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How to improve small business 401(k) plans
by Tony Novak, CPA, MBA, MT
revised February 18, 2013
The article “How to Start a Small Business 401(k) Plan” was updated February 15, 2013
Public media and new government regulations converged in 2012 to raise awareness of the flaws of 401(k) plans. There are numerous issues that should cause some alarm. Even Ted Benna, known as the father of 401(k)s says that the whole 401(k) system should be scrapped. Yet that is not likely to happen; 401(k) plans are deeply embedded in our consumer finance culture. At a core level, saving part of what we earn while reducing taxes really is really a good thing so it makes more sense to focus on improving 401(k)s rather than bash the system.
What can be done to improve 401(k) plans? It is relatively simple – the necessary changes fall into two categories: plan design tweaks and employee education. Of the two, employee education will take a far greater effort. This article focuses on the practical steps that a small business employer can take to improve its 401(k) plan.
Updating the Plan
Small business 401(k) plans are most likely to suffer from neglect. IRS estimates that almost half of the plans fail to meet current requirements. We presume this results from a breakdown in communications between the employer and the plan sponsor. As a practical matter, no one gets paid directly for keeping 401(k) plans at state-of-the-art level of performance and compliance. Periodically, an extra effort is required. The fix is simple: pull the 401(k) plan documents out of a file and have them reviewed by an independent expert. Common sense suggests that the “independent expert” should not be the person who currently serves the plan or the person wants to sell the next 401(k) plan add-on or investment.
The review is likely to point out at least a few of the common flaws and suggestions:
- Update the plan document
- Update and distribute Summary Plan Descriptions to employees
- Add automatic enrollment provisions
- Update employee contact information, especially for home mailing address and e-mail communications.
- Change from paper to electronic delivery of documents, statements and communications
- Add direct employee resources independent of the plan sponsor
- Add or expand a systematic employee communication program
- Add an employee education program
Nothing else will have as much impact on improving the 401(k) plan as adding an employee education program. The specific methods of providing this service may vary, but it is not difficult for managers to see that empowering their employees is the best way to ensure success of the 401(k) plan.
The federal government makes it easy by providing a top quality “textbook” and supporting materials specifically for this purpose. All “government quality” jokes aside, the latest materials in the series titled “Taking the mystery out of retirement planning” are among the most useful consumer finance education materials we’ve seen. Best of all, they are free.
The specific methods will vary for different businesses but the following methods have been most effective for small businesses:
- Lunch time seminar programs
- One-on-one meetings, in person or via video chat with screen sharing capability
- Provide self-study materials with optional follow-up on request
- Promoting social media resources that focus on consumer finance education
- Educational programs and resources available outside business hours that can include spouses1.
Like most business projects, the success of each option is in the details. Regardless of the format, the key to success is persistent active promotion of the education programs by the employer.Announcements included in regular employee communications and active promotion by the employer is usually required. Successful programs tend to take a holistic approach to personal financial planning rather than focus solely on the 401(k). Make sure to use an experienced provider who is independent of the firm that runs the 401(k) plan or its investments.
The cost of an employee education program can be as little as $20 per employee, although a high quality ongoing program that engages employees in one-on-one professional services is likely to be more.
About the Author: Tony Novak, CPA, MBA, MT, specializes in support for small business benefit plans and employee education programs with more than 20 years experience as an independent financial planner and a registered investment adviser. He can be reached at (800) 609-0683 or email@example.com
1We believe that efforts to include employees’ spouses in consumer finance education can provide huge return to employers in reducing many of the most common stress factors that result in lower employee productivity.
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