A 401(k) advisor can be hard to find. As business owners, you want help creating and managing a 401(K) because you are already extremely busy and you likely don’t want to devote additional time to a retirement plan.
Although there are fewer and fewer advisors wanting to handle 401(k) plans every year because the laws protecting employees continue to get more strict. I personally think this is fantastic!! If the plan is for the benefit of employees, a 401(k) advisor should be there to help ensure it’s a good plan for all. That being said, 401(K)’s are a whole other beast. If you are a business owner who has attempted to set up a 401(k), you know this to be true. If you are in California, CalSaver’s new law might have you looking for alternatives and you are just starting to get your feet wet in this world of 401(k)’s. Wherever you are in the spectrum of knowledge or experience, this article will help you have a much better understanding of what a 401(k) advisor can help you do, where to find one and when it might be time to break up with your current 401(k) advisor.
A 401(K) advisor helps employers (often called plan sponsors) manage the fiduciary and compliance responsibilities that come with sponsoring a 401(k). That’s probably the most important aspect of a 401(k) advisor's role. How they do that is by helping you find the right 401(k) plan recordkeeper, determine what the plan rules should be, (eligibility at 18 years old or 21 years old? After one year on the job or immediately upon hire?) and what investment options are best for your unique set of employees.401(k) advisors also help maintain the plan up to standard and they help you keep up with all of the different rules and regulations that the Department of Labor or the IRS might enact.For example, 2020 brought about a change in 401(k) withdrawal taxation rules that allowed employees to withdraw up to $100,000 from their 401(k) and split the taxes into 3 years. Those kinds of regulatory changes are hard to navigate because as plan sponsors, the final say on many aspects of a 401(k) plan are up to you but you are busy enough running a businessHaving a 401(k) advisor on your side to do the legwork helps alleviate some of the stress that comes with it.
If you are a business owner looking to offer a 401(k), a 403(b), a profit-sharing plan, or any other type of ERISA retirement plan, you should consider hiring a 401(k) advisor. The truth of the matter is that you are not required to have a 401(k) advisor in order to establish a 401(k). It is possible to have a plan recordkeeper and an officer (likely yourself) as the only two parties running the plan. If you are going that route I would recommend you emerge yourself in the ins and outs of the rules and regulations first. You are considered a fiduciary of the plan and you are to do what’s in your employee's best interest. Creating a plan that would allow you to put away a ton of money tax-deferred is great but it can’t be discriminatory. You can’t offer a plan that is top-heavy and expect the government to be happy with that- your plan would not pass the yearly testing when filing your 5500.
--Passing discrimination testing-Filing yearly 5500-Picking the investment funds to offer your employees-Comparing your plan to other plans like yours so you can be sure your employees are not paying high fees-Requesting proposals from multiple 401(k) plan recordkeepers, TPA’s, etc.-Verifying that payroll “speaks” to 401(k) so no one ends up with discrepancies-Providing “financial advice” to your employees
I am glad you asked!A 401(k) advisor can get paid in a few ways.One way is for a business owner to pick up the tab. I have clients that do that and it is extremely generous. I wouldn’t say it’s rare, but it is nice to see. Basically, the owner simply pays for the 401(k) advisor’s fee out of pocket and considers it a business expense. This is personally what I prefer because I don’t do any commission business since I am a fee-only advisor. I like to keep things nice and transparent.The other way a 401(k) advisor gets paid is through the plan assets via a flat percentage fee or asset-based fees. This option can get confusing because employees might see an “all-in” expense ratio but they don’t know who got paid what. The 401(k) investment funds might compensate the advisor, the 401(k) recordkeeper might have also split some of the fees with the advisor. The plan may use what is called zero revenue sharing which makes the 401(k) advisor fee show up as its own expense separate from all other plan expenses so that is usually fine.“In zero-revenue-share funds, participants only pay the investment management expense. Other fees, such as the adviser and record-keeping fee, would be billed as separate line items, paid in a hard-dollar or asset-based arrangement”401(k) advisors get paid “basis points” (a percentage) of the total plan assets. The average for a start-up to small plan used to be 1% and then it went lower as the assets grew.Now the “best practice” for a start-up plan is to charge 50 basis points or half of a percent. So, a 401(k) advisor makes nothing from a brand new start-up plan with no assets.A $200,000 plan at 50 basis points pays a 401(k) advisor $1,000 a year. The owner can pay the $1,000 directly out of pocket or the plan assets can pay for it.
A 401(k) advisor can help with as much or as little as you let them get away with. Ok I am half-joking and I don’t mean to piss any of you advisors reading this, (if you happen to be reading this) but 401(k)’s used to be referred to as the “trojan horse” of the industry because it used to take minimal effort to keep a plan sponsor happy. Eventually, things changed and a new start-up 401(k) plan is now paying most 401(k) advisors half of what they used to pay for “a lot more work”.
-Research, request for proposal, interview, recommend and select a 401(k) recordkeeper.-Help you decide if you should go with a bundled or unbundled 401(k) plan -Research, interview, recommend and select a Third Party Administrator (TPA) if you are going to go with an unbundled plan.-Recommend plan features and design from Roth 401(k) feature, to auto-increase contributions.-Create the 401(k) plan adoption agreement and plan rules-Help with your 401(k) investment lineup (investment fund options to offer)-Manage the relationship between all parties involved in the plan design and administration-Help choose your Default Investment Account-Implement the 401(k) plan roll-out (or 401(k) amendments)-Present and educate your employees on the plan-Regularly meet with your employees either on-site or online to answer questions
-Increased participation rate-Increased contribution deferral rate-Maximize employer tax savings-Increase investment line-up “score”-Lower expenses if the current expenses are considered high or higher than desired-Lower HR’s time spent answering 401(k) questions-Increased education and engagement amongst employees-Improved overall plan satisfactionYour employees should know exactly what the plan rules are, what the investment choices are, and what to choose, as well as what they need to consider before they take a loan or withdraw funds.
-Educate employees on how to decide if they should choose a traditional or Roth 401(k) option-Weigh out the pros and cons of using their 401(k) to put a down payment on a house-Understand the benefits of contributing to their 401(k) plan while still paying back their student loans or other debt-Understand key management roles if there are any and how to help with their compensation structure to make the most of your plan-Help sales or other unique team members understand how to take advantage of their 401(k) even if their pay is not consistentIdeally- employees will actually contribute enough to retire comfortably (my personal prayer) and rave about their 401(k) plan, 401(k) advisor to other people because that speaks volumes about you as the employer!
Basically, if you currently have a 401(k) advisor and you get help with none or a minimal aspect of what we discussed today, it’s time to break up!If your participation rate has not improved since your 401(k) advisor started working with your plan, it’s time to break up!If your 401(k) is never available for you, it’s time to break up!Lastly, if your 401(k) advisor refuses to review your plan’s metrics on a regular basis, especially if it has to do with the fees being too high, it’s definitely time to break up. Sorry.
In conclusion, this article has helped you have a much better understanding of what a 401(k) advisor is, what a 401(k) advisor can help you do, and when it might be time to break up with your current 401(k) advisor. If you would like to speak with us about starting a 401(k) plan or benchmarking your current plan, please reach out to us!Happy to help.[author_info]Pamela Rodriguez CFP®[/author_info] ]