A 401k plan can be a wonderful benefit to offer employees as well as a great way for a business owner to reduce taxes. Unfortunately, many plans are too complicated, too costly, and offer little to no advice, education or help to plan participants. As a result, these plans have been a failure in helping people save for retirement.
But it doesn’t have to be that way. Here are five ways employers can offer a better 401k plan:
- Limit the Number of Investment Choices Available within the Plan. When it comes to 401ks, offering a long list of investment choices is not necessarily a good thing. Too many choices can create confusion and “analysis paralysis”, where participants are so unsure about what choices to make that they don’t make any. A better plan offers a limited number of sensible, low-cost choices.
- Offer Professionally Managed Diversified Portfolios. Many plans provide a list of investment choices and then leave it up to the participant to choose specific investments and create a sensible portfolio. A better plan provides participants with a series of professionally managed portfolios, or all in one asset allocation funds, each with varying degrees of risk.
- Ensure that Fees are Low and Transparent. Too often plans can be laden with fees without participants even knowing it. A better plan includes flat, per capita administrative costs that are paid by the employer, and investment expenses that are about 1% or less. These fees are clearly disclosed and easy for the participant to understand.
- Offer Employer Contributions. Every 401K plan should include some type of employer contribution, and a 401K matching program is a particularly effective way to encourage participation.
- Provide Participant Education. Instead of leaving employees to fend for themselves to determine if and how they should participate in the 401k plan, a better plan provides employees with access to an advisor that can provide education and advice.
These are just a few tips on how to optimize a 401K plan for the benefit of both the employer and employees. If you have any questions on optimal 401K plan design, please free to call our offices at (561) 491-0231.
