Business owners have to make similar decisions when it comes to their retirement plan. There are various levels of service available – from DIY retirement plan to a full service plan. What level of service is right for your plan? Following is a summary of service levels available in the retirement plan space and the pros and cons of each option. For more details about the different plans listed here, see our white paper on Choosing the Right Plan for your Business.
DIY Retirement Plan – Any plan with the word “simple” in it is designed to be a DIY retirement plan. Simplified Employee Pension (SEP), or SIMPLE IRA for example, are plans that many business owners can administer themselves fairly well with the assistance of their CPA.
- Pros – The eligibility and contribution rules are fairly straight forward. Plan documents are limited to a few elections. No government filings are required.
- Cons – If you don’t follow the eligibility and contribution rules, you run the risk that in audit your mistakes are identified, and you may face having to make contributions retroactively to current or former employees plus pay interest and/or penalties.
Payroll company plan – Having your payroll company administer your retirement plan is a little like asking you neighbor to help you with your home improvement project. It may be handy, and low cost, but you run the risk that neither you nor your neighbor really know what you’re doing, and again you end up with a big (expensive) mess on your hands. Click here to see our piece on payroll company plans.
- Pros – The integration of payroll and retirement is very convenient. The cost structure of per employee per month seems easy to afford.
- Cons – The responsibility of identifying Key Employees and Highly Compensated Employees, maximum contribution levels and other compliance matters are still the responsibility of the plan sponsor. The investment expenses are often very high to offset some of the expenses of administering the plan. The national call center service is not tailored to the needs of most clients, and it can be very frustrating to get a quick answer. Plan design elements are limited to very basic options for the convenience of the payroll company administration team. There is no support for ancillary services such as representation in IRS or DOL audit.
Investment company “bundled” plan – Some investment companies want to build assets under management, so they offer administration services to clients to hold them captive under their umbrella. This is a little like hiring a company that advertises a lot to help you with your home improvement project, even though you have no idea whether they are going to be good at what they do.
- Pros – You have the convenience of one phone number to call for questions about document provisions, investments or administration of the plan. The investment companies want you to keep your money with them, so they will provide basic services to keep the plan running. Some companies may offer some fiduciary protection through investment review processes.
- Cons – You are limited to the investment options available under that one company’s menu of options. Fees charged on the investments under management are used to offset administration expenses. Data submitted to the company about your employees and their contributions is considered to be accurate. Most will not review that data for accuracy. The plan sponsor must review all reports for accuracy to confirm that the investment company’s reports tie out to their corporate records. Plan design options are often limited. Bundled providers do not provide ancillary services such as representation in IRS or DOL audit.
Full-Service Plan – Just like hiring specialty contractors with a proven track record to manage your construction project, hiring specialists to help you with your retirement plan can save you time and money.
- Investment professional – Someone who will work with the business owner to design the right investment mix for the plan, and provide a review of those investments pursuant to a mutually agreed upon Investment Policy Statement. This level of fiduciary documentation and review is critical to a plan’s success and the success of the participants in the plan.
- Custodian/recordkeeper – This company holds the investments for the plan. They accept contributions, process trades, track the balance of each participant’s account, offer web access and/or produce periodic statements for the participants in the plan.
- TPA – The TPA, like Benefit Resources, is like an accountant for the plan. The TPA is responsible for helping the business owner design the plan and they will draft the plan documents to those specifications. The TPA receives basic employee and company information every year to perform the regulatory compliance testing for the plan, and to prepare the annual government filings. Having a TPA you can rely on will protect your fiduciary responsibility for administering the plan properly.
- Pros – By hiring professionals in their respective fields, you are getting best-in-class for your plan. Operational issues are much more likely to be identified and fixed early if you have trained professionals reviewing your plan on a regular basis. Review and documentation of investment selection performed on a regular (annual) basis will provide protection from fiduciary breach lawsuit claims. Expenses are outlined clearly by each of the organizations providing service, because there is no need for hidden charges.
- Cons – Trained professionals come with an expense, and the costs to the company may be a little bit higher than with a plan with lower service levels.
In summary, a business owner, CFO or HR specialist needs to weigh the services of each retirement plan option along with the costs. Just like The Money Pit, saving a little bit of money today by doing a DIY retirement plan can cost you a small fortune in the long run if you don’t do it right.
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