Sponsoring a workplace retirement plan is hard. No one argues the fact that complying with ERISA law in order to help workers save for retirement is difficult. Because it is challenging, plan sponsors are prone to make mistakes. It isn’t uncommon for a plan sponsor to do something they aren’t supposed to, fail to do something they should, or just simply make bad decisions.
Retirement plan sponsorship is fraught with peril, so here are three bad decisions that sponsors regularly make and tips to avoid them. Share these with your business owner clients to help them successfully sponsor their retirement plan.
Thinking A Payroll Provider Can Administer A Plan
Every business owner wants to streamline and simplify their processes and operations. Efficiency leads to profit. That is why many plan sponsors think it is a good idea to have their payroll provider administer their retirement plan. They already have a working relationship, the payroll provider already has access to their numbers, and has proven themselves dependable; what could go wrong?
It takes more than just expertise in working with numbers and government regulations to successfully administer a retirement plan. The law governing retirement plans is vast and detailed and successful plan administration requires specialized knowledge and experience in the field. Most payroll providers simply lack the expertise necessary to administer a retirement plan without making mistakes or missing important things. Instead of working with a payroll provider, it is best to work with a company that specializes in workplace retirement plans.
Adopting An IPS That Is Not Aligned With The Plan Document
While an investment policy statement (IPS) is not legally required for retirement plans, most agree that it is essential. As an advisor, you understand the value of utilizing an IPS with your clients and can see why it is so important for a company retirement plan.
Deciding to adopt an IPS is a good decision for plan sponsors. The bad decision is adopting an IPS that is not aligned with the plan document. Legally, the plan document is the most important guideline for the running of the plan. Your clients need to review their plan document in detail before adopting an IPS. A well-structured, well-followed IPS does more harm than good if it conflicts with the plan document.
Choosing The Wrong Kind Of Plan
There are a lot of different options when it comes to tax-advantaged retirement plans. There are 401(k)s, cash balance plans, traditional pensions, SEP IRAs, safe harbor plans—the list could go on and on. Each plan’s differences make it uniquely suited to different companies and different workers. Does the company mostly employ young, part-time workers? Does the business owner need to make up for lost time in saving for retirement? Can the company afford to make regular employee contributions or does it require more flexibility?
The answers to these questions help to determine the best retirement plan for a specific company. One mistake plan sponsors make is thinking that all retirement plans are equally beneficial. That can lead to making a bad decision and the company ends up with a retirement plan that does not serve its needs or the needs of the workers well. To avoid such a big mistake, it is imperative to work with a pension specialist when choosing and building a retirement plan.
If you have clients that sponsor retirement plans, help them avoid these bad decisions. Teach them the importance of prudent plan design and administration. If you need help, email me at firstname.lastname@example.org. We can partner together to ensure that your clients’ retirement plans benefit them and their workers instead of causing problems.
About Kenny Phan
Kenny Phan is a Managing Partner/Pension Consultant at FinancialFocus Retirement Plan Services. He works as a pension specialist who partners with financial professionals to design and implement pension plans. His area of expertise is customized defined benefit, defined contribution, and 401(k) plans. Serving financial advisors and businesses around the nation, he is supported by FinancialFocus Retirement Plan Services. Together, they provide comprehensive plan design consultation, administration, document installation, compliance testing, as well as IRS and DOL reporting for qualified retirement plans.