5 Important Features of a 401(k) Plan for Business Owners

By Grant Bledsoe

Most small businesses struggle to attract and retain key employees. But rather than throw a bigger salary at candidates, many business owners are finding that offering a robust benefits and retirement package will seal the deal.

Insurance coverage, paid time off, and other ancillary benefits are great; a strong retirement and 401(k) plan can be the difference between adding a dedicated employee and losing them to a competitor. Unfortunately, the 401(k) options available for small businesses are often expensive and confusing. And many businesses that take the time and energy to implement new plans find them to be ineffective and they go unused–defeating their purpose.

Features to include in your business's 401(k) plan

To ensure your plan becomes an effective “talent attractor,” here are the five most critical features it will need to have:

1. Simple to use

First off, saving for retirement can be confusing. Participating employees will want to make decisions about how to invest their contributions, which is a daunting task for some. On top of this, not every employee will want to defer their salaries immediately, which can hinder the effectiveness of the plan.

To overcome these hurdles, successful 401(k) plans need to be easy to use. They need to have a user-friendly, intuitive interface that’s easy for your employees to navigate. They should also have sufficient information and resources available for participants to learn as they go.

Effective 401(k) plans also need to connect easily with your payroll system. I don’t believe your plan needs to be operated by a payroll company like Paychex or ADP, but it will need to sync up seamlessly. You don’t want your payroll person pulling their hair out every time they need to make contributions to your plan.

2. Low cost

The biggest problem I see with small business 401(k) plans is that most are far more expensive than they need to be--in fact, some can even range up to 3 percent per year! But while it may sound like a no-brainer to look for a low cost option, the fee structures within a 401(k) can be extremely confusing.

Here is a breakdown of the fees included in most 401(k) plans:

• Record-keeping fees: A 401(k) plan typically has an operating system that tracks employee contributions, processes disbursements, and provides an online portal for participants to view their accounts and make changes. These are all record-keeping functions for which your service provider will charge a fee.

• Investment fees: Most small business 401(k) plans have a menu of mutual funds and/or exchange-traded funds for participants to choose from. Each of these investment options charges an annual operating fee, based on the amount invested.

• Custody and brokerage fees: 401(k) plans are technically trusts, and accounts must “live” at a bank or brokerage firm. Your plan will also need some transactional help when investing new cash every time you and your employees make contributions. These services are offered by banks or brokerage firms. Oftentimes custodians and brokers will bundle their fees together with record-keeping fees if they’re providing both services. If a custodian is selected independently of a record keeper, it will charge an additional fee.

• Advice and management: Financial advisors and consultants who help administer 401(k) plans also charge their own fees. These might be a flat annual or quarterly fee, or a percentage of the assets in the plan.

Many 401(k) plans like to lump the above fees into one “bundled” arrangement, and bury them in one annual statement; they also may be deducted directly from the assets in your plan. Since the disclosures can be confusing and you don’t cut a check directly to your service provider, your service fees can be easy to ignore.

To make sure you have an effective plan, it’s important to understand and manage your fee structure. Your participants will thank you in the long run. Lower plan expenses mean their retirement savings will grow faster.

3. Has ample investment options

Effective 401(k) plans will have a menu of investments for participants to choose from. This menu should include at least one investment option from all the major asset classes:

• Large cap U.S. stocks
• Small cap U.S. stocks
• International stocks
• Emerging markets stocks
• U.S. government bonds
• U.S. corporate bonds
• International or global bonds
• Stable value or money market fund

Many plans will also offer diversified options like a conservative fund or target date retirement fund. As long as there are enough options for participants to build a diversified portfolio, your menu will remain in good shape.

4. Limits your liability as a business owner

If you make the decision to sponsor a 401(k) plan through your business, you’ll take on certain fiduciary responsibilities to anyone who participates. Deferrals from your employees’ paychecks must be made within a reasonable time frame, investment options must be monitored, and you’ll need to reassess the cost of your plan periodically.

These responsibilities are becoming more important. Class action litigation is picking up around the country as participants are suing plan sponsors for neglecting their fiduciary duties.

Don’t be deterred, though. Many 401(k) service providers can actually take on some fiduciary responsibilities for you. While some business owners understand and are comfortable taking on fiduciary risk, others prefer to delegate it to their service providers. An effective 401(k) plan will give you a level of responsibility you’re comfortable with; the rest should be outsourced to service providers.

5. Supports your business’s needs

Your employees should be offered guidance on the benefits of tax advantaged retirement savings, as well as how to enroll in the plan and invest their contributions. Plans can be very detailed and customized, and since every business is unique, an effective 401(k) plan will offer the features and educational opportunities that you and your employees need, AND conform to your company’s culture.

Choose a 401(k) plan wisely

Offering a 401(k) plan can be a tremendous benefit to help attract and retain top employees. It can also be a wonderful way to save for your own retirement, which many small business owners tend to neglect.

But before jumping at the first opportunity to implement a plan, make sure the plan you decide on has these five features. Otherwise you might be second-guessing your decision down the road.