What to look for in a 401(k) plan

Five things that just don’t look right in a 401(k) plan

There are several aspects of a 401(k) plan that employers should consider when choosing what is best for their employees and business.

There are several aspects of a 401(k) plan that employers should consider when choosing what is best for their employees and business as a whole, including features, fees, services, fee variations, restrictions, educational assistance and customer service.

The following are a few examples of what not to do when choosing, participating in or offering a retirement plan.

Using the same mutual fund company for almost every fund option

Pretend you are the general manager of a football team and you are seeking out players to draft. Would you pick all the players from the same team or find the best performing players from each team? Of course you would pick the best quarterback from team one, the best running back from team two, the best center from team four and so on until you have an all-star team.

Why not do this with your 401(k) plan? Let’s say all of your mutual funds in the plan are from the same fund family. There is no mutual fund family that is perfect in every asset class, sector or style, much like the football players from one team are not the best in the league at every position.

While some fund families may have demonstrated much better quality performance and risk mitigation, there may be others that have specialties in certain areas (such as overseas, small-cap or high-yield bonds), or they simply have better performing managers or teams of managers than other mutual fund families. Consider hiring an advisor to be your qualified professional of the 401(k) plan and they can work toward picking your “all-star” fund lineup.

Not benchmarking your funds and plan fees on a regular basis

If you don’t know the answers to each of the following questions already, talk to your advisor and find out.

  • What does your 401(k) plan’s Investment Policy Statement look like?
  • How are your plan’s funds performing relative to peer groups and competitors?
  • What fees are hidden inside your mutual funds, and are all the fees included in the 408(b)(2) disclosure?
  • What is the 408(b)(2) disclosure?
  • How are your advisor, record keeper and third party administrator being paid, how much are they being paid, and by whom?

Consistently failing compliance tests

In most cases, it is required that 401(k) plans have compliance tests to ensure that plans do not discriminate in favor of highly compensated employees. Failure of these tests often requires a refund (with resulting tax bills for the participant) be given to key employees or family members of your organization.

This is an indication that your plan design may be lacking key ingredients. In some situations, a “safe harbor” contribution or match could help alleviate this issue, or even adding enhanced one-on-one education could result in increased deferral rates, thereby eliminating compliance and testing failures.

Having a low participation rate

Low participation rates can be the result of several plan issues. One could be poor plan design, such as an ineffective match or profit sharing option. Another culprit could be too many mutual fund offerings. Behavioral finance studies have shown that too many choices in a plan lineup can lead to a decline in employee participation. The wrong amount or type of information provided to employees can also result in low participation.

A low participation rate typically indicates the plan sponsor could easily be doing something different to increase participation for their employees.

Not hiring a financial advisor for the plan

A financial advisor is an integral part of a retirement plan. However, not just any financial advisor will suffice. Just like all mutual fund companies have different specialties, so do financial advisors. Specialties include life insurance, high net worth asset management, non-profit endowment management, estate planning, and yes, 401(k) retirement plans.

Don’t simply hire any financial advisor with credentials following their name. Find out how many plans the advisor works with and what percentage of their practice is devoted to retirement plans.

A professional retirement plan advisor should periodically benchmark your plan’s funds, fees and fiduciary risks, while regularly meeting with your retirement plan committee and your employees to ensure that the goals of all involved are staying on track. This education and communication should increase participation in the plan and, in many cases if the process is consistently followed, lead to significant increases in desired outcomes.

A professional retirement plan financial advisor should, in most cases, be serving as an ERISA 3(21) or ERISA 3(38) Fiduciary. This will show the Department of Labor that you, as a plan sponsor, have addressed the important subject of mitigation of fiduciary risk. Ask your advisor if they serve as a 3(21) or 3(38) Advisor.

Need more information?

For more information or to conduct a complimentary benchmarking of your 401(k), 403(b) or 457 retirement plan, contact AGH Wealth Management’s team of retirement plan specialists using the information below.

Brad Bechtel

Senior Vice President
Employee Benefit Services

Brad Bechtel leads AGH’s employee benefit services (EBS) division, which serves clients nationwide. EBS is one of the region's largest providers of retirement plan recordkeeping services for daily valuation plans. The division provides consulting services to clients on employee benefit plans, including plan design, implementation, operation, fiduciary due diligence, compliance, and through affiliate AGH Wealth Management, discretionary and non-discretionary investment fiduciary services, investment advisory services and employee education.

Brad is experienced in executive compensation, including non-qualified, phantom stock, top hat and excess benefit plans, as well as other deferred compensation approaches. He has consulted for numerous Fortune 500 corporations on investment management and fiduciary due diligence. He also provides search and selection due diligence consulting services for companies seeking new investment and recordkeeping providers for their qualified plans. Brad is a registered investment advisor who holds Series 7, 24 and 66 FINRA registrations, and he is a member of the American Society of Pension Professionals & Actuaries.

David Darby

Senior Vice President
AGH Wealth Management

Dave Darby has been a licensed financial professional since 1989. Before joining AGH, he worked with a large mutual fund company and for nearly a decade in banking, including serving as chairman of the mutual fund selection committee for the super-regional bank’s 401(k) product. With more than 25 years in the financial services industry, Dave brings a unique perspective, having worked for both a mutual fund complex and a bank trust department, while providing investment management due diligence and education services for plan sponsors and participants in the plan. Dave holds Series 7 and Series 63 securities licenses.

Dave provides investment management, fund selection and evaluation and employee education related to retirement plans. He is a graduate of the University of Kansas, where he earned a bachelor’s degree in personnel administration and psychology. He continued his education at Baker University, where he received his master’s degree in business administration.

Advisory services offered through AGH Wealth Advisors, LLC, a registered investment advisor, Member FINRA/SIPC. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed are for general information, and should not be considered a solicitation for the purchase or sale of any security.