How to Set up a 401(k)

Steps

1. Have a clear understanding for why you want to establish a 401(k). For example, some companies want to attract or retain good employees, while others want to ensure there is a succession plan in place for the older workforce.
2. Define the needs of your organization and its employees as it relates to retirement benefits. Conduct a simple survey to determine potential plan participation.
3. Determine whether the company is planning to match contributions or not.
4. Create a census with critical employee information such as full name, employment status (part-time or full-time), hourly wage or salary, level of employment (entry level, management, etc.), and the date of hire.
5. Determine a vesting schedule for when employees can participate.
6. Choose a 401(k) advisor well. Do your due diligences by interviewing and receiving a proposal from at least 3 different 401(k) providers. And, ask lots of questions.

Tips

• Make sure you clearly understand how your financial advisor and recordkeeper are being compensated.(Commission or Fees)
• Understand how investment options are chosen and managed by the investment advisor.
• Ask for historical returns for the different allocation models. There should be approx. 5-8 models to choose from (For example: Very Conservative - Very Aggressive). For mutual funds, request fund ratings and report.
• Understand how and when financial statements are provided to the plan administrator and employees who participate.
• There are 3 basic platforms to structure a 401k: 1) Annuity, 2) Mutual Fund, and 3) Trust. Learn the pros and cons of each one as the mechanics are different and the most suitable one depends on several factors including costs and convenience.
• There are open architecture and closed architecture bundled products. Open architecture are more open to varying styles of investment choices and vehicles (ie stocks and ETFs) This can be beneficial for the more sophisticated investor.

Warnings

• Watch for hidden fees and high commission or fee structure. (recommended: 1% or below depending on plan size)
• Your plan administrator (TPA) and investment advisor should not be the same entity. This creates a conflict of interest. In this case, the recordkeeper and compliance provider are also doing the investing.
• The biggest names are not necessarily the best providers.

Sources and Citations

• http://en.wikipedia.org/wiki/Employee_Retirement_Income_Security_Act
• http://www.dol.gov/dol/topic/health-plans/erisa.htm

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