Introduction:

The generation of our parents and grandparents relied on a combination of pension and social security to support retirement.  Today, pensions are all but gone and the ills of Social Security are well-documented.  And so now, more than ever, the burden of financing a 20-30 year retirement has fallen on the shoulders of the American worker.  In the workplace, the most popular account type for financing retirement is the 401k savings plan.  Originally designed as a supplement to pension, its popularity has grown, and today, 401k plans can be found from companies large and small: from well-known icons such as Apple, Google or Home Depot, to the small main-street business such as the Mom and Pop dry-cleaning shop.

The 411 on the 401k:

A 401k plan is an employer-sponsored retirement plan which enjoys tax-favored status from the IRS.  One of the primary concerns for investors is to grow savings in a tax-efficient manner because taxes, over time, erode the earning power of investments.  401k plans are funded with employee contributions and an optional employer match.  Employee contributions are made on a pre-tax basis.  For example, a worker who earns $40,000/year and defers 10% ($4,000) of his or her salary into the 401k plan pays current year taxes on only $36,000 worth of salary.  In addition to the “up-front” tax break on contributions, the 401k account grows tax-deferred until withdrawal.  But because this is a long-term retirement account, IRS regulations stipulate that cash withdrawals from a 401k account prior to age 59 ½ may be subject to taxes and a 10% IRS penalty. 

Employers may also contribute to the employee’s 401k account through a company match.  The formula for the company match varies but for the sake of this example, we will use the most common match, found in a Safe Harbor 401k plan.  In a Safe Harbor 401k plan, the complex formula is more simply described as an effective 4% match.  In most cases, the match is dependent on the employee making contributions.  Using our previous example, an employee who earns $40,000 contributes 10% ($4,000) to his or her own 401k plan.  Therefore, the company match would be maximized at a total of 4% of employee compensation, which is $1,600 (4% of $40,000).  Some 401k plans also provide for profit-sharing and if you would like to learn more about the profit-sharing component, we welcome you to visit our online library resource on 401k plans, found in our LIFE Center.  401k plans also provide the option of loans and hardship withdrawal but we highly recommend against both of these options.  The reason is simple: Given the ability to take money out of an account, unfortunately, many employees will do so.  We believe that if Social Security permitted early withdrawals, it too would be raided for short-term cash emergencies.  But Social Security provides no option to withdraw prior to retirement.  For the sake of all workers’ retirement, we wish this too were the case with 401k plans.

Are businesses heeding the call?

Although many well-meaning businesses institute a 401k plan, we believe that the importance of the 401k plan is easily overlooked, given the priority of other matters related to the business.  All too often, the 401k plan is seen as simply another expense and the 401k employer match is one of the first business expenses cut during tough business cycles.  But we believe that the 401k plan should be one of the top priorities of any business.  Because even the most enthused worker will eventually be forced to retire.  So the question should be asked, if he or she doesn’t sufficiently save through the company 401k plan, how will he or she afford to retire?

Successful 401k Plan Defined

Popular rhetoric generally defines a successful 401k plan based on the size of employer match, the notoriety of the 401k vendor, or the low fees of the plan.  Although employer match and reasonable investment fees are important considerations, they pale in comparison to the true measure of a successful retirement plan.  We believe that a successful retirement plan is measured by the ability of workers to retire in dignity.  Yet this critical concept appears to receive too little press or scrutiny.  Because if a worker fails to adequately save or plan for retirement, the Social Security safety net does little more than stave off abject poverty for the expected 20-30 years of retirement living.

How we can help

We are passionate about 401k plans and work with small businesses to help them develop and implement a successful 401k plan for their employees.  Our firm is not a 401k vendor.  Our role is to serve as the financial advisor to your plan and help align you with the 401k vendor that best serves your need.  Read below for more detail.

1. Plan Review: In reviewing 401k plans, we provide a marketplace comparison to make sure that the services provided by the 401k vendor provide are helpful, efficient, and delivered at a competitive and reasonable cost.
2. Plan Design: We assist with design and recommend best 401k practices, such as utilizing safe harbor provisions and helping plan trustees understand their fiduciary responsibilities.
3. Plan Transfer: If you choose to change 401k vendors, we quarterback the transfer, help with the paperwork, coordinate the movement of funds from one 401k vendor to another, and provide hands-on guidance to help you provide proper disclosures to your employees.
4. Participant Education: With all the services we provide, we believe that the most important is participant education.  We encourage higher saving rates, provide straight-forward education on investment fund selection, and make our firm available through one-on-one meetings with each of your employees.  In addition to providing 401k education to each employee, we also provide other investment and insurance recommendations, should the need arise.  As part of our service model, we offer these additional services at no extra expense.
   
   

How we are compensated

Based on the scope of the services we provide and the asset size of your 401k plan, we are compensated either by fee-only or commission, but not both.  In a fee-only capacity, we act as the fiduciary advisor to your plan and can also serve as a co-fiduciary.  Through the more traditional commission compensation, we serve as the advisor of record and our commission is generated from the investment management fees of the 401k plan.  We prefer a fee-only engagement but regardless of the manner in which we are compensated, we provide up-front and clear disclosure of our compensation for your review prior to the execution of an engagement.

Let’s Get Started on your FREE 401k Plan Check-up!

Regardless if you are a veteran of 401k plans or you are interested in learning more about a 401k start-up plan, we can help.  Simply complete the form and we’ll contact you soon.  For existing 401k plan business owners, take 5 minutes to complete our form and we’ll provide you with a FREE 401k Plan Check-Up.  If you are not quite ready to complete the form and need to learn more first, we’ve got that covered as well in our online library.  We call it the Library of Investor and Financial Education or LIFE Center for short.  Simply browse our 401k Resource Page in the LIFE Center and once you’ve finished, come back to this page to complete your form and we’ll get started on your FREE 401k Plan Check-Up.