Traditional 401(k)...
Design…
A business owner puts in place a 401(k) plan for a reason. They them self want to save towards their retirement, or maybe their employees have voiced a desire to have a plan so that they can save towards their retirement. Whatever is the case, the employer needs to consider how a retirement plan will affect the business and the business’ bottom line.
When designing a plan it is important to take into consideration that having a plan will mean that the business more likely than not will need to make employer contributions to the plan on behalf of all eligible employees. The design of the plan is how it is tailored the way the business owner wants it to be. Eligibility requirements are put in place to make an employee earn their way to becoming a participant. A vesting schedule is implemented so that once an employee becomes eligible they will have to earn their employer contributed plan balance over a period of time. We design the plan within the IRS’ parameters based on the plan sponsor’s desire.
Understanding what the business it looking to accomplish and presenting a design to the owner is the first step when considering a pension plan.
Administration…
Proper 401(k) administration requires a determination of necessary administrative services to keep the 401(k) in compliance. Competent, cost-effective 401(k) consultants or service organizations must be selected to provide these services and their performance must be monitored. Nondiscrimination testing is one area that demands special expertise. Improper 401(k) administration can lead to governmental penalties or the loss of the 401(k) plan’s favorable tax status
Recordkeeping...
It is important that 401(k) monies be properly allocated to participants’ accounts. Failure to do so can distort participant balances and endanger the tax status of the 401(k) plan. A more sophisticated recordkeeping is required when participant-directed accounts are available than when investments are pooled. A computer-driven recordkeeping system is essential for larger 401(k) plans. Checks on recordkeeping should be performed by the employer or an advisor.
Investments...
401(k) investments can be pooled or participant-directed. If participant-directed accounts are selected, an employer may reduce fiduciary responsibility for investment losses if the requirements of the Department of Labor are met with respect to these accounts under Section 404(c) of the Internal Revenue Code. If participant-directed accounts are not established and investments are pooled, the employer must use extra care in making investments, since 401(k) earnings will be reflected in the accounts of the participants. Forming an investment committee, appointing an investment manager or adviser and monitoring investment earnings and other measures may help reduce employer liability in this area.
Communication with Employees...
Though 401(k) employee communication is important to help meet certain reporting and disclosure requirements, convincing employees to participate is integral for the 401(k) plan’s success. If employees are shown how the 401(k) arrangement can help them save for retirement and defer taxes, their appreciation of the program should lead to greater participation. The employer should provide investment information and education but not advice, even though the line between them may be blurry. Employee communication using printed material, videos, slides and the Internet are important, but face-to-face meetings and targeted and individualized approaches are often more useful. Investment education meetings and financial counseling should be considered. An enrollment meeting is advisable when the 401(k) is established. The effectiveness of employee 401(k) communication can be measured by surveys, employee advisory groups and other methods