Establishing a retirement plan for your company is not as easy as you may believe it is. Finding a capable local investment or insurance representative is just one step. To make sure you satisfy your employees and comply with government regulations, you should educate yourself before establishing and managing your company's retirement plan.
Plan design
The first thing to consider is plan design. New Internal Revenue Service (IRS) rules involving safe harbor 401(k) contributions, which are similar to traditional 401(k) contributions but must provide for employer contributions that are fully vested when made, allow employees to maximize their contribution rates and contribute up to $15,500 of their salaries. An additional $5,000 may be contributed by employees older than 50. This type of plan will enable you to maximize contributions for yourself and key employees.
Additionally, new cross-tested plans—employer-sponsored, defined contribution retirement plans that favor older, long-term employees—allow different employer contribution rates for different employee classifications. This type of plan can allow a contribution rate for key employees of up to three times the contribution rate for nonkey employees. A retirement plan adviser can explain these options further.
Regulatory compliance
You also must be aware of various government regulations because the IRS and U.S. Department of Labor (DOL) could have an expensive surprise for you if your company's retirement plan is not in compliance.
Simple noncompliance mistakes can cost you hundreds of dollars per day in late filing fees and penalties. For example, forgetting to annually file IRS Form 5500 can result in a daily fine of tens of thousands of dollars. Additionally, an outdated document can face disqualification and render your retirement plan invalid, thereby causing a default and return of the contributions with fines and penalties that can equal up to 75 percent of the plan balance.
Fortunately, this rarely occurs and easily can be avoided or corrected through the IRS Voluntary Compliance Program. If you encounter a disqualification issue, you should contact an attorney who specializes in correcting retirement plan deficiencies.
Fiduciary compliance
As your company's retirement plan sponsor, it is your responsibility, as well as the responsibility of the plan's trustees, to act in good faith for the benefit of all plan participants. DOL provides a complete set of due diligence rules and regulations at www.dol.gov.
Under these rules, the primary responsibility of a plan sponsor or trustee is to run the plan in the sole interest of the participants and beneficiaries. Any self-dealing can result in a trustee or plan sponsor exposing his or her personal assets to participants' claims.
One way to reduce this liability is to offer traditional investment options, such as mutual funds, with target maturity-type investments that automatically reduce the equity or stock market exposure for participants. Although this approach does not guarantee compliance with fiduciary regulations, it does provide participants with a level of expertise and guidance they would not receive otherwise, thereby reducing the chance of a lawsuit.
Investment selection
Selecting plan investment options can be confusing, especially when the market runs through a downward cycle.
Although it can be difficult to pick a winning selection of funds for your company's plan, it is your responsibility to establish a written investment policy statement regarding how you select and monitor the plan's funds. Possibly the biggest mistake employers make is to ignore the performance of the fund lineup or assume someone else is doing it for them. 2007 showed lawsuits starting to arise from employees who can prove their employers were complacent about investment selections.
Take time
Establishing an effective retirement plan requires you to take these issues into account—doing so could save you headaches and money.
Brian Heckert is president of PENFlex Services Inc., a business consulting firm with offices in Nashville, Ill., and Peoria, Ill.
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