Selecting and
Administering a 401(k) Retirement Plan
Purpose of Process (see below how HRnetSource™ can help):
401(k) plans are very popular and are offered by most companies. They allow employees to contribute to their retirement plan on a pre-tax basis, which lowers the employees tax obligation in the current year, while allowing the employee to save for future retirement. The purpose of this process is to:
- Select a 401(k) plan that is attractive to employees and applicants,
- Help ensure regulatory compliance, and
- Minimize administration costs.
Recommended Steps in the Process:
- Choose a preliminary 401(k) plan design. Often the insurance
broker can help you choose the plan design features (see the
process on Selecting a
Health Insurance Broker). Consider the following features:
- The performance of the investment options (funds) compared with the appropriate financial benchmarks.
- Frequency in which statements of account balance and earnings are distributed to employees (at least quarterly).
- Number and type of funds in which employees can invest their plan contributions. (usually five).
- Size and design of the company matching contributions, if any (companies typically match 50 cents on the dollar of employee contributions, up to 4% or 6% of the employee's salary).
- Years of service required before the employer matching contributions are vested (typically employer contributions are partially vested after one to two years of service, and fully vested after five or six years of service). Employee contributions are always fully vested (vesting means the employee can take these funds when they leave the company).
- Frequency in which employees can make investment changes (daily has recently become the most common frequency, although it's not a good idea to worry about a long term investment like a retirement plan on a daily basis).
- Amount of service required before a new employee is eligible to participate (typically 3 to 6 months).
- Loan availability (typically provided)
- Select a company to administer the plan. Determine if the Plan
Administrator can handle your preferred plan design features and
evaluate the following:
- Administrative and investment fee charges.
- Amount of assistance provided in maintaining regulatory compliance, such as providing the Summary Plan Description (SPD), discrimination testing, annual reporting (Form 5500), and tracking changing government regulations.
- Ability and success at managing fund investments (although
you can select separate money managers and plan
administrators, it is often simpler to have the two services
provided by a single company).
- Finalize the plan design features with the Plan Administrator.
- Obtain approval from top management on the plan.
- Review the Summary Plan Description for accuracy, which is
typically written by the Plan Administrator.
- Communicate the plan to employees and allow them to enroll.
Subsequent to the initial enrollment, allow employees to enroll
or change contribution percentage on a quarterly basis.
Investment changes can typically be made (depending on the Plan
Administrator) on a daily basis, by the employees communicating
directly with the Plan Administrator. The enrollment process
includes:
- Distribute a general announcement about the enrollment period, and where to obtain enrollment information.
- Communicate the information in company newsletter, the HR Intranet/Portal, and other company media.
- Arrange meetings with representatives from the investment fund managers to inform employees about the fund performance.
- Employees enrolling for the first time must complete a
form (either paper or on-line) designating their
beneficiary. Review the enrollment information to ensure the
proper completion.
- For paper-based enrollment, distribute copies of the enrollment forms to payroll and the Plan Administrator, file the form in the participant's shadow file, and enter the enrollment information into the HR information system. (See the Maintaining Personnel File process).
- For electronic enrollment, enrollment data is
automatically saved (and backed-up) in the HR information
system. From there it can be electronically transferred to
payroll and the plan administrator (see how HRnetSource™ Can Help).
- Allow loans to be submitted on a periodic (monthly) basis.
- File the Annual
Report (IRS Form 5500) with IRS, and distribute the
Summary Annual Report to employees (SAR) within the prescribed
deadline (See the Regulatory
Reporting process). Ensure the plan administrator discloses fees
and expenses as required.
- Review the Summary Plan Description with the Plan
Administrator on an annual basis, and revise, as needed.
- Process rollovers as needed. [A rollover is a transfer of
funds by an employee from another account (typically a previous
401(k) account) into the employee's current 401(k) account.]
Confirm the rollover amount and plan qualification of the
previous plan by reviewing the distribution documentation. If
the documentation is not adequate, instruct the employee to have
the previous employer certify the rollover amount and plan
qualification. If the funds were rolled into a transitory IRA,
the employee will need to confirm the rollover amount and
qualification of the former employer's plan and provide copies
of all the activity records of the IRA account.
- Process hardship withdrawals as needed. The regulations allow
employees to withdraw their funds while in service for certain
hardship reasons. Employees should be encourage to seek other
sources of funds, if available, because of the substantial
penalties for withdrawing money from the 401(k) plan before age
59 and one half.
- Educate and inform employees of their investment options on a regular basis. However, do not provide investment advise. (See related topic under Process Tips below.)
Publicize the 401(k) plan frequently (including fund performance, enrollment periods, and investment education). Encourage employees to participate. This may be especially challenging for younger and/or lower paid employees, to whom this benefit will not be as popular. Yet their participation is critical to passing the 401(k) discrimination tests and maintaining a qualified plan.
Pension plans, also called "defined benefit plans," are another retirement plan option. Pension plans have lost their popularity because they are highly regulated and therefore, difficult to administer and the cost of pension plans is greater than their perceived value. In addition, pension plans are difficult for employees to understand because of their complicated formula and benefit calculation rules. Less than 17% of large organizations and far fewer small/mid-sized organizations offer pension plans.
The Department of Labor
regulates retirement plan disclosure and documentation.
Proper plan documentation and communication, and structure of plan
investment options are important to limit employers' fiduciary
risk.
The funding policy statement outlines the plan's overall investment strategy and should include:
- The plan's investment goals and objectives;
- A description of the decision-making process for structuring the portfolio;
- The criteria for measuring performance and adherence to the plan's objectives.
The document should be reviewed and updated annually. Consult your financial advisor to ensure that your retirement plan's documentation is appropriate and reviewed each year.
Pension plans have traditionally discouraged workers from continuing to work beyond the normal retirement age by only paying pension benefits when an employee actually retires. As a result, employees often retire from one company to collect their pension and begin working for another company. The practice of encouraging employees to retire can result in a loss of key talent in the organization. This can be especially harmful with a short supply of skilled and experienced workers.
As an alternative, consider a phased retirement plan which will
allow retirement age workers to work part-time and receive some
retirement benefits.
HRSource™ and SelfSource™ help support retirement plan administration in several ways:
- Employees can view their retirement plan contribution level in
SelfSource™.
- Employees can enroll in 401k plan using SelfSource™ and make contribution rate changes during open enrollment.
- SelfSource contains a link to the retirement plan
administrator web site, where employees normally can make
changes to how their contributions are invested.
- Retirement contribution changes can be electronically
transmitted to payroll via the HRSource™ payroll interface.
- HRSource™ can generate employee benefit statements that itemize benefits (including retirement benefits), display the value of benefits, and tally benefit costs to calculate total compensation.
- HRSource™ provides alerts for upcoming retirement plan eligibility or ineligibility.
- Use the HR
Portal to help communicate upcoming enrollment dates and
encourage participation
