When was the last time you or your clients took a hard look at your 401(k) plans?If you're like many small and midsized business owners, chances are that you haven't spent much time reviewing the plan since the day it was set up three, five and perhaps even 10 years ago. Most employers implement a plan and simply assume that even years later it will continue to do what is best for themselves, their company and their employees.
Unfortunately, making this assumption can be a serious mistake. As a result of such lack of attention, you and your clients may be doing a disservice to your employees, and even opening yourself up to potential problems - even litigation.
You can begin the process by asking if the plan offers good investment choices. Are there diverse investment options within the plan? Are the fees charged within the plan competitive or excessive? Do employees receive the necessary educational information on how best to save for retirement?
Any owner or primary decision-maker must be proactive in making sure that their company has a quality plan. Employees deserve it and, over the long term, it can benefit the company. Financial problems, after all, can create an enormous amount of stress, leading to unproductive, unhappy employees. Conversely, employees who have built or are on the path to financial independence tend to be much more positive and productive.
By educating employees to start saving for retirement as early as possible and showing older employees that it is never too late to get serious about their retirement, you can create an environment that lends itself to a more productive work force and greater company loyalty.
In the current economic environment, where companies might be unable to give the raises or bonuses necessary to retain quality employees, this becomes even more important. Paying lower fees for the plan can give employees a significant benefit upgrade at little or no additional cost.
Many older plans, as well as some newer plans, have high fees built into them. These fees tend to be hidden, which businesses never see because they are built into the investments' expense ratios. Unless one scours through thick prospectus reports that may feel like they are written in an ancient language, they remain hidden - yet they can make a significant difference.
Take the case of a 35-year-old employee making $80,000 per year, who receives a 5 percent annual raise and saves 10 percent in his 401(k) each year. If the average annual return in Plan A is 8 percent and Plan B is only 7 percent because the fees in Plan B are 1 percent higher, the difference in amount saved between the two plans becomes significant at age 65. While the value of Plan A would grow to $1,530,857, Plan B would then be worth $1,316,125 - a difference of $214,732, or 16 percent.
Another key component missing from the administration of many 401(k) plans is employee education. Employees need to understand the benefits of participating in a retirement plan, the time value of money, the affects of inflation and the basics of asset allocation. These are important concepts that can greatly serve them in preparing for retirement. Many employees are poorly prepared for retirement and, as they get closer to it, find themselves underserved by the 401(k) plan that they have been investing in for years. This does not need to be the case.
Finally, there is a legal fiduciary responsibility to protect employees in a 401(k) plan. Very often the administrator of the plan is the company owner or the chief financial officer. How effectively have they managed this role? In fact, do they even know that they are responsible?
A recent Supreme Court decision shows that this fiduciary responsibility is no longer being taken lightly. In an opinion rendered earlier this year, the court allowed an individual participant to sue a 401(k) administrator for the first time. This is particularly troubling because in many cases individuals who are fiduciaries are unaware of this designation and have little if any idea on how to fulfill this important responsibility.
In today's financial climate, the time may be right for you and your clients, as business owners, to take a hard look at your respective employee investment plans. It may be time to make some much-needed changes.
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