Putting into place a retirement plan at your company can seem daunting. There are so many options. Plan sponsors need to set goals and determine what type of plan they want.
Ary Rosenbaum, a New York attorney with The Rosenbaum Law Firm P.C., has come up with 10 things all plan sponsors should do before starting a retirement plan.
1. Determine how many employees you have. This may sound like a no-brainer, but the number of employees will determine what type of plan you can implement and how expensive it will be. Rosenbaum points out that using “easy” retirement plans, like SEP-IRAs or SIMPLE-IRAs “may not be a good fit with a company with employees because the trade-off in using a plan with no administrative cost is that you have to make required contributions to employees.
2. What is the purpose of setting up a retirement plan? Deciding what you want out of your plan will determine what type of plan you offer. Many plan sponsors want to save for retirement themselves or reward highly compensated employees and others want to offer their workers a great benefit to boost morale and retain good employees.
3. What is the age and compensation of the owner(s) or other highly compensated employees? The biggest benefit for most plan sponsors of setting up a plan is for the owners and highly compensated employees to be able to save the maximum benefit themselves. “One way to achieve the maximum savings is the use of a defined benefit plan, cash balance plan, or a cross-tested profit-sharing allocation that will award higher contributions to these high paid employees and some of the key factors are age and compensation,” Rosenbaum said.
4. How much can you afford in employer contributions? If the company can’t afford any employer contributions, then plans with an employee salary deferral feature, such as a 401(k) plan where the employees contribute all or most of their retirement savings, should be the plan of choice, he said.
5. Who will pay plan expenses? For plans other than daily valued 401(k) plans, plan expenses are usually paid out of pocket by the plan sponsor since they can take it as a business deduction. For daily valued 401(k) plans, expenses are charged to participant accounts. Plan sponsors also must be aware of their fiduciary responsibility in picking a plan where the fees and costs are reasonable.
6. Ask the employees. Rosenbaum recommends asking employees what they would like to see out of their retirement plan and whether they would defer money into an account if they had the option.
7. Find a financial advisor. Advisors can help plan sponsors choose investments and help reduce your liability as a plan fiduciary since they will assist in the investment management of the plan whether the plan is trustee or participant directed.
8. Find a good third-party administrator or ERISA attorney. They can help you maximize your tax deductions, facilitate your plan administration and maintain its qualification at an affordable price.
9. Get the proper insurance for the plan and the plan’s fiduciaries. The Department of Labor requires all retirement plans get an ERISA bond to protect plan assets from theft. In addition, Rosenbaum recommends buying a fiduciary liability policy that protects the plan’s fiduciaries from any litigation from plan participants for breach of fiduciary duty.
10. Once you set it, don’t forget it. After implementing a retirement plan, many plan sponsors neglect their role as plan fiduciaries by not reviewing their plan providers for cost and competence.