Just because your company has a 401(k) plan in place doesn’t mean it’s working well for your company and employees.
If you’re seeing any of the following seven warning signs, it’s time to seek an outside opinion and analysis of your 401(k) plan:
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Participation rates are dropping.
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The HR team is fielding a large or growing number of personal questions and concerns about the plan.
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Employees are using only a small number of available mutual funds or choosing funds that make little sense for their age. For example, if a large number of younger employees are primarily investing in cash or money market funds, that may indicate a poor understanding of retirement planning or the plan itself.
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New employees aren’t rolling over money from their previous employer’s plan into yours.
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More employees are taking out loans against their 401(k) accounts.
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The plan’s overall investment growth is poor versus cash from contributions.
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Your plan’s administration costs are rising or considerably higher in one year.
Is It Time To Call In 401(k) Plan Specialists?
If you’re experiencing any of the above issues with your 401(k) plan, you might want to bring in a specialist to help resolve any problems. A 401(k) specialist should be able to help you to uncover the root causes behind these problems and implement possible solutions.
Here’s an example: A medical group was experiencing low overall participation in its 401(k) plan, due in part to the wage disparity between the physicians, the nurses and the administrative staff. This resulted in a plan that would be considered “top-heavy,” according to the IRS, and subject to certain corrective measures.
As a result, the doctors were getting unexpected funds back from the plan every year, which affected their tax planning and the amount of money they could put away. Meanwhile, the other staff members didn’t see the plan as beneficial to them, so many did not participate.
In general, the IRS considers a 401(k) plan to be top-heavy when it provides over 60 percent of the present value of benefits to the company’s key employees. This is a common problem “especially for smaller plans and plans with high turnover,” according to the IRS. For example, “If you’ve been operating a 401(k) plan covering only you and your spouse, and you hire other employees who become eligible under the plan, you’ll probably have to make required minimum contributions if the new employees are non-key employees.”
When the medical group contacted Richard Brothers for help, we recommended a combination of strategies to improve plan participation and performance. We started with educational activities to increase overall knowledge about retirement planning and the employee benefits.
Next, we suggested offering a broader, more flexible range of investment options that better accommodated the needs of the doctors, and encouraged the plan trustees to put the “safe harbor” provision in place, so that all employees could receive a guaranteed three percent match. This multi-pronged approach corrected the top heavy problems, while increasing participation and employees’ satisfaction with their compensation and benefits.
In the end, having a 401(k) plan in place doesn’t mean it’s working. Whether you’re experiencing a drop in participation or seeing other warning signs that your plan is in trouble, seek an outside opinion from a 401(k) plan specialist.
Worried about the cost of your current 401(k) plan? Request a free, 30-minute consultation with Richard Brothers and start maximizing your plan’s value.
