Practical Strategies to Select and Sustain a Winning Employee Benefit

Key Takeaways:
  • Selecting the right retirement plan involves understanding fiduciary responsibilities, tailoring options to business needs and ensuring competitive fees through regular benchmarking.
  • Limiting investment choices to 10-15 funds and implementing a Qualified Default Investment Alternative (QDIA) helps simplify decisions and align with fiduciary standards.
  • Ongoing plan maintenance, including employee reviews and compliance checks, helps the plan remains effective, competitive and legally sound.

 

Selecting a retirement plan is more than just picking a 401(k) provider. It’s a commitment to your employees’ financial futures and an important part of your company’s overall benefits strategy. Whether you’re establishing a new retirement plan or evaluating an existing one, understanding the intricacies can help you make informed choices that benefit your employees and safeguard your business.

In a recent webinar, Justin Mitchell, CPA, PFS and managing wealth consultant at Adams Brown, discussed the responsibilities and strategies surrounding retirement plan selection. Here’s a breakdown of the steps and insights he shared to help you navigate the process.

Why Retirement Plans Matter for your Business

Retirement plans are a tool for attracting and retaining employees. Beyond the obvious benefits for employees, retirement plans also provide tax advantages for the employer. However, as Justin pointed out, many businesses overlook deeper motivations for these plans: they help protect assets from creditors, foster long-term employee loyalty, and can be tailored to support employees’ unique financial needs.

Key Steps to Selecting & Implementing a Retirement Plan

  • Understand your Fiduciary Role

As the plan trustee, you’re more than just the person signing off on a retirement plan. You’re a fiduciary, legally required to act in the best interest of your employees. This role involves selecting, monitoring and maintaining a plan that serves participants fairly and efficiently. This fiduciary duty means choosing options that minimize costs, provide a well-rounded selection of investments and prioritize employee benefits over business gains.

  • Identify the Right Plan for your Business Needs

Every company is different, so the right plan structure should reflect your specific business needs and employee demographics. Justin suggested reviewing various options like traditional 401(k)s, profit-sharing plans, SEP IRAs and SIMPLE IRAs. Talk with a retirement plan advisor to discuss how these options align with your business goals and employee expectations. Retirement plans can often be customized, allowing flexibility around vesting schedules, eligibility requirements and employer matching.

  • Choose a Reliable Record Keeper & Administrator

Record keepers, such as T. Rowe Price, Fidelity and John Hancock, handle the daily administration of retirement plans, including tracking contributions and managing compliance. Selecting a provider with strong customer support, reasonable fees and up-to-date technology is helpful. Remember, these companies will not only custody your employees’ funds but also engage directly with your employees, promoting education and retirement savings recommendations. Their services should be accessible, secure and easy for employees to navigate.

Benchmarking: Help your Plan Stay Competitive

Retirement plan costs often hide in the fine print. As Justin highlighted, regularly benchmarking your plan’s fees, services and investment performance is a cornerstone of responsible plan management. A few examples of fee’s that a benchmarking study compares against industry standards are record-keeping fees, third party administer fees and investment expense ratios.

A plan with hidden fees can cut into employee investment returns. Justin shared an instance where his firm bench marked a plan and found annual fees exceeded 3%—a steep price that effectively reduced employees’ retirement savings. Annual benchmarking can reveal these costly inefficiencies, and adjusting terms with providers can often result in employer and employee savings.

How to Benchmark your Retirement Plan

Benchmarking should be part of your annual review process. Look at:

  • Custodian Stability and History: Does the custodian have a track record of serving businesses like yours? Long-standing providers with solid financials can bring both expertise and reliability to your plan.
  • Fee Structure: Fees should be transparent and competitive. Consider whether an asset-based fee or a per-participant fee structure is more advantageous. Asset-based fees increase with the plan’s assets, while per-participant fees remain consistent with employee headcount, regardless of asset growth.
  • Investment Performance: Regularly compare your plan’s investment options to industry benchmarks. If any fund significantly underperforms, it may be time to consider alternatives.

Real-World Example

Justin shared an example of a business paying $48,000 annually in fees on a $4.7 million plan. After benchmarking, it was clear this cost was competitive, but the structure of the fees warranted a closer look. For businesses with growing plan assets and stagnant employee count, moving to a per-participant fee structure instead of a percentage-based fee could save thousands of dollars annually. These savings can then be reinvested into the plan or used to reduce overall costs for participants.

Managing the Investment Lineup: Balancing Diversity & Simplicity

One common pitfall in retirement plans is offering too many investment choices, which can overwhelm employees and lead to decision fatigue. Justin recommends limiting options to 10-15 funds that provide a range of risk levels. Employees should have options for both conservative and aggressive investments, depending on their financial goals.

Default Fund Selection

All plans should have a Qualified Default Investment Alternative (QDIA). QDIAs are funds where contributions are directed if an employee doesn’t make a choice. Popular options include target-date funds that adjust risk based on an employee’s age. This approach aligns with fiduciary standards by ensuring employees are placed in an age-appropriate investment strategy.

Ongoing Plan Maintenance

Once a plan is set up, ongoing management becomes the focus. Fiduciaries should not only establish the plan but also ensure it continues to meet fiduciary standards. Here are some best practices Justin shared for maintaining compliance and maximizing plan effectiveness:

  • Annual Employee Census Review: Review eligibility, contributions and matching on an annual basis. This review verifies that all eligible employees are properly enrolled and contributions match the plan’s terms.
  • Processing Distributions and Loans: Distribution requests need trustee approval, not just provider confirmation. This ensures that funds are being managed and distributed in accordance with the plan’s rules.
  • Plan Documentation: Retain documents like the Investment Policy Statement (IPS) and investment committee meeting minutes. These records demonstrate that you have a consistent process for evaluating and managing the plan, which is crucial if a complaint or audit arises.

Questions?

The right retirement plan does more than provide for your employees’ futures—it’s a key part of your company’s financial health and long-term success.

At Adams Brown, our retirement plan advisors are here to help you select, maintain and benchmark your retirement plan. If you’re interested in learning more about your options or conducting a benchmark review of your existing plan, contact an Adams Brown Wealth Consultant today.