Your Company 401(k): What Business Owners Should Know

This is the first of a series of articles addressing 401(k) plans, their benefits, your responsibilities as the business owner, the costs involved and how to make the best use of a plan for you and your company. But before we delve into the facts and figures, let’s consider the current climate as it relates to this industry. The old adage “knowledge is power” is so true, but unfortunately, most of us just don’t know what we don’t know and some advisors are intent on keeping it this way. During this series, we are going to show you what you need to know, even if you already have a plan in place, and help you to understand your options.

As a Business Owner, You Have Options

Over the years, the financial landscape has changed and continues to change on a daily basis. As an advisor for many years, I have helped hundreds of business owners and companies solve their financial problems and have answered their questions. Over those years, there has been a dramatic shift in 401(k) plans as it relates to financial advising, including the products being offered and what is expected of the everyday business owner. Moreover this is especially true as it relates to the business owner's  Fiduciary Responsibility (we will come back to this term later).

The problem is the industry continues to shift away from being client-oriented, opting more toward expediency along with product-pushing and profitability. In this age of fast-food drive-thru advising, with the one-size-fits-all mentality of industry giants and pre-packaged products like target date funds, insurance-wrapped 401(k) plans, and Robo advisors (to name a few), these plans are designed to be extremely costly and fee-heavy to maximize profits for the financial firms and the brokers. The industry has commoditized itself by exchanging relationships for profits. Are these changes really best for you, the business owner?

The purpose of this article is to help business owners like you understand the issues you face and the importance of sound financial advice, specifically as it relates to you and your business. Whether you currently have a 401(k) plan, are thinking about a 401(k) plan or think a 401(k) plan may be too expensive for you and your employees, this series of articles will help guide you to a better understanding of your options. Its purpose is to provide you with the knowledge necessary to re-evaluate your current plan and/or look at options better suited for you and your company. Because if it is done correctly, not only will you be providing a benefit for your employees but, it will help you personally reach your own financial goals and objectives while possibly lowering your fees, costs and liability. (For related reading, see: 401(k) Plans for the Small Business Owner.)

Economic Growth and Tax Relief Reconciliation Act of 2001

Let’s start with the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). This law was passed by President George W. Bush to simplify company sponsored retirement plans like 401k(s) and to include safe harbor plans, profit-sharing plans, defined benefit plans and cash balance plans. Why does this matter to you? As a business owner, plan sponsor and participant, it has increased your ability to contribute significantly more each year since 2001, including catch-up contributions for those individuals age 50 and older. More importantly, it has given you the ability to design a retirement plan, even a 401(k), to fit your needs and, if designed properly, reduce your fees and costs.

As a business owner sponsoring a plan, you have three levels of fiduciary responsibility. You are on the hook for any excessive fees being charged, poor fund choices and not knowing there are better options out there for plan participants. Seems unfair, right? Well, it protects your employees by making sure their best interests are taken into consideration when managing a plan. This is spelled out under the Employee Retirement Income Security Act of 1974 (ERISA). (For related reading, see: Are You ERISA Compliant? Follow This Checklist.)

Review Your Employer-Sponsored Retirement Plan

Having your plan reviewed on an annual basis is imperative, especially with the new DOL rule looming. A real comparison done on your plan can illustrate how your fees were excessive and provide you the ability to reduce your fees and costs for the plan participants. What does this mean to you? Remember the two statements made in the beginning of this article? The first statement was sometimes we just don’t know what we don’t know. Well, now you know, and it is important to understand you do have options. The second statement was knowledge is power, but applying that knowledge equals success. So let’s apply that knowledge and understand what your options are. Here are the first steps in applying your knowledge and ensuring you are on the path to success:

  1. Have your plan independently reviewed to ensure you understand the fees you are currently paying. Also, make sure it a one- or two-page summary so it is easy to read and understand.
  2. Make sure the majority and the quality of the funds you have selected and offer in your plan are in the top 50% of those funds offered. If they are not, you need to ask why.
  3. Ask your advisor if they are a fiduciary and what type of fiduciary they are, and make sure it is in writing as to their fiduciary responsibilities to the plan. (For related reading, see: DOL Fiduciary Rule Explained as of February 3, 2017.)

Once you have completed the above review and made the appropriate changes, you are well on your way to having a healthy plan that will benefit you and your employees.

(For more from this author, see: Where Should I Roll Over My Pension Contributions So They Can Be Accessible?)

EGSI Investment Management dba EGSI Financial (EGSI) is an investment adviser registered with the State of Ohio. Please contact EGSI if there are any changes in your personal or financial situation or investment objectives, or if you wish to impose, add or modify any reasonable restrictions to the management of your account. Our Form ADV Part 2A is available upon request.