Making the decision to sponsor a 401(k) plan is an important step in helping you and your employees save money for retirement on a tax favored basis. But it’s just the first step.
Once you’ve decided to offer a plan, the next step is to focus on how your 401(k) plan will be designed and managed. If careful attention isn’t paid to plan design on the front end, there’s a good chance that neither your business nor your employees will reap maximum benefits from the plan.
Primary 401(k) Plan Goals
As you think about 401(k) plan design, keep in mind that there are three primary goals most companies want to accomplish with their 401(k) plan:
- Provide a valuable employee benefit.
- Bolster the overall compensation package (which also includes salary, health insurance, vacation time, etc.).
- Tax Planning for Highly Compensated Employees (HCEs).
Given this, consider ACG’s approach and 401(k) best practices for plan design:
Set specific goals for your 401(k) plan.
What exactly does your company want to achieve by offering a 401(k) plan to your employees? Which of the three main goals listed above is the most important and which is the least important? Are there other goals you want to accomplish with your plan?
For example, tax savings is one of the main benefits 401(k)s offer to businesses and employees. Your company will receive a deduction for matching contributions you make to employees’ accounts while employees can defer income, which helps reduce their current taxes. This benefit may be especially important for owners, executives and other highly compensated employees (HCEs).
Tip: The total deferral and contribution limit for 401(k) and profit sharing plans is $53,000. An additional $6,000 can be deferred for participants age 50 or older. If saving more than $53,000 is desired, consider adding a cash balance plan for even higher contribution limits.
Understand your company’s demographics and culture.
Is your workforce primarily blue-collar or white-collar? Hourly or salaried? English-speaking or non-English speaking? Ideally, your plan should be designed with these factors in mind.
For example, if your workforce consists primarily of blue-collar hourly workers, you might want to incorporate an automatic enrollment (auto-enroll) provision into your plan design. With this feature, new employees are automatically enrolled in the plan when they become eligible to participate in the plan. If they don’t want to participate, they have to opt-out. This feature tends to increase plan participation among demographics that traditionally have low participation rates.
An automatic escalation (auto-escalate) is another provision to consider. Here, employees’ deferral percentages are automatically increased every year, say by 1 percent, until they reach the IRS imposed cap of 10 percent. Each plan sponsor can select the escalation percentage as well as the cap, as long as the cap doesn’t exceed the IRS limit. Making deferral percentage increases automatic can help employees save more for retirement over the long term.
Understand your fiduciary responsibility as the plan sponsor.
As the sponsor of a 401(k) plan, you are legally required as a fiduciary to put the interests of plan participants first in all the decisions you make about the plan. To meet the ERISA standard of a fiduciary, you must act prudently and in the sole interest of plan participants at all times.
It’s critical that you understand your exectations and specific fiduciary responsibilities as a 401(k) plan sponsor and take steps to limit your potential legal liability. These include following the prudent expert standard and exclusive purpose rule, avoiding prohibited transactions, offering participants a diversified selection of investment funds, and following the terms of the plan document.
Work with an experienced retirement plan specialist.
There are approximately 70,000 pages in the ERISA code governing qualified retirement plans. Therefore, it’s critical to work with an expert plan consultant who is knowledgeable in plan design and administration as well as fiduciary governance.
Sometimes, companies choose to work with their bank or an insurance agency in the design and implementation of their 401(k) plan. But banks and insurance agencies may not have the kind of expertise required to implement these and other 401(k) best practices. Instead, they often simply pull a one-size-fits-all 401(k) plan template off the shelf and use it regardless of a company’s specific needs and goals.
ACG Takes a Focus on 401(k) Plans
At ACG, we specialize in designing and administering 401(k) plans. We don’t use off-the-shelf plans — instead, we custom design plans based on our clients’ specific goals and the demographics of their workforce.
We will take the time to understand your workforce to determine your employees’ demographics, compensation levels and other details. In addition, we invite insight from your CPA, attorney and other advisors to get a broad perspective on your company. Based on all of this input and data, you can have the confidence that we will design a customized 401(k) plan just for you and your company.
Contact ACG to learn more about how we can custom design the right 401(k) plan for your business and your employees.