Hyden, Miron & Foster, PLLC Law Blog

Thursday, March 31, 2016

Building a Better 401(k) Plan

What can my business do to enhance its 401(k) plan?

Today, employees no longer rely on traditional pension plans for their retirement because defined contribution plans like 401(k) and 403(b) plans have replaced guaranteed retirement income, or defined benefit, plans. Defined contribution plans, however, were not designed to be the only source of retirement funding and many plan sponsors are concerned that their employees will not have enough money saved.

Some observers believe it is time to upgrade defined contribution plans so that they function more like defined benefit plans. That being said, most employers believe the onus is on the employees to contribute more to their plans, without considering the possibility of enhancing the employer-sponsored match. What these employers fail to consider, however, is that employees will invariably decide to work longer which will lead to higher healthcare costs. This, in turn, will have a negative impact on the business.

Keys for a Good Defined Contribution Plan

There are a number of ways for a plan sponsor to provide maximum value to a 401(k) plan including:

  • Employer Match -- Increasing the amount employers are willing to contribute may encourage employees to save more
  • First Day Eligibility--The majority of plans now allow workers to begin making pre-tax contributions immediately which can ensure that employees do not fall behind in saving
  • Immediate Vesting -- Top-rated plans offer immediate vesting of employer contributions
  • Fees - Administrative fees for recordkeeping, accounting, marketing and investor education should be stated in a dollar amount in the statement and kept low
  • Investment Options -- Plan participants should have a range of investments to choose from, including mutual funds, asset allocation funds, and target date funds
  • Automatic Enrollment  -- The majority of plans offer automatic enrollment, unless employees opt out, which optimizes participation rates
  • Access to Financial Experts - Because many employees do not have investment knowledge, they should be provided with investment advisory services

Ultimately, plan sponsors need to evaluate their plans in relation to the plan participants with an eye on total plan costs, company generosity, salary deferrals and account balances and encourage participants to maximize their contributions. If you are a business owner looking to establish a defined contribution plan, you should consult with a qualified business attorney with expertise in retirement plans.

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