as a business owner you could be at risk personally.
So, when choosing a 401k company for your business, make sure that they help you with developing an ongoing process which is intended to protect you and minimize your risk!
QUESTION #2: Are you monitoring the fees within your plan?
As mentioned above, fees within your 401k plan need to be “reasonable”. You may think that I am referring to “investment” fees, which I am, but there are other fees you also need to be aware of.
These include custodian fees, investment manager fees, recordkeeping fees, and third party administration fees.
These fees should clearly be listed in any sort of proposal that you receive from a 401k company. If not, then I suggest you continue your search with another company.
QUESTION #3: Is there a defined investment strategy in place?
Low fees are certainly important within a 401k plan, but that in and of itself is not an investment strategy. There are other things you need to consider.
Specifically, you need to think about whether or not you want actively managed investment or passive ones.
Actively managed investments are those that attempt to beat the returns of the overall market, but usually carry a higher price tag. However, you’ll have to weigh this against the studies that show that most actively managed investments fail to beat the market.
Passively managed investments typically mirror the market and are much less costly. And based on the research in the link above, they tend to outperform their actively managed counterparts.
You investment strategy should also state (1) which size investments you should purchase, (2) whether or not you wish to over or underweight certain investments, (3) which investment categories you should make available to your employees, and (4) which types of bonds you should own.
At the end of the day, don’t just buy a “product” from a 401k company, instead have a clearly defined investment strategy that you can lean on in good times and bad. And to take it a step further, a good 401k company will actually create for you an Investment Policy Statement which will outline your strategy.
QUESTION #4: Are there models created for employees?
While it’s nice that 401k plans offer a menu of investments to choose from, this can be overwhelming for employees. But, if employees have the option of choosing from one of several models that range from conservative to aggressive, this can make it easier for them to start investing.
As you can see, there are some important things you need to consider when choosing a 401k for your business. But it’s also important to address these issues on an ongoing basis; it’s not a one-time event. Establishing a continual process that reviews your legal responsibilities, fees, investment strategy, and models, helps to mitigate your risk as an employer and provides a 401k plan to your employees that will help them to reach their goals.
If you are overwhelmed at the prospect of setting up a 401k or even reviewing your existing one, feel free to reach out to us. We offer a complimentary consultation and there is no obligation for you to sign up for anything.
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Do you have any experiences that hurt you because proper estate planning was not done? Please share any thoughts, comments, or questions below.
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