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RETIREMENT PLAN INSIGHTS |
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How To Upgrade Your Current 401(k)
Here are some simple steps you can take right now!
James Lorenzen, CFP®, AIF® | January 24, 2012 |
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Greetings! 
Some people believe that to improve their plan they have to change their plan and all the providers. While that is often true - many older broker-sold and insurance-driven plans can be riddled with hidden fees that penalize retirement savings - it isn't always true.
Sometimes, even some simple steps can make a big difference! Here are a few tips that may help you `optimize' your plan for smoother sailing.
Enjoy!
Jim |
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 How to Upgrade Your Current 401(k)!
Here are some simple steps you can take right now.
If you have a 401(k) plan that's more than a few years old, it might be worth taking a close look at what you have and, maybe just as important, what you may be missing!
Why is this important?
There are two reasons: (1) assuming you participate in your 401(k) yourself, you have a stake in your plan's health - you should care from a personal standpoint, and (2) if you make decisions regarding your company's plan (approving service providers, etc.), then you are a plan fiduciary - you should care from a legal and personal standpoint!
How can you enhance and optimize your 401(k)? Garden City, New Jersey-based ERISA attorney Ary Rosenbaum offers these suggestions:
Add a Roth Feature
The Roth 401(k) feature simply allows a participant to designate some or all of their deferrals on an after tax basis, allowing for tax free distributions at distribution if certain requirements are met. There should be no added cost to adding this feature (except for a plan amendment), it simply is an addition to an existing plan. It's almost amazing that a majority of plans have yet to add this feature - it doesn't complicate plan compliance and participants should have the opportunity to decide whether to defer some or all of their salary deferrals as after-tax and enjoy that tax free growth. Also, the addition of a Roth 401(k) feature allows eligible plan participants (those older than 59 ½ or normal retirement age) to convert their pre-tax salary deferrals into Roth deferrals after taxes are paid.
Add Automatic Enrollment
Some plan sponsors balk at this feature which defers a participant's income automatically if a participant fails to affirmatively waive participation in the salary deferral component of the plan - they're afraid of possible complaints, But, Ary isn't the only ERISA attorney who thinks this option is a smart move. Automatic enrollment makes a statement that the employer is interested in the welfare of their employees by having them set aside a portion of their income for retirement. It's about your corporate culture. If your employees believe you care about their future and you take the time to provide meaningful education, you'll find this will be a smart option to add.
Eliminate Eligibility Requirements for Salary deferrals
Here's another idea some plan sponsors won't like. Immediate eligibility may increase plan costs because the plan may have multiple accounts sitting in the trust account belonging to former employees who quickly terminated employment after their date of hire. Nevertheless employers should understand that immediate eligibility for salary deferrals is an attractive employee recruitment and retention tool. Let's face it, a one year of service eligibility requirement is strike against taking a job offer. Immediate eligibility for deferrals doesn't preclude the employee from having a year of service requirement for employer contributions and it won't affect discrimination testing on salary deferrals because under the otherwise excludible rule, testing will be completed as if the plan had an age 21 and a year of service requirement for salary deferrals.
It can be easy to forget that a 401(k) plan is an actual employee benefit and immediate eligibility for salary deferrals is attractive for any employee, old or new.
Review Your Investment Selection Process
Whether the plan is participant or trustee directed, it is incumbent on the plan sponsor to review the investment selection process and whether it complies with ERISA to limit liability. This process requires the retention of a plan consultant, development of an investment policy statement (IPS), selection and review of plan investments based on the IPS, memorializing any decisions taken by the plan fiduciaries in the selection and review of investment options, and employee investment education (if the plan investments are directed by participants).
Does your plan have an IPS? Can you put your hands on it? Do your investments comply? You might be amazed at how many plans don't have an IPS, a plan consultant, or a review of investments to see it complies with the IPS. Ary often talks about his experience of once working for a law firm that had a 401(k) plan which had all of those deficiencies before he advised them to clean up that potential liability disaster.
Prune an Excessive Fund Line-Up
When it comes to having investment options for participant directed 401(k) plans, many advisors and plan sponsors believe that more is better. Studies suggest otherwise and the reason might be because plan participation for salary deferrals is generally depressed with participant-directed plans providing large fund menus. The participants are simply overwhelmed. Why have three large-cap growth funds? Even if there was a stock-intersection study to determine overlap, how many participants - or committee members, for that matter - would really know what they're looking at? Who's kidding who?
Review Plan Fees
With fee disclosure regulations taking effect in less than 90 days, all plan sponsors will be advised by their plan providers as to what fees are being charged and what compensation that these providers will receive. What that means is now plan sponsors have no excuse not to review plan fees and inquire with competing plan providers to determine whether the fees are reasonable.
This past year, a Federal District Court here in California determined that a plan sponsor breached their duty of prudence by using retail share classes of mutual funds, when less expensive institutional share classes of the very same funds were available. Plan costs have been an important discussion over the last few years because of the demands for required disclosure and because so many plan sponsors have been sued by participants for excessive fees. And, plan sponsors now in insurance company group annuity contracts (GAC) should be especially vigilant. Here's a hypothetical example, yet based on an actual case study of a small $3 million plan; but notice just how much was saved just in the first year by revamping a GAC, without even changing the investments!
Complete an Annual Review of the Plan
Just like an annual physical, it's necessary for your plan to stay healthy. Unfortunately, too many plan sponsors get busy with other issues and don't schedule regular maintenance. A 401(k) plan should be reviewed annually to determine whether the fees being charges are reasonable, whether the investments are still proper according to the IPS, whether the plan still fits the needs of the sponsor and participants. There's only one way to do that: Take your plan to market and get `apples-to-apples' comparisons. In addition, it's also worth determining whether the plan documents and the plan's administration is compliant with ERISA and the Internal Revenue Code.
While plan sponsors may consider this review cost prohibitive, there are many financial advisors, TPAs, retirement plan consultants (including yours truly), and ERISA attorneys who can perform that service at a reasonable fee. The key is you want your review to be independent, objective, and conflict-free.
When was the last time you took your plan to market to compare what you're paying and receiving against what else is available? That may be your first best step!
This is a big one. It is a breach of a plan fiduciary's duty of prudence to pay fees that are unreasonable for plan administration and investments. It is required for plan sponsors to understand the fees that plan participants pay and determine whether those fees are reasonable for the services involved and what is available in the marketplace.
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 About IFG
The Independent Financial Group is a Registered Investment Advisor providing retirement plan investment and fiduciary consulting to plan sponsors on a fee-only direct-payment basis. IFG acts as our client's advocate in the financial marketplace, providing independent and non-conflicted guidance. IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description. In adition to benchmarking, investment due-diligence, and fiduciary services, IFG helps plan sponsors organize and maintain required documentation.
About Jim Lorenzen, CFP®, AIF®
James Lorenzen is a CERTIFIED FINANCIAL PLANNER™ and an Accredited Investment Fiduciary® in his 20th year of private practice with clients located in New York, Florida, Colorado, and California. Jim has been a headline speaker on financial and organization development topics at more than 500 conventions throughout the United States, Canada, and the U.K. His articles have appeared in more than thirty publications, including The Journal of Compensation and Benefits, The Profit Sharing Council of America's Insights, and The National Management Association's Manage. He's also been interviewed on American Airlines' Sky Radio and by The Wall Street Journal for Smart Money magazine. More about Jim here.
Accredited Investment Fiduciary®
AIF and AIFA Designees have successfully completed a specialized program on investment
fiduciary standards of care. The curriculum is conducted by the Center for Fiduciary Studies in association with the Joseph M. Katz Graduate School of Business, University of Pittsburgh. Created by Fi360, training began in 1999 to provide the investment industry with the first full-time training and research organization focused exclusively on investment fiduciary responsibility and portfolio management. Designees are required to complete a rigorous training program, successfully pass an examination, conform to a code of ethics, and adhere to continuing education requirements on a yearly basis. These requirements ensure Designees are familiar with the prudent process developed by fi360, as well as kept up to date with recent industry events affecting fiduciaries.
About RPAG
In order to provide IFG clients with the highest standard of `best practices' and institutional-level services, while still maintaining a conflict-free independent environment. IFG has retained Retirement Plan Advisory Group (RPAG) to serve as a `back-office' consulting and technology resource. RPAG provides IFG with highly experienced `back office' of consultants and a state-of-the-art technology platform that support both IFG and plan sponsor clients. The RPAG network includes 350 member firms in 45 states serving approximately 20,000 retirement plans with $65 billion in assets. In short, everyone wins: This back-office support in design, ERISA issues, education, and technology allows The Independent Financial Group to provide institutional-level service without the conflicts of in-house product vending or hidden compensation arrangements.
About This Newsletter
Plan Sponsor Insights content represents the opion of the author. Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.
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