There was a time when 401(k) retirement plans were out of the reach of many small businesses due to high cost and complex administrative duties. This has changed – mainly due to technology. Retirement plans are now very cost effective and the administration streamlined. Any business structure – whether it is a C Corporation, S Corporation, partnership, or sole proprietorship can establish a 401(k) designed to benefit the business, the owner, executives, and employees.
Contributions made by employers are tax deductible to the business or the deduction flows through to the owners of the company. In addition, contributions made by employees are deductible to the employee and grow tax deferred. Therefore, overall employer payroll taxes may be reduced because employee taxable income is reduced with pre-tax 401(k) contributions.
There are many benefits associated with opening and maintaining a 401(k). The most obvious advantage of a 401(k) plan is an efficient, tax effective way for the CEO, executives, and employees to save for retirement. A 401(k) provides flexibility to tailor a plan according to the executive’s needs. A 401(k) allows the business to attract key employees and retain key employees by rewarding the most important employees (within guidelines).
What Criteria Should I Look For with a Plan Administrator?
There are typically two entities a small business owner works with when opening and maintaining a 401(k) plan. First, is a plan administrator and second is an investment advisor. They work together for the benefit of the business owner and the goals associated with opening a 401(k) plan. The plan administrator will typically charge less than $2,000 for the initial set up and/or transfer of the plan. There also may be a small ongoing monthly fee charged by the administrator. A good plan administrator will be knowledgeable and active implementing the appropriate retirement plan, participate in an initial enrollment meeting, provide ongoing record keeping and support, and provide the business with a tax form 5500.
What Criteria Should I Look for with an Investment Advisor?
When a business implements a retirement plan, they assume legal responsibility for managing someone else’s money. An investment advisor plays a critical role mitigating risks for a business that offers a 401(k). One of the first steps a business can take to mitigate risks is to hire experts – an advisor. The first critical decision will be to find an appropriate advisor. A fee-based advisor will provide transparency and avoid a potential conflict of interest that a commissioned based advisor might have. A knowledgeable fee-based advisor will provide advice to help choose diversified investment options, an investor policy statement (IPS), low cost funds, and a way to monitor the investments in the plan according the IPS. A good advisor will also provide ongoing financial education to employees. This process allows the business owner to document the steps taken to provide a high quality 401(k) plan for employees which mitigates the risk of having the plan.
Business owners with existing accounts should be aware of certain “red flags” that may lead to problems with regulatory agencies. These include:
1) High expense mutual funds with no 401(k) fee transparency
2) An out-of-date or no investor policy statement (IPS)
3) Lack or no ongoing financial education or seminars
4) Lack of diversification with investment choices
5) No system or criteria to monitor the 401(k) and mutual funds
It is the fiduciary responsibility of the business owner to take these steps to maintain a 401(k) plan. It can be made easy with the appropriate team in place. If these steps are not taken, contact a professional investment advisor familiar with mitigating risk.
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