401(k) Selection and Improvement

This information will help you establish and maintain a successful 401(k).

Employers are frequently unprepared for the demands that a 401(k) can place on their organization. But if these demands are handled properly, it can provide substantial benefits for both employers and employees. With a 401(k), companies can attract employees who will be motivated towards achieving the organization's objectives at relatively little cost. Since six separate functions must be well executed to achieve success (design, investment, administration and compliance, recordkeeping, communication with employees and control of expenses) and since 401(k) service providers rarely have expertise in all six functions, a consultant is usually needed to oversee 401(k) selection and prevent problems in maintenance.

A 401(k) plan must be carefully designed by a consultant to accomplish all its objectives. A matching contribution is frequently used to encourage greater employee participation and decrease employer costs. 401(k) plans must consider the difficulties in meeting the nondiscrimination requirements and those designed for smaller organizations must also consider the possibility of the requirement of "top-heavy" contributions. Before a program is established, a survey should indicate the amount of contributions that can be expected from employees.

Investment options must be carefully established and monitored if assets are kept in a pooled account. If separate, "self-directed" accounts are established for participants, rather than the a pooled fund, providing investment information for employees, but not investment advice, is essential. Whether these accounts are established or not, employers must use care in executing their investment responsibilities, since problems could lead to lawsuits by participants, difficulties with the DOL or other severe consequences. Prototype documents of a particular fund provider usually cannot be used unless employers are willing to limit themselves to the funds offered by them. By not using these documents, employers can have a virtually unlimited choice with respect to investments.

A description of all necessary services should be indicated by the consultant or service provider when the 401(k) program is established. All 401(k) administration and compliance requirements should be assigned and monitored. A third-party administrator will often be needed for this function since many 401(k) providers cannot provide the expertise required for plan administration and/or compliance. "Nondiscrimination testing" is an area for which special expertise is required. Contributions by "highly-compensated" employees must be monitored, since excessive contributions could result in large penalties by the I.R.S. or disqualification of the plan. Employers should not assume that the work of a third-party administrator is correct and should review it. Employers should not assume that the work of a third-party administrator is correct and should review it. A good recordkeeping system is needed to ensure that 401(k) monies are properly allocated to the accounts of its participants. If recordkeeping is not properly maintained, mistakes could occur that may ultimately result in plan disqualification by the I.R.S..

401(k) accounts should be explained to employees before they are established, to gain their support and encourage their participation. Using matching employer contributions, improving plan design and strengthening employee communication programs can improve employees' appreciation and lower the employer's costs. Poor communication with participants could necessitate additional employer contributions to satisfy compliance requirements, jeopardizing the desire of the employer to continue the 401(k).

Expenses can arise from any of the areas mentioned above. Investment charges can be difficult to ascertain and easily be "hidden", especially those within mutual funds . Employers should be cognizant of all charges when the programs are established and make provision for their periodic review.