It can be very beneficial for a business owner to set up a 401(k) plan to reward its employees, as well as be able to help employees save money for retirement. This can improve employee retention. Also, when adding a profit sharing or matching contribution to the plan, your company has the opportunity to benefit from some tax savings. Note of caution: By setting up a 401(k) plan, you open the door to another source of liability - fiduciary responsibility toward your employees. Consider these factors.
First, let's clarify who is a fiduciary. At the most basic level, a fiduciary is anyone that has discretion in administering and managing the 401(k) plan or controlling the plan's assets. Ordinarily the fiduciaries would consist of the trustee, investment advisor(s), the plan's administrative committee members, and the people who elect people to fill these roles. It is important to note that simply deciding to have a plan, determining what benefits to include, amending a plan, and terminating a plan are business decisions, and thus do not make a person a fiduciary - it is the person who takes the action to implement these decisions that is the fiduciary.
The responsibilities of these fiduciaries include:
- Taking action solely for the purpose of providing a benefit to plan participants and beneficiaries
- Performing their duties as described in the plan documents
- Following the plan documents
- Offering diversity in the plan's investment options
- Paying reasonable fees for the administration of the plan
How can you limit your liability?
- Document every decision, the process used to carry it out, and the reasoning pertaining to fiduciary responsibility.
- Give participants the ability to control the investment decisions in their accounts, but make sure to give them sufficient information to make informed decisions!
- Monitor the investment manager periodically to ensure that he is handling the plan investments prudently. This is required of an employer.
- Monitor the fees being assessed and make sure they are reasonable by having a plan comparison performed
The above steps are just a few ways to make sure that you enjoy all the benefits of providing a 401(k) plan to your employees and to prevent the plan from becoming a burden. There are, of course, other factors and concerns in maintaining a 401(k) plan, and you should contact your provider with any questions to make sure you have all of the information you need to make informed decisions.