During this recession, business owners are concerned with decreasing cash flows. As a result, many are scrutinizing their retirement plans to ensure that they’re spending wisely.
This is an opportunity for plan sponsors to revisit their retirement plan to see if it still meets the original goals and whether any specific goals should change.
“There’s a fiscal focus and an educational component of keeping people aware of their finances to make sure they have proper asset allocation and investment diversity,” says Patrick Shelton, managing member of BSW Benefit Plans Plus LLC, an affiliate of Brown Smith Wallace LLC. “You want to make sure your plan is working well and you’re getting the best value for your money.”
Smart Business spoke with Shelton and Robert Higgins, a Benefit Plans Plus LLC senior consultant, about how to design your retirement plan for maximum benefits and how to make sure your plan is in compliance.
How can you design your retirement plan to get the maximum value?
Review your retirement plan from a total cost standpoint. Work with your advisers to determine not only plan investment and administrative fees, but also employer and employee contributions and any soft-dollar costs for running the plan through human resources.
Total after-tax costs should be the benchmark. For example, if the business is privately held, owners may defer their income through the plan and deduct employer contributions made on their behalf, as well as plan expenses, significantly reducing their taxes. Be sure your plan accomplishes its basic purpose in a tax-efficient manner.
How can companies make sure their plans are in compliance?
Benefit Plans Plus LLC has designed a Fiduciary Health Check to help clients ensure their plans are properly administered. The first step in this analysis is to identify all plan fiduciaries. At least one plan fiduciary is named in the plan document, but other individuals are deemed ‘functional fiduciaries’ due to their plan duties. These unnamed parties are often unaware of their fiduciary status and responsibilities.
Step two is to compare plan procedures with plan document requirements to verify that the plan sponsor properly manages the plan, provides quality materials, satisfies compliance testing requirements and submits timely tax filings.
You should also review communications to make sure employees receive the proper notification. Lastly, review insurance for proper plan coverage through a required fidelity bond and supplemental fiduciary liability insurance, if necessary. This type of analysis ensures that the plan is spending dollars wisely and continues to provide a plan that helps employees prepare for retirement. It also minimizes risks to participants and the plan sponsor.
How is compliance testing different from a fiduciary check?
Government-mandated compliance testing is much more specific. Failing your annual compliance testing is an indicator of design flaw. There are ways to avoid such failures, for example, through enhancing matching contributions or promoting employee participation in the plan.
A compliance review may uncover other errors requiring a technical correction. Without frequent review, plan sponsors are often unaware that they’re doing something incorrectly or not filing the proper reports. The government provides several self-correcting programs that permit plan sponsors to go back and fix operational errors. Because of the complexity of the rules involved in these situations, a sponsor should seek assistance from experienced professionals.
What is a third-party administrator, and how can using one help with your benefits plan?
A TPA is a local, smaller business that provides a closer level of service. Instead of having to call an 800 number, you have direct contact with a local person who can physically meet with you.
TPAs tend to be specialists and can often provide insight into complex retirement plan regulations. You can outsource some financial functions to TPAs, who can also troubleshoot if you have questions or issues. Using TPAs leads to better-run plans. Within any given marketplace, there can be a large number of TPAs but only a handful with a quality reputation.
You need to find a firm that not only has technical expertise, but is also professional and communicates well. Ask a trusted business adviser, like your accountant or attorney, for a referral. TPAs can also be found online at sites such as www.nipa.org, www.401khelpcenter.com or www.asppa.org.
How can employees maximize the benefits of their employer’s plan?
Employees must educate themselves about their plan. It’s your money; use the plan and investment information provided and ask plenty of questions. Use resources such as financial items on a provider’s Web site, newsletters, media articles and peers.
There’s a misconception that people can’t afford to participate in a retirement plan. Contributing only a little bit each pay period helps. This is a long-term investment but, if you persist, the dollars will grow. At a minimum, participate up to the level that your employer provides a match. If you can get free money, you get an automatic return. It’s a good investment to make.
Focus on the long term, and make sure you have proper asset allocation and incorporate your 401(k) into your overall financial planning. Be sure the plan best serves your needs relative to growth and retirement.
Patrick Shelton is managing member of BSW Benefit Plans Plus LLC, an affiliate of Brown Smith Wallace LLC. Reach him at (314) 983-1212 or firstname.lastname@example.org. Robert higgins is a senior consultant at BSW Benefit Plans Plus LLC. Reach him at (314) 983-1358 or email@example.com.