In this post we talk about design features and risks of small business 401k plans, but if you are looking for options to set up a plan, take a look at this related article - Small Business 401k Plans - What are you options?
THE RISK IN NOT KNOWING HOW TO REVIEW 401K REPORTS
At Benefit Resources we spend a lot of time understanding our clients’ employee information and plan design so that we can guide our clients through the complexities of the rules and regulations. I think most small TPA firms take a similar level of care.
The risk that small business owners take with relying on a bundled or national service provider for their 401k plan is that the large provider doesn’t necessarily take the same level of care as the local provider. The fees may be a little lower than those charged by the local firms, but the level of service is often substantially different, and more responsibility lies with the small business owner to provide perfect information, and to understand the reports that are generated from that information.
Following are a few examples of problems that we have seen in some small business 401k plans that used a national provider:
1. Failure to provide the correct list of Highly Compensated Employees and Key Employees. It is the business owner’s responsibility to let their provider know who is a shareholder, which employees are immediate family members, and which employees earned over $115,000 in the prior plan year.
At BRI we ask those questions too, but if we see people who appear to be related or who might be classified incorrectly we stop and make a phone call. We track compensation from year to year to reduce errors. The national companies take what you give them and run with it without stopping to make sense of it.
The risk here is that if you don’t have the right people in the testing, then the results will be incorrect. If you got a report that asked you to check and/or confirm the accuracy of the test, would you be comfortable in taking that responsibility? Fixing a test that was performed incorrectly is much more expensive than getting it right the first time.
2. The risk to having to calculate your own contributions. It is the business owner’s responsibility to compute and remit employer contributions to their national provider.
At BRI we ask our clients what contributions they would like to allocate for the year. We determine which employees are eligible for the contribution, and we perform the allocations in compliance with the plan documents. The national providers often require that the business owner determine eligibility and run the calculations themselves. Would you be comfortable in making the decisions about who gets a contribution, and how much they get without making one mistake? Failure to determine eligibility correctly, allocating contributions are subject to a variety of minimum coverage and non-discrimination rules. It’s a huge risk for the small business owner to perform these calculations.
3. The risk of not understanding related employer and affiliated service group rules. Common ownership (even foreign ownership), or having one company provide services exclusively for another company may result in testing issues for retirement plans. Plans sponsored by companies that have parent-subsidiary or brother-sister relationships, and companies that work exclusively together likely require that the plans be considered together for purposes of testing. These rules are highly complex (CLICK HERE to see our white paper on this topic).
The national providers will simply ask if you are a member of a controlled group, and take your answer at face value. At Benefit Resources, we will drill down to make sure that we understand the answer to our questions. Failure to properly test related plans can be a very expensive fix.
View Small Business 401k Plans; Design Features and Risks - Part 1.
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