An A to Z overview of 401(k) plan sponsorship

As both a primary vehicle for retirement savings and a key component to a company’s benefits package, 401(k) plans have become ubiquitous. That doesn’t mean they’re without challenges.

“Employers have a number of obligations as a 401(k) provider, especially for those that choose to administer their own plans,” says Debra Pitschman, CPA, a partner at Case | Sabatini. “Some can manage these responsibilities themselves, but most use a third-party provider.”

Smart Business spoke with Pitschman about the major considerations for companies as they choose, institute and manage a 401(k) plan.

What should companies look for when choosing a 401(k) plan?

The quality of the 401(k) plan has a direct impact on an employee’s ability to retire. Keeping this in mind, companies should be sure to look into three main areas when choosing a 401(k) plan.

First, structure your company’s 401(k) plan in a way that encourages the maximum amount of savings. Doing so requires an understanding of the tax savings for the employee and employer contributions.

Fees and structure are other aspects to explore. Ideally, fees should be reasonable, well monitored and clearly communicated to participants. Smaller employers may prefer bundles that provide all the investment, record-keeping, administration and education services into a packaged fee.

Third, looking at diversification for fund selection is important. A good plan offers investments that help employees build high-quality portfolios. A company should aim to offer at least 20 different choices of core assets that include stocks, bonds and mutual funds, along with cash equivalents.

What are the employer’s obligations?

Employers have many obligations when administering a 401(k) plan. Those include:

  • Plan compliances with the plan document and any adoption agreement.
  • Ensuring that the company follows the requirements with the plan for contributions, loans, forfeitures and distributions.
  • Understanding and communicating the service provider’s agreement for maintaining the plan.
  • Keeping the plan up to date with current regulatory rules.
  • Making sure the plan is properly maintained to prevent penalties.

This is not an all-inclusive list of all the responsibilities of a plan sponsor, but it should give employers a sense of their myriad obligations, some of which carry the threat of penalties if rules aren’t followed or deadlines are missed.

How can companies ensure they have adequate employee participation?

Ease of entry and exit improves employee participation in the company 401(k) plan. Implementing auto enrollment for new hires is one way to accomplish that.

Another way to boost participation is by increasing the matching contribution.

Companies could also simplify investment options for employees by including fund options that have a target retirement date and a coinciding investment schedule.

What are the common mistakes 401(k) plan sponsors make?

It is often the case that the plan sponsors fail to remit the employee and employer contributions in a timely manner. They also tend not to follow the plan document correctly when it comes to participation, contributions, loans and distributions.

Problems also arise when employers do not calculate the deferral on the correct wage base. Another complication is not reallocating forfeitures to participants in the calendar year incurred.

What should companies look for in a third-party provider?

Among the core competencies to look for is how the provider processes information. This would include how the provider processes enrollments, allocates contributions, distributes loans, issues statements and manages customer support.

There are a variety of companies that can help. The key is to find someone with experience managing 401(k) plans or working with an auditor to ensure the program is complying with all the applicable laws and regulations.

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