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Elements of a Successful 401(k) Plan

As the primary retirement savings vehicle for many employees, it’s crucial to get a 401 (k) plan right.  Yet, offering and maintaining a plan can be cumbersome.  To help meet the fiduciary obligations and ease the administrative burdens, here are four essential elements for a successful 401(k) plan.

  1. Education: Employees in a 401(k) plan bear the responsibility for saving and investing decisions. Unfortunately, many are ill-equipped to go it alone and often look to others for advice. As the plan sponsor you should make ongoing educational resources a priority to reinforce the importance of saving, offer guidance on the available investment options, and help clarify plan specific details (e.g. employer-match).  Over time, increased knowledge leads to better employee engagement and more informed decisions.  Schedule a session with your plan advisor soon.
  2. Fund Menu: Keep it simple and ignore the seemingly endless number of funds claiming to have a differentiating characteristic and/or ability to outperform the market. A core menu of diversified index funds gives the “do-it-yourselfer” plenty of choice.  For those who prefer to be less involved, a suite of target-date funds designed to adjust allocations over time based on expected retirement date is appropriate  and can serve as the Qualified Default Investment Alternative (QDIA).  All menu options should be low-cost, index funds. Why?  Because, despite the marketing blitz to the contrary, academic studies show active management rarely works.
  3. Costs: Increased transparency and cost controls should be your goal. Many service providers bundle their fees and expenses, which makes it challenging for you and your employees to decipher who’s getting paid what. For example, 12(b)-1 fees show up in a fund’s expense ratio, yet are often a payment made back to the investment advisor.  These funds, and bundled fees in general, should be avoided. In addition, fees for administration, investment advisors, and fund expense ratios should be minimized. Reducing costs is one of the first steps to take in maximizing returns (Read more in “Fees, fees, and more fees…”).
  4. Compliance: As a fiduciary on a 401(k) plan, you are held to a lofty compliance standard.ERISA section 404(c) lays out requirements related to the investment menu, plan design and administration, and disclosure documentation that need to be met.  Checking the box on each of these items doesn’t have to be time-consuming but does require ongoing attention.  An investment advisor who assumes a fiduciary role can help you alleviate, but not eliminate, that burden. Advisors should provide guidance through time and act as a partner to ensure reporting and documentation is robust.  This will go a long way to save you time, aggravation, and ultimately, legal trouble.