Picture this: you’re a company founder navigating the competitive landscape, vying for top talent against established companies. You know attracting and retaining the best employees is crucial for success. But how do you stand out? What can you offer that will entice talented individuals to join your team? The answer lies in your employee benefits package, and one key component that today’s workers increasingly expect is a 401k plan. In this comprehensive guide, we’ll explore the challenges that companies face when choosing a 401k plan and how you can address them effectively. We’ll also provide insights into selecting the right 401k provider for your company’s unique needs. So, let’s dive in and discover how you can overcome the obstacles and provide your employees with a valuable retirement savings option.
The Challenges of Choosing a 401k Startup
Before we delve into the solutions, let’s first understand the challenges companies encounter when selecting a 401k plan. By being aware of these challenges, you can make more informed decisions and navigate the process more effectively.
The Employer’s Responsibility
One of the primary obstacles a retirement plan poses to any employer is an increase in responsibility. Important to realize is that employees want a promising future. A retirement plan is one of the clearest ways to show that you share their concern.
But you have a high level of responsibility because you have the power over what happens to employees’ retirement money. And just like Uncle Ben said to Peter Parker in Spiderman, “With great power comes great responsibility.”
However, you don’t have to fear the responsibility of a retirement plan if you understand how to control it. Here is a simple way to look at it. Adopt a PASsion For Duty. That phrase will help you remember the acronym: PASFD
- Prudently show care about your employees’ future
- Act solely in the interest of the participants and their beneficiaries
- Stick to the plan documents
- Fee reasonableness is crucial
- Diversify plan investments
That phrase is to help you better understand the word fiduciary. If you offer a retirement plan to your employees, you will act as a fiduciary. To act as a fiduciary, you must have a PASsion For Duty. The information that follows will help you learn how to act as a fiduciary, choose a retirement plan wisely, and overcome other obstacles.
401k Startup Costs: Balancing Affordability and Value
Let’s start by looking at the costs to get started and then consider the ongoing cost of a 401k startup plan. Depending on your chosen provider, setup costs can range from $0 to $5,000 (or more). There are certain factors that drive that range of cost. The size of your company and the design of a 401k are the primary factors. Here is why.
A two-person company is going to have a lower overall cost than a 200-employee company. Interestingly, companies with 2 or 200 employees are considered small businesses. Design can also vary greatly. For example, if you need a custom plan document filed with the IRS, you may have a significantly higher cost than if you use a prototype plan. The IRS preapproves prototypes, and each user of that prototype plan has specific options that they elect.
Ongoing expenses related to administration are necessary to maintain the program. These costs include 401k payroll, required notices, informational materials, annual nondiscrimination testing, and more. Some 401k providers offer bundled services to handle these administrative tasks. Bundled services can save 401k startups the need to hire full-time staff. Administrative costs can range from $0 to $3,000 per year, and some providers may charge a per-participant fee for each employee enrolled in the plan.
The Trap of Value
Be cautious of 401k providers that say they have zero or very low costs. Setting up and administering a retirement plan takes time and effort. No one works for free.
If the cost is zero or very low, there are two possibilities. The first possibility is that the cost is somewhere. No-cost 401k startups may have the fees buried in the investment options. The second consideration is that the low cost is not sustainable. In the past, low-cost providers have tried to undercut the market, but they have had a difficult time staying in business. That is an assumption. But who knows, maybe they cracked the code and will last this time. If you realize this and you are OK with it, that is fine. But make sure you are aware of all the costs and how they are paid. Remember, you have a fiduciary responsibility. So have a PASsion For Duty.
A dependable source for benchmarking 401k cost is The 401k Averages Book. If you are seeking an impartial resource to compare the fees associated with a 401k plan, consider the 401k Averages Book.
New Streamlined Options for a 401k Startup
Administration is a significant responsibility. Retirement plan requirements seem to be changing constantly. Add to that the responsibility of making sure that you are selecting appropriate investment options. For a startup company, those responsibilities can be overwhelming.
But there are methods to use outside management to lessen the administrative burden. Plus, recently, Congress introduced an option to make the operation of company retirement plans much more manageable. The pooled employer plan (PEP) has the promise of being less expensive, easier to administer, and reducing the liability of offering a retirement plan to employees. If you have an interest in the PEP, follow the link to another post that centers on PEPs.
Let’s look at some of the strategies to use outside administration to lessen retirement plan management for your company.
Fiduciary Responsibility: Understanding Your Role and Liability
As a company offering a 401k plan, you assume fiduciary responsibility. As such, you must act in your employees’ best interests. There are three types of fiduciary roles in the 401k space:
- 3(16) Administrative Fiduciary
- 3(38) Investment Fiduciary
- 3(21) Investment Fiduciary
The 3(16) Administrative Fiduciary is responsible for plan administration, including tracking employee eligibility, processing changes, and ensuring compliance with IRS and DOL requirements.
The 3(38) Investment Fiduciary is responsible for selecting and monitoring the investment options in the 401k plan.
The 3(21) Investment Fiduciary provides investment advice but has less control over investment options than the 3(38) fiduciaries.
Understanding your fiduciary responsibilities is crucial. Non-compliance can result in significant penalties. You can lessen risk and ensure proper plan governance by outsourcing some of your fiduciary duties to a qualified provider. But keep this in mind. You can never completely absolve yourself of all fiduciary responsibility. You are still responsible for the results of all three of these options. They are merely sharing the responsibility by taking over certain duties.
Managing the Workload: Navigating Complex Plan Administration
Administering a 401k plan can be complex and time-consuming, especially for startup companies with limited resources. Many responsibilities are involved in managing employee accounts: savings rate changes, syncing payroll data, and completing regulatory paperwork.
One way to address this challenge is to leverage technology and automation. Modern 401k providers offer streamlined administration and payroll integration, reducing the manual effort required. By choosing a provider that acts as a 3(16) Administrative Fiduciary, you can offload many day-to-day administrative tasks and ensure compliance with IRS and Department of Labor requirements.
401k Startups: Bundled vs. Unbundled
A 401k that is bundled means that all services are handled by one entity. Bundling has its pros and cons. The biggest benefit is that everything is handled by one provider. There are close to 60 responsibilities that an employer has regarding a 401k. Bundling puts all of these responsibilities together.
But that advantage can also prove to be a disadvantage. A con of bundling can be that all the responsibilities are handled as one. It can be difficult to make changes to your plan with a bundled 401k provider. But on the other hand, that is the primary benefit of a PEP. So, there are those that are OK with handling the administrative aspects of a retirement plan. Then there are those that want the bundled approach. From this point, you can see that there are a lot of options. With that in mind, hiring a retirement plan advisor who knows the pros and cons can be invaluable.
Addressing 401k Startup Challenges
Low, Transparent Costs: Finding Affordable Solutions
Startup companies often operate on tight budgets, making cost considerations crucial when selecting a 401k plan.
Seek out providers with simple, transparent fee structures that include setup fees, a base monthly fee, and per-participant fees. Compare pricing options from different providers to ensure you get the best value for your investment.
Here’s a pro tip. Remember, employers have a fiduciary duty to make prudent decisions concerning costs that are passed on to employees. It is very important that you create a due diligence file and keep track of your efforts to control costs. This may seem counterintuitive, but you are not looking for the lowest cost. You are looking for the best value. The due diligence file shows that you maintained that PASsion For Duty. And you are fulfilling your fiduciary duty.
Furthermore, take advantage of the tax credits available for small businesses. The SECURE Act of 2020 introduced tax credits of up to $15,000 over three years for small businesses setting up a 401k plan for the first time. These tax credits can offset setup costs and make offering a 401k more financially feasible for startups.
Streamlined Administration: Leveraging Technology and Automation
To alleviate the administrative burden of managing a 401k plan, consider partnering with a provider that offers streamlined administration and payroll integration. Look for providers that use technology and automation to simplify tasks like 401k payroll, required notices, and completion of regulatory forms.
Some providers will have their own software solutions, and some will be able to integrate into the payroll system you are already using. Even if you do use a provider that acts as a 3(16) Administrative Fiduciary, you still must get the information from your company to that administrator efficiently.
Employee Engagement: Simplifying Plan Design and Education
You can encourage employee engagement with your 401k plan by simplifying plan design and providing comprehensive education and support. If you have too many options, employees can be so overwhelmed that they do nothing. If you use a PEP, 3(38) Investment Fiduciary, or 3(21) Investment Fiduciary, they will have an investment selection process. However, if you do not use any of these designs, you should work with your retirement plan advisor to create an investment policy statement.
Your retirement plan can be PRIMED for success by including the following in your investment policy statement:
- Purpose and goals of the plan and its investment program
- Roles and responsibilities of the plan sponsor, fiduciaries, service providers, and participants
- Investment selection, monitoring, and termination criteria and methods
- Measures and benchmarks for evaluating the investment performance and risk
- Expected diversification and asset allocation guidelines for the investment options
- Disclosure of fees and expenses associated with the investment options
- Statement review and update procedures
You can further simplify your 401k by offering an auto-enrollment with a default investment option that employees can customize later. This approach ensures that the plan starts working for employees from day one. Even if they need more time or knowledge to customize their investment options, auto-enrollment gets them started. For 401k startups established by employers with more than ten employees, auto-enrollment will be mandatory starting from 2025.
Consider working with a provider offering automated onboarding processes, guiding employees through enrollment, and providing educational resources. Look for providers that offer interactive tools or advisors to help employees understand the basics of the plan and make informed decisions.
Enhanced Investment Options: Careful not to overdo it
While a standard selection of low-cost mutual funds is a good starting point for your 401k plan, be cautious about offering too many options. Additionally, be cautious of cryptocurrencies, individual stocks, and ESG options. While these may be attractive to some, they can increase the responsibility of selecting appropriate investments. If you are starting a plan, keep it simple.
Transparent and Supportive Provider: Prioritizing Employee Experience
When selecting a 401k provider, prioritize transparency and excellent customer support. Look for providers that offer intuitive online platforms and user-friendly interfaces, allowing employees to easily access their 401k accounts and make changes as needed. Responsive customer support is also crucial.
If you have more than one provider to compare customer service, let AI help. Here is an example of what Bing AI came up with when comparing Ameritas and Aon’s customer service. A note of caution when using a chatbot. Sometimes they’re wrong. Be sure to verify your inquiries.
Comparing Aon Customer Service to Ameritas Customer Service
The ratings and reviews from customers: Aon has a lower average rating than Ameritas on Trustpilot1, a site that verifies customer reviews. Aon has 1.2 out of 5 stars, based on 200 reviews, while Ameritas has 4.7 out of 5 stars, based on 850 case studies and testimonials2. Aon also has more complaints than Ameritas on ComplaintsBoard3, a site that verifies customer complaints. Aon has 10 complaints, while Ameritas has only one complaint.
The contact options and availability: Aon has fewer contact options and availability than Ameritas. Aon does not provide a phone number or an email address for customer service on its official website. Customers have to fill out a form or use a chatbot to get in touch with Aon. Ameritas provides phone numbers, email addresses, and mailing addresses for different types of customer service on its official website. Customers can also use a live chat option to get in touch with Ameritas. Aon does not offer 24/7 customer service or claims reporting, while Ameritas does.
The information and transparency: Aon has less information and transparency than Ameritas on its official website. Aon does not provide details about its claims process, electronic claims filing option, or discounts. Customers have to contact Aon directly to get more information. Ameritas provides more details about its claims process, electronic claims filing option, and discounts on its official website. Customers can also access service forms, policy information, beneficiary information, and more online.
Based on these factors, it seems that Ameritas customer service is better than Aon customer service in terms of ratings and reviews, contact options and availability, and information and transparency. However, this is not a definitive conclusion, as different customers may have different experiences and preferences.Bing chat mode. (2023, August 2). How could To compare Aon customer service to Ameritas
Scalability: Planning for Growth
Choosing a 401k provider that can accommodate your current needs while being scalable as your business grows will save you time and money. Look for providers offering flexible plan options and seamlessly handling increased participants and assets under management. Scalability ensures that your 401k plan can grow alongside your company, providing ongoing support and services at each stage of your business’s development.
Company Match: Enhancing the Benefits Package
While not mandatory, offering a company match can significantly enhance your benefits package and attract top talent. A company match is when the employer contributes to the employee’s 401k account based on their contributions. It’s important to note that the company match is optional, and you have control over the specifics, such as the matching percentage and maximum contribution.
A company match can provide several benefits, including attracting and retaining great employees, tax advantages for the employer, and alignment with industry standards.
Here’s a pro tip. You can establish a time period that the employee must continue employment to receive the full contributions made by the employer. That is called the vesting period. Employers may even limit access to employer contributions until the employee’s retirement age. Vesting periods and access must be detailed in the plan document filed with the IRS. So, your retirement plan advisor can help guide you on these options.
Choosing the right 401k plan for your company can be complex. Still, you can navigate this journey effectively by understanding the challenges and available solutions. When selecting a provider, remember to prioritize cost-effectiveness, streamlined administration, and a positive employee experience. By addressing these challenges head-on and choosing the right 401k provider, you can offer your employees a valuable retirement savings option that helps you attract and retain top talent in the competitive startup landscape.
A retirement plan advisor can be an invaluable resource for a 401k startup. Richards Financial Planning offers a fee-based consultation service to help employers evaluate the best plan for their company’s long-term success.
If you’re seeking personalized guidance in starting a retirement plan, schedule a call with Van Richards, ChFC. Simply click below to set up a brief call.