Top Ten Blunders Plan Sponsors Make With Their 401(k) Plans
1. Underestimating the benefit of a company
sponsored retirement plan.
So many employers still just don't get it. A good retirement plan is absolutely one of the most important benefits you can offer employees. But even now, over 20 years after 401(k) plans were introduced, employers still miss by a mile the value they can get out of providing – and promoting – a retirement plan at work. In fact, there are still companies with 500 or fewer employees that don't have a 401(k) plan in place. Finding top-quality employees is hard enough. And trying to recruit them to your firm without a good retirement plan is even harder.
2. Wasting valuable time in the provider selection process.
Many sponsors don't put a process in place before they start looking for a 401(k) plan provider – and end up wasting a great deal of time in the long run. Although the word "process" may make you think of endless meetings and paperwork, a selection process doesn't have to be complicated. You simply need to determine right from the start exactly what you want your plan to accomplish and what it will cost. Be sure you understand how prospective providers charge for their services so you aren't caught off guard by any "hidden" fees.
3. Exaggerating the ease of plan conversion.
Every year around 10% of all plan sponsors change providers. But, if you expect the conversion process to run without a hitch, you are probably setting yourself up for a big disappointment. The conversion process is almost always fairly complex and time consuming. So keep in mind that your troubles won't disappear overnight once you choose a provider. Much of the success of any conversion will depend on your old provider supplying information and data in a timely fashion to your new provider. You should communicate with your new provider to create a realistic timetable of who will do what – and when. Don't forget about the Sarbanes-Oxley Act, which requires specific Blackout period notices and restrictions.
4. Settling for poor plan design.
"What exactly do we want this retirement plan to do?" should be the first question you ask, but it's often ignored. Your plan needs to be designed specifically to work for your employees and the particular demographics of your workforce – and that's not as easy as you might think. You should give a great deal of thought to how each provision you choose will affect your plan participants. Employees of different age groups, income levels, and ethnic backgrounds will be affected in various ways by each provision. That doesn't mean, however that you have to spend a lot on a high-powered ERISA law firm to design you plan. Prototype plans are widely available with options to fit very specific needs.
5. Not educating plan participants.
Many plan sponsors say they're dedicated to educating their participants but don't follow through and do what it takes to implement a comprehensive educational program. The more your employees know about the financial realities of retirement, the more likely they are to participate fully in the plan. In fact, communication and education programs have been shown to be just as effective in getting employees to participate in a retirement plan as increasing the match – and that could mean a substantial cost savings for the sponsor. Unfortunately, a lot of providers think education stops at enrollment. Keep looking until you find a provider that will provide ongoing education throughout the life of your plan.
6. Making poor investment selections.
The average number of investment options offered by retirement plans continues to increase. According to Plan Sponsor's 2002 Defined Contribution Services Survey, the average number of funds offered is 15.94 (up from 14). Keep the following factors in mind when choosing the investment options for your plan: the number of choices the plan will offer, and the ability of those choices to meet the various investment needs of a diverse group of participants.
7. Not understanding your fiduciary responsibility.
As a plan sponsor you have a fiduciary responsibility to your participants based on the "prudent man rule", and you are legally obligated to guarantee that the plan complies with ERISA. Make sure you devote the resources necessary to insure that the plan runs smoothly and efficiently – and remains legally compliant. The scope of your fiduciary responsibility is broad. It includes plan design, administration and compliance, investment performance, participant education, and trust and custodial services.
8. Not forming a relationship with your provider.
By creating a relationship with your plan provider, they have a vested interest in your plan's success and you get the full benefit of their experience. What I can tell you from my own professional experience is that the success of any retirement plan is dependent on the quality of the relationship that develops between the sponsor and the provider they select. Think of your provider as an active participant – just another part of your company's total resources – to get the most of this important relationship.
9. Not preparing participants for distributions and rollovers.
For many people, the assets in their retirement plan may be the largest sum of money they ever have access to – even greater than the equity in their homes. They need to know how to handle a rollover or a distribution when it comes time for a job change or retirement. According to Plan Sponsor's 2002 Defined Contribution Services Survey, only 54.7% of employers surveyed provide education to participants taking a distribution. For retirees, the way this transaction is handled could affect the income they receive for the rest of their lives. Just as important, transferees need to be aware that even a modest sum should be protected so it can grow over time. As the sponsor, you also have a vested interest in participants making wise choices so the plan won't have to maintain those accounts indefinitely.
10. Not reviewing the plan annually.
A lot can change in a year. Laws and regulations in the retirement plan industry change constantly, which may necessitate changes in your process, procedures or plan design. And as the demographics of your company change, you may need to make changes that assure the plan remains attractive to your employees and remains in legal compliance. It is also a great time to make sure that the staff and technology you have in place are sufficient to make your plan the best it can be.
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