Retirement plan installation and retirement plan maintenance can present problems for the unwary. This information on retirement plans will help you avoid them.
Tip: For a successful retirement plan each of the following retirement plan functions must be well executed: design, investment, administration and compliance, communication with employees and control of expenses.
Trap: Rarely does a retirement plan service provider have expertise in all plan functions. Mutual fund service providers, for example, may have expertise only in the investment function. Therefore, a retirement plan consultant is usually needed to coordinate all plan functions and ensure they are properly assigned and monitored prior to the plan's establishment.
Tip: A retirement plan must be carefully designed. A retirement plan consultant can help determine whether a retirement plan is feasible, which type of plan should be established and the plan features that should be selected.
Trap: Retirement plan providers that offer investment vehicles, such as banks, mutual funds and insurance companies may not emphasize plan design. Prior to its adoption, a retirement plan consultant should review any design restrictions that may be imposed on the employer.
Tips: Employers can have a virtually unlimited range of investments if they adopt their own retirement plan and do not use a prototype retirement plan offered by an investment provider. Many retirement plans (excluding defined benefit pension plans), allow the alternative of pooled investments or individual participants controlling their investments through self-directed accounts; when choosing self-directed accounts, providing investment information for employees, but not investment advice, is essential. Since employers have fiduciary responsibilities with respect to retirement plan investments they must exercise prudence in their selection and retirement plans must be carefully monitored. Investment problems could lead to lawsuits by participants, difficulties with the DOL or other severe consequences.
Trap: Prototype retirement plans of an investment provider should not be used unless employers are willing to limit themselves to the investments offered by them. Employers must also understand and be comfortable with all the investment expenses before retirement plans are adopted.
Tips: Retirement plan administration and compliance requirements must be assigned and monitored. A third party administrator will often be needed for this function. Employers, their accountants or others should not perform this function unless they have the special knowledge and training required. Employers must be made aware of all necessary services before the retirement plan is established.
Trap: Many individuals are providing services to retirement plans who are not specialists in the field. In small plans, an employer's accountant may desire to provide administrative services to the retirement plan. Investment providers frequently perform this function to strengthen their relationship with employers. Employers must ask pointed questions of the competency of their administrative service providers BEFORE they are hired.
Tip: It is very important for employees to be made aware of their benefits under the retirement plan.
Trap: Poor communication with employees could cause their lack of full appreciation of the retirement plan or conflicts with them, jeopardizing the desire of the employer to continue the retirement plan.
Tip: Retirement plan expenses can arise from any of the areas mentioned above. Employers should be cognizant of all expenses when retirement plans are established and make provision for their periodic review. It may be necessary to obtain an independent opinion of their reasonableness.
Trap: Investment expenses can be difficult to ascertain and easily be "hidden", especially those within mutual funds. High or undisclosed expenses could endanger the retirement plan's success.