Business Owner’s Guide

FNAQs to Maximize Retirement Plan Benefits  

FNAQs: Retirement Plan Guide

Small business owners in the $1-$20 million market have many options to customize your retirement plan. You may favor tax and savings benefits for owners and key personnel, or more as a recruitment tool for all employees. How can you customize a plan to meet your needs and simplify plan compliance and adminstration?  

Big firms with boilerplate business models can’t or won’t custom design small business plans. A knowledgeable fiduciary adviser can help you select specialized expertise to better meet your needs. Common failures include testing and compliance, low employee participation and savings rates, and poor investment selection.

ERISA law requires you to understand your fiduciary roles and responsibilities. What can you outsource to strengthen compliance, free your time, and reduce your risk?

This skilled fiduciary adviser has your back.

The process is simplified from start to implementation with a clear focus on results. We search the market for providers who best meet your cost and service objectives as well as help you understand your roles, meet your duties, and minimize your risk. Your fees will be fully disclosed and benchmarked; investments selected and monitored; and we teach your team how to use the benefit to build a more secure future.

For a no cost plan review and consult email

These questions will help you understand key issues:

Questions 1-18: Plan objectives; Plan type for your needs; weighing costs, goals, and Pros/Cons
Questions 19-24: Compliance risk and your role(s); who will minimize your liability
Questions 25-28: Service offering and service level; Plan design tailored to your needs
Glossary of Retirement Plan and ERISA Terms

1) What criteria do you need to make a good decision?
Key Selection Criteria

The first question to ask yourself: is this plan for your personal tax and saving benefit, OR is it primarily to be an employee benefit? The second question: which provider has the specialized expertise and philosophical alignment to sit on your side of the table and help you customize a Plan design that best meets your needs? These Q&A’s are designed to raise your awareness of key basics so you can protect yourself and create a benefit that works for your objectives.  

2) What Plan objectives are most important to you?

Before selecting Plan features first consider: How do you wish to prioritize your business and employee objectives versus your personal tax and saving benefits? The Four R’s: Recruiting, Retaining, Rewarding, Retiring are all part of this consideration. Certainly, helping employees to understand the value of tax preferred savings is important and often overlooked. An uneducated employee won’t appreciate it. Different plan features address different objectives and may conflict with your goals. Thoughtful plan selection and design should seek a balance that best reflects your priorities as well as plan demographics so you can optimize the return on your cost.


3) Qualified vs. Non-qualified: Which Plan Type is Best for You?
Two Primary Plan Types: Qualified and Non-qualified
Qualified Plans

Qualified plans can vary in complexity and must comply with ERISA provisions such as vesting, contribution limits, discrimination rules, fiduciary responsibility, minimum funding, reporting, and disclosure rules. Contributions are deductible for the employer (and tax-deferred by the employee) in the year they are paid. Most plans allow employer and employee contributions (profit sharing plans being an exception in most cases). The money grows tax-deferred until withdrawn. The Plan is fully “funded” in a trust and creditor protected at both the corporate and individual level.

Non-Qualified Plans

A non-qualified plan is a type of employer retirement, savings, or deferred compensation plan that isn’t required to meet the more restrictive tax and labor compliance requirements applicable to qualified plans. Therefore, they offer greater flexibility. Typically, they target a select group of executives with benefits in lieu of or as a supplement to those provided in the employer’s qualified retirement plans. There is no set vesting schedule and the benefit can be tied to corporate or employee performance targets. These plans are often offered in lieu of equity-based compensation.

The contributions (employer, employee, or both) can be much higher than qualified plan limits. Tax treatment differs as the employer’s tax deduction must wait until the employee receives the benefit as income. They can be funded with pre-tax contributions like a typical 401k, or with after-tax contributions that grow tax-deferred and distribute tax-free (much like a ROTH) without the income limitations and contribution caps. To qualify, these plans must be “unfunded” and subject to “substantial risk of forfeiture” and are based on the employer’s “promise to pay.” The money is not creditor protected.

4) Qualified Plan Types: What are The Tradeoffs?

The most common retirement plan solutions for small businesses and the self-employed are qualified plans like 401K and profit-sharing plans. IRA-based SEP and SIMPLE IRAs are also popular options; IRAs are not “qualified plans” and typically are cheaper to adopt and easier to administer. However, they have lower maximum contributions and provide less flexibility than qualified plans. And they may not be as tax and saving efficient for business owners and/or highly compensated employees (HCE). More advanced Plan designs such as cross-tested 401Ks, Cash Balance, and Defined Benefit plans can allow for much higher savings and contribution rates with lower employee contribution expense than IRA SEPs, SIMPLEs, and standard 401k Plans. Every situation is unique and requires census data to test tax and saving efficiency. Solopreneurs can also establish Solo 401K, Defined Benefit, or SEP IRAs.

Depending on Plan selection and features, some mix of the following key tradeoffs will exist:
• Tax & Saving Benefits, Contributions Limits;
• Compliance & Fiduciary Liability (which can create personal liability);
• Administrative Cost & Complexity


IRA-based plans technically aren’t “qualified” plans. We include them with the qualified plan summaries below because they allow a small employer to establish a retirement plan for employees without the more complex administration and higher expense found in qualified retirement plans. And sometimes simple is the best solution! More complex plan designs offer more flexibility as you will see.

The “Pros” and “Cons” listed below will primarily be from the employer’s perspective; though there may be some overlap between employer and employee advantages.

5) What is a SEP IRA and when should it be considered?

The SEP is an employer-sponsored plan that can be adopted by self-employed individuals or small business owners. Employer contributions are made to the participating employee’s IRA; employees can’t contribute to a SEP. Tax-deferred contribution levels for SEPs are significantly higher than the contribution limit for traditional IRAs. Contributions are made on an annual basis, must be a uniform percentage of salary for all participants, are fully vested when made, and are tax deductible for the business. Importantly, contributions do not have to be made each plan year and the amounts can vary.

A SEP is a good alternative to a qualified profit-sharing plan; it’s easier and less expensive to install and administer. For very small employers, it’s one of the simplest types of tax-deferred employee retirement plans available.

• Contributions by employer are discretionary and tax deductible; can be funded up to tax return filing (including extensions);
• Simple, low-cost setup; tax-deferred savings for employees; can adopt any time up to tax return filing date (including extension);
• Good for self-employed that can’t take advantage of higher contributions in solo 401k and defined benefit plans.

• Employee can’t contribute so may not allow for adequate retirement income (only the employer can contribute, so employee has no control over their outcomes); 100% immediate vesting and portable;
• Must cover all employees age 21, who have worked with company for 3 of last 5 years.

6) What is a SIMPLE IRA and when should it be considered?

An employer-sponsored plan that can be adopted by self-employed individuals or small business owners. Unlike the SEP, employees can contribute (elective deferrals); employers have a minimum funding requirement and can either match employee contributions (not to exceed 3% of employee compensation) or contribute 2% of compensation (non-elective) for all eligible employees. Determining which is most cost effective will depend on participation rate and salary levels.

A SIMPLE is a good alternative to a qualified profit-sharing plan; it’s easier and less expensive to install and administer. For very small employers, it’s one of the simplest types of tax-deferred employee retirement plans available.

• Contributions by employer are tax deductible; employee can also contribute;
• Simple, low-cost setup (must have no more than 100 employees, employee must make $5,000 to be eligible); tax-deferred savings for employees;
• Good for the lower income, self-employed.

• Contributions by employer are required (2-3% of employee salary);
• Lower contribution limits may not allow for adequate retirement income; 100% immediate vesting;
• Older employees can’t accelerate savings and catch-up contribution are lower than 401Ks);
• A 25% early distribution rule applies during first 2 year of participation.

7) What is a Profit-sharing plan and when should it be considered?

A profit-sharing plan provides the employer the most flexible contribution feature; the range each year could be nothing, a 100% discretionary amount, or a formula-based amount. Each participant has an individual account in the plan. Participants can’t contribute pre-tax unless the plan meets additional requirements. The employer’s contribution is allocated to the individual participant accounts based on a formula which can’t discriminate. Also, the contribution can be annual, so there is no need to process monthly contributions as you would with a traditional 401k.

Best used if an employer’s profits or financial stability are uncertain. This gives the employer flexibility and cost control. Can include incentive features designed to retain employees. Can be a standalone plan or is often used to supplement an existing defined benefit plan.

• Contributions by employer are discretionary and tax deductible; flexibility on amount;
• Simple to setup, easier to design and administer than other qualified plans; tax-deferred savings for employees;
• Can contribute if no profits; can apply any vesting provision under the code (2-6 years generally used).

• Employee can’t contribute so may not allow for adequate retirement income; perhaps the least attractive employee option since no funding is required, and employee isn’t able to contribute.

8) What is a Money Purchase Plan and when should it be considered?

The employer is required to make an annual contribution to each employee’s account regardless of the firm’s profitability for the year. Each employee has an individual account in the plan. Annual contributions to each employee’s account are subject to a nondiscriminatory contribution formula. Usually, the contribution formula is a specified percentage (up to 25 percent) of each employee’s annual compensation.

Ideal when employees are young and willing to accept some degree of investment risk. Because the plan requires an annual employer contribution, it provides for more retirement security than a profit sharing, less than from a defined benefit.

• Contributions by employer are tax deductible; employee contributions are tax deferred;
• Simple, low-cost setup, easier to design than other qualified plans; tax-deferred savings for employees.

• Contributions by employer are required;
• May not allow for adequate retirement income (better than profit sharing, not as good as defined benefit.

9) What is a Solo 401k Plan and when should it be considered?

This Plan allows small-business owners to make both employee and employer contributions for themselves; has higher contribution limits than a SEP or SIMPLE. Well suited for self-employed people with no employees other than a spouse. Employer contributions might be subject to vesting terms.

• Contribution by employer are discretionary and tax deductible; employee can contribute.

• Slightly more complicated to set up than a SEP IRA; withdrawals before age 59 ½ are like other qualified plan rules and penalties.

10) What is a Traditional 401k Plan and when should it be considered?

A 401k is a qualified profit sharing or stock bonus plan. Plan participants may contribute on either a pre-tax or after-tax (ROTH) basis. Pre-tax amounts contributed to the plan are not taxable to the participants until withdrawn; ROTH contributions grow and distribute tax-free. This Plan is similar to regular qualified profit-sharing plans and will be subject to normal nondiscrimination testing.

When an employer wants to provide a qualified retirement plan for employees but can afford only minimal extra expense beyond existing salary and benefit costs. Traditional 401(k) plans can be funded entirely from employee salary reductions.

• Contributions by employer are discretionary and tax deductible; employee can contribute;
• Tax-deferred savings for employees; Roth 401(k) feature can be added;
• Employees have a degree of choice in how much they wish to save;
• Cost effective; Plans can be funded entirely through salary reductions by employees (i.e. plan assets).

• As with all defined contribution plans account balances at retirement age may not provide adequate retirement savings for employees, especially those who entered the plan at later ages;
• Because of the “actual deferral percentage” (ADP) nondiscrimination test, a 401(k) plan can be relatively costly and complex to administer;
• Employees bear investment risk under the plan, both before and after retirement. However, they can also potentially benefit from good investment results.

11) What is a Safe Harbor 401k Plan and when should it be considered?

A safe harbor plan automatically passes the ADP, ACP and top-heavy test requirements. There is also a notice requirement and the employer needs to satisfy one of the contribution requirements listed below.

Used when an employer is willing to make minimum funding requirements for non-highly compensated employees, so that the highly compensated can maximize their contributions.

• Contributions by employer are tax deductible; employees can contribute
     -A matching contribution of 100 percent of the employee contribution up to 3 percent of compensation, plus 50 percent of deferrals from 3 to 5 percent; or
     -A non-elective (non-matching) contribution for all eligible non-highly compensated employees (NHCE) equal to at least 3 percent of compensation; HCEs may be excluded.
• Employees have a degree of choice in how much they wish to save; tax-deferred for employees; Roth 401(k) feature can be added.

• Contributions by employer are required which adds to cost vs. Traditional 401k;
• As with all defined contribution plans account balances at retirement age may not provide adequate retirement savings for employees, especially those who entered the plan at later ages;
• Employees bear investment risk under the plan, both before and after retirement. However, they can also potentially benefit from good investment results.

12) When would it make sense to do a cross-tested plan?

The cross-tested plan means “it’s tested as if it were a defined benefit plan.” In defined contribution plans typically older plan participants enjoy higher contribution levels (as a percentage of compensation). The employer contribution formula is based on the participant’s age and compensation. Age-weighting permits account balances of older participants to build up quicker. The age-weighted formula tends to target owners and key employees who typically are older than rank-and-file employees.

The plan is designed to maximize benefits to highly compensated employees. Benefits for other employees are designed to provide the minimum contribution that is required by nondiscrimination regulations. A minimum of 5 percent of compensation for the non-highly compensated employees is generally required. Also referred to as a new comparability plan.

To use cross-testing, the plan must also satisfy a “gateway” requirement. Generally, the minimum gateway requirement is satisfied by providing all non-highly compensated employees with contributions equal to no less than one-third of the highest contribution (up to 5 percent of compensation) made to any highly compensated employee.

• Provides tax-deferred retirement savings for employees;
• Retirement benefits can be maximized for older, highly compensated employees, especially when there are many younger non-highly compensated;
• This age-weighted plan is relatively simple and inexpensive to design, administer, and explain to employees compared with a defined benefit plan

• Maximum additions are the same as all defined contribution plans (a defined benefit may allow higher contributions);
• Employees bear investment risk;
• Employers have funding requirement (though not subject to minimum funding requirement);
• May need actuarial services on an annual basis.

13) What alternatives are there to cross-tested plans?

1. Defined benefit plans provide greater security and stability due to employer and government guarantees. Defined benefit plans also allow greater tax-deductible employer contributions for older, highly compensated employees, because the annual addition limit does not apply. These plans are more complex and costlier to design and administer.
2. Money purchase plans offer an alternative without the age-related contribution feature.
3. Non-qualified deferred compensation plans can target selected executives. The employer’s tax deduction is generally deferred until benefit payments are received. Due to flexible vesting rules, this can be 5, 10, 20 or more years after the contribution is made. 
4. Individual retirement savings is available as an alternative or supplement to an employer plan, but income limitations may apply; and contributions limits are lower than for most qualified plans.

14) What is a Cash Balance plan and when should it be considered?

The Cash Balance plan is a “hybrid” qualified defined benefit plan. Investments are pooled for all participants into one account. The employer (or adviser) is responsible for managing this pool. Each participant has a hypothetical individual account that earns an interest credit annually. The employer guarantees the contribution level as well as a minimum rate of return on each participant’s account. A cash balance plan is often used in tandem with a 401k Plan.

Used to replace traditional pension plan due to lower funding cost. Good when the employees are relatively young and have substantial time to accumulate retirement savings, or when employees are concerned with security of retirement income.

• Contributions by employer are tax deductible; if used with a 401k plan, employees can contribute;
• Employer guarantee removes investment risk from the employee; tax-deferred savings for employees;
• Benefits are guaranteed (within limits) by the PBGC;
• Plan benefits are easy to communicate to employees.

• Contributions are required by the employer; the employer has investment risk which can increase their cost. The retirement benefit may be inadequate for older plan entrants;
• Due to the need for actuarial services, minimum funding requirements, and the PBGC guarantee;  administration is more complex than qualified defined contribution plans.

15) What is a Defined Benefit plan and when should it be considered?

A defined benefit pension plan is a qualified employer pension plan that guarantees a specified benefit level at retirement. Since the employer is responsible for making investment decisions and managing the plan’s investments, the employer assumes all the investment risk.

Employer’s plan design objective is to provide an adequate level of retirement income to employees; many employers prefer to allocate plan costs to maximize saving benefits to older employees who are often key or controlling employees.

• Contributions by employer are tax deductible;
• Employees obtain a tax-deferred retirement savings funded by the employer;
• Adequate retirement benefits can be provided for all employees regardless of age at plan entry;
• Benefit levels are guaranteed by the employer; and for some plans (generally larger plans), by the Pension Benefit Guaranty Corporation (PBGC);
• For older highly compensated employees, a defined benefit plan generally will allow the maximum amount of tax-deferred retirement saving.

• Actuarial and PBGC aspects of defined benefit plans result in higher installation and administration costs than for defined contribution plans;
• Defined benefit plans are complex to design and difficult to explain to employees;
• Employees who leave before retirement may receive relatively little benefit from the plan.

16) What is an ESOP plan and when should it be considered?

A stock bonus plan is a qualified employer plan like a profit-sharing plan. Participants’ accounts are invested in stock of the employer company. An ESOP is a stock bonus plan that the employer can use as a conduit for borrowing money from a bank or other financial institution to purchase employer stock.

Provides a tax-advantaged way for an employer to offer employees a stake in the company through stock ownership. An ESOP creates a market for the stock and can provide the opportunity for estate tax benefits for a sale of stock to the ESOP. Employers can leverage and generate capital for the company through tax-exempt loans.

• Employees receive ownership in the company, which may create a performance incentive;
• Employees aren’t taxed until shares are distributed; taxation of the unrealized stock appreciation can generally be deferred until shares are sold by the employee;
• Creates a market for the illiquid stock and helps owner(s) diversify;
• Employer tax deduction for a cash or stock contribution to the plan;
• Employer deduction for dividends paid to the ESOP and distributed to participants or used to pay off ESOP loan (C-Corp only);
• Deferral of gain for selling shareholder to the ESOP and buys replacement securities (C-Corp only).

• Subject to qualified plan requirements: coverage, vesting, funding, reporting, disclosure, etc.;
• S-Corps are permitted to establish an ESOP; however, they aren’t eligible for all the tax benefits provided to C-Corp ESOPs;
• Issuing stock to employees “dilutes” existing shareholder value and control;
• Company stock may be very speculative; investment risk can create employee morale problems if they don’t see or understand the value of the plan.

17) What is the relationship between guaranteed funding vs. cost?

The general takeaway for Qualified Plans: A simple plan is less complex and will cost less; however, it may have less tax and saving benefits as well as other Plan features that can meet your employee recruitment, retention, reward, and retirement outcomes. Your objectives, cash flow, and plan demographics (age and compensation) should determine the best plan type for you. A knowledgeable advisory team can help you find your best solution.

18) What is a Non-qualified Plan and when should it be considered?

A non-qualified deferred compensation (NQDC) plan may be used alone or to augment a qualified plan. Per the Internal Revenue Service (IRS) NQDC’s are an elective or non-elective plan; an agreement between an employer, employee, or independent contractor (or service recipient and service provider) to pay them compensation in the future. In comparison with qualified plans, NQDC plans don’t provide employer’s tax deduction at time of contribution like qualified plans under IRC § 401(a).

Under a non-qualified plan, employers generally only deduct expenses when income is recognized by the employee or service provider. As noted above, under qualified plans, employers are entitled to deduct expenses in the year contributions are made even though employees will not recognize income until the later years upon receipt of distributions.

The NQDC, however, gives the employer more tools to target benefits for key employees without the cost of covering a broader group of employees. They can provide benefits to executives beyond the dollar limits allowed in qualified plans and can be customized with more flexibility than qualified plans. For example, vesting schedules have more latitude and employee payouts can be tied to corporate and individual incentive targets.

Despite their many names, NQDC plans typically fall into four categories:

1. Salary Reduction Arrangements simply defer the receipt of otherwise currently includible compensation by allowing the participant to defer receipt of a portion of his or her salary.
2. Bonus Deferral Plans resemble salary reduction arrangements, except they enable participants to defer receipt of bonuses.
3. Top-Hat Plans (aka Supplemental Executive Retirement Plans or SERPs) are NQDC plans maintained primarily for a select group of management or highly compensated employees.
4. Excess Benefit Plans are NQDC plans that provide benefits solely to employees whose benefits under the employer’s qualified plan are limited by IRC § 415.

Despite their name, phantom stock plans are NQDC arrangements, not stock arrangements.

• Contributions by employee/employer can be far more than qualified plans;
• Contribution may be either pre-tax or after-tax subject to plan design;
• Tax deferred growth and/or tax-free distributions are possible depending upon plan structure; can be used to augment qualified plans;
• Maximum flexibility to achieve 4 R’s (who, how much, vesting, performance targets, etc.)

• Contributions by employer aren’t tax deductible until they become income for the employee which may take a long time depending on plan vesting provisions;
• Based upon employer’s “promise to pay”; money must be available to creditors i.e. “risk of substantial forfeiture,” to employee must be present under Section 409a rules;
• Pass-through entities can’t take full advantage of non-qualified plans.

19) Are you in compliance with ERISA’s Five Key Mandates?

The ERISA standard is very clear: The Plan operates for the “sole benefit of plan participants.” You are the Plan CEO and “fiduciary in chief” and this carries a broad range of responsibilities. What process do you have to evaluate your compliance?

Employers can outsource different functions; however, you need to have a process to select plan service providers and monitor plan activity. The Courts and the DOL have spoken very clearly: Employer/Plan Sponsors can’t rely solely on the experts you hire. The Tibble vs Edison Supreme Court case made it clear that you need to be able to question the expert’s methods and assumptions.

Your broad responsibilities are to perform, interpret, select, and monitor Plan activity. Sounds daunting. Yet it’s very manageable with a process.

20) How to best manage your duties to the Plan?

You don’t want, or need to be, an ERISA expert. You have a business to run. The retirement plan, qualified or non-qualified, is a key employee benefit as well as a strong talent retention tool for your business. How best to operate with confidence in your compliance when it isn’t your area of expertise?

The good news is you can outsource many plan duties. However, you’ll always retain fiduciary responsibility in selecting and monitoring providers. The challenge is hiring the right providers whose interests align with your and don’t create conflicts with your fiduciary duties.

Let’s discuss ways to help you select. 

21) Do you have a process to monitor Plan activity?

Do you have a good process in place to select service providers and monitor plan activity? Is there a  written Investment Policy Statement (IPS) that governs plan roles and responsibilities to give you a measurement tool to document all investment related plan activities? A good investment adviser will help you document or implement processes where needed and work with you and the third-party-administrator to interpret plan documents, so you can be confident you are operating the plan in compliance with DOL and IRS guideline.

22) What risks, responsibilities, and liabilities are yours?

You have multiple fiduciary responsibilities: administer, select, monitor, interpret, invest – each carry different risk levels. It’s not ALL or NONE. Rather, there are layers of fiduciary responsibility. Investment related liability can create personal liability and is the biggest expense in the Plan. Logically, this creates the biggest potential for liability. How best to manage this risk?

23) Would you rather “transfer” or “share” this investment risk?

A 3 (21) fiduciary “shares” investment risk with you, meaning they will suggest fund selection for you, but the ultimate authority and liability is with you. Whereas, a 3 (38) fiduciary offers ERISA’s highest standard of care which “transfers” investment risk away from you to the investment professional. According to a Plan Sponsor Magazine survey, less than 20% of advisers offer employers this important protection. Why wouldn’t the investment professional be ready, willing, and able to take on this responsibility? Which of these options makes the most sense for you?

24) Does hiring a brand name provider ensure your liability is covered?

It’s a huge fallacy that big brands are a safer bet. Big brands have name recognition, and they also have business models that may conflict with plan goals and increase your risk (ask for our white paper court case review). Clever marketing creates confusion and may leave you more exposed than you believe. “Fiduciary assistance” and “fiduciary warrantee” are overused, underdefined marketing terms, which have little, if any, legal standing. Read and understand your advisory agreements fully. Don’t tolerate ambiguity. Ask your adviser if they will serve as a full 3 (38) investment manager in writing. Be sure that it covers every investment they recommend for the Plan AND that it’s clearly stated in writing!

25) How can you compare one offering vs. another?

1) Business Model Comparison: understanding how your provider(s) get paid, how much, and who pays them are keys to helping you understand plan economics, provider incentives, and to fulfilling your fiduciary duty to participants under ERISA law.

2) Service Matrix Comparison: knowing the service levels that are available to you and your participants, how they can help better serve retirement goals, and reduce your fiduciary risk.
• Are ERISA 3 (21) or 3 (38) investment agreements in place? Risk reduction is key.
• What is the adviser’s commitment to helping you understand your fiduciary obligations?
• What is the adviser’s commitment to helping your employees plan well for retirement?

3) Cost Comparison: Your plan’s cost needs to be “reasonable.” What is reasonable?
• Benchmarking services vs cost with other Plans in your size range is a good way to measure where you stand relative to your peer group.

26) How can you evaluate your Plan costs?

Most owners of small plans don’t have a good handle on plan expenses. A 2018 Pew Charitable Trust study of 912 businesses with between 5-250 employees (40 employees on average) showed that 34% of small to midsize business leaders said they were “not at all familiar” with their retirement plan fees, while 47% said “somewhat familiar.” Not good statistics. Here is how to remedy this lack of awareness.

Tips to Understand Plan Fees:
1) Ask all providers for their 408 (b) 2 disclosure. This document details the provider’s fees and should help you evaluate where any conflicts might exist;
2) Review service agreements with each provider;
3) Ask your adviser to show you the investment fund expense ratios, how the funds rank against their respective benchmarks, and why these funds are in their lineup.
• Are there lower cost share classes within any of the fund families? The answer to this question should always be NO.

27) How do you evaluate services?

Advisers and plan providers with educational programs, open investment fund architecture, and transparent business models will simplify your duties, contain costs, and reduce your risk. Value is a function of services rendered, “all-in fees,” and helping you to remain compliant. Cost is always an important consideration, but cheapest isn’t always the best value. However, you must understand the compensation structure, methods, and assumptions of the providers so you can adequately gauge if your Plan participants are getting “reasonable” value. Since it isn’t your area of expertise, put the burden of proof on the adviser. 

28) Three Questions You Must Ask Your Plan Provider/Adviser

A 3(38) Investment manager removes your investment related liability; and specifically allocates risk away from the owner to the investment manager. Why wouldn’t a self-respecting investment professional want to do that for their clients? Yet less than 20% of advisers to the small plan market operate this way, according to Plan Sponsor magazine’s survey. Therefore, do yourself a huge favor and ask:

1) Are you serving as a full 3 (38) fiduciary on all Plan assets?
2) Will you accept the 3 (38) status in writing with a clear written description of fees and services covered? If not, why not?
3) Which fiduciary duties do I, as Plan Sponsor, still retain?

Glossary of Key Retirement Plan & ERISA Related Terms

1. 3 (16) ERISA Adviser: The Plan Sponsor/Employer typically is responsible for day-to-day administration decisions such as interpret Plan documents, determine employee eligibility, establish plan policies and features such as hardships or loan provisions; ensure notice filings, testing, file form 5500 are done by deadline (not to be confused with the third-party administrator or recordkeeper who typically do not have fiduciary responsibility). A good TPA, recordkeeper, and adviser will facilitate information with the Sponsor to help them run the Plan efficient and compliant.

2. 3 (21) ERISA Adviser: a shared responsibility between you as Plan Sponsor/Employer and an investment service provider. The risk is “shared” but the ultimate authority, responsibility, and liability is with you as Plan Sponsor/Employer.

3. 3 (38) ERISA Investment Manager: affords you as Plan Sponsor/Employer the highest standard of care under ERISA law; the Investment Manager takes discretion for Plan investments, and effectively transfers investment liability away from you as Plan Sponsor/Employer to the investment professional.

4. Bundled Plans: refers to an arrangement where one service provider may take on several roles and bundles Plan fees with all associated services. This structure can lead to a lack of transparency and poor disclosure of services provided (see Indirect Fees vs Direct Fees).

5. Department of Labor (DOL): administers and enforces workplace activities for about 10 million employers and 125 million workers. ERISA regulates employers who offer pension or welfare benefit plans for their employees. Title I of ERISA is administered by the Employee Benefits Security Administration (EBSA) and imposes a wide range of fiduciary, disclosure and reporting requirements on fiduciaries of pension and welfare benefit plans and on others having dealings with these plans.

6. Employee Retirement Income Security Act of 1974 (ERISA): is a federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans.

7. Fees and Expenses: can be very complex; disclosure is not always as clean as it could be. Non-explicit fees like soft-dollars, sub-transfer agent fees, and 12b-1 fees, can be hard to detect. However, it’s your duty to monitor them.

8. Fiduciary: in 401K Plan context, refers to the roles and the legal obligations to work in the sole interest of plan participants.

9. Fiduciary (Named): generally, this refers to the Plan Sponsor/Employer who has overall responsibility for the Plan. Since many employers are not investment professionals, ERISA guidelines consider it prudent to select outside service providers to help them manage fiduciary duties. The Sponsor still retains the duty to select and monitor service providers and plan activity.

10. Four R’s: Recruit, Reward, Retain, and Retire – Plan type and plan features can be tailored to these different employer objectives. A good adviser can bring in the appropriate expertise to help you maximize the objectives that are most important to you.

11. Highly Compensated Employee (HCE): for 2019 employees earning $125,000 are considered HCEs; those earning less are considered Non-Highly Compensated (NHCE) or rank & file.

12. Indirect Fees vs. Direct Fees: fees fall into three general buckets: Plan Administration, Investment, and Individual Services. There is no standard format. Some providers “bundle”, some “unbundle”, some do a mixture of both. Fees can be paid from investment returns, the employer, or from plan assets. This complexity leads some Sponsors and participants to think the Plan is “free.” Not so. Hidden costs can be substantial, which is why the DOL has made fee disclosure mandatory since 2012. As you’ll see, “all-in” Plan costs can vary drastically and have very real consequences for long-term retirement goals.

13. Open Fund Architecture: refers to the investment fund lineup (meaning they aren’t trying to sell proprietary or affiliate funds) but can choose from a very broad fund universe without the conflicting motives of getting paid from the mutual fund, insurance company, or broker dealer. This should promote a search for the best overall value in diversifying the fund lineup.

14. Revenue Sharing: is the practice of adding additional non-investment related fees to the expense ratio of a mutual fund. These additional fees are then paid out to various service providers – usually unrelated to the fund company managing the fund. Mutual fund returns are reported net of fees, so the money collected from investors and paid out to other parties is not explicitly reported to investors, it simply reduces the net investment return of the fund. Because investors don’t see the fees being deducted, the true cost of the fees charged is often overlooked when calculating the total cost of plan services.

Nothing herein or elsewhere on this site constitutes investment, legal, or tax advice. Please see Disclosure.

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