There are three core elements to a 401(k) plan, contributions, investments and compliance. Our goal is to help business owners optimize the benefit of their plan by providing innovative ideas and strategies for each core element.
Interpreting the IRS regulations can be a daunting task. For example, the definition of one term, compensation, is approximately 50 pages long. We set out with one objective in mind, “How can we use the Code in the plan design process to optimize benefits for our clients?”
Over the past 30 years, the standard 401(k) plan design has been an arrangement where if you defer x then your matching contribution will be y. If it’s slightly creative, there may be a profit sharing component as well. This methodology treats all employees the same and ignores the fact that employees are typically compensated on the value they bring to your organization.
- Not all employees have to be included in the plan. 30% of the eligible workforce can be excluded.
- Participants don’t have to get the same level of contribution. You can decide how much each one receives.
In order to maximize contributions, the optimal solution may include multiple plans where each plan has its own unique objective. Sometimes, this may be a stand alone 401(k) that includes a target group of employees, coupled with a separate profit sharing plan and layered with a cash balance plan. While this may be an administrative challenge for most firms, DCM has developed proprietary software and processes for the efficient operation of a multiple plan arrangement.
Rethinking the plan design of your firm’s 401(k) can easily transition it into a compensation planning tool, resulting in significant tax savings, possibly eliminating the annual audit requirement (for large plans), while maximizing the benefit to the business owner and key executives.
It has been our observation that most 401(k) plans are delivered by financial advisors. While many advisors may be an expert in financial planning for instance, or managing a sophisticated portfolio of securities, few have the expertise to manage all aspects of your firm’s 401(k) plan. As the business owner, you have a fiduciary obligation to your employees as a participant in your firm’s plan. When selecting an advisor to manage your 401(k) it’s natural to first turn to your trusted advisor, but this may not always be the prudent choice.
The regulations under ERISA (Employee Retirement Income Security Act of 1974) apply the prudent expert rule. If you are not an expert in the area of investments then you should consider hiring one. As the plan sponsor you are held to the expert standard, and judged accordingly. Selecting your trusted advisor who may not be an expert in 401(k) plans would also violate the principles of the prudent expert rule. One approach may be allowing participants access to a self-directed brokerage account and thereby access to your trusted advisor. The remainder of the plan’s participants, those not selecting the self-directed brokerage account, could be serviced separately by someone who is an expert in this field.
DCM can work you and your financial advisor to develop an innovative solution that is custom tailored for your organization, and the needs of your plan’s participants.
A 401(k) plan is entitled to tax favored status but to maintain this status the plan must satisfy the regulations outlined in Internal Revenue Code §401(a) and 401(k). Furthermore, since the plan is established for the benefit of participants it must also comply with the ERISA. Tax status qualification is under the jurisdiction of the IRS, and compliance with ERISA is under the jurisdiction of the U.S. Department of Labor (DOL).
We understand that for you to be successful you need to focus on your business, and not be burdened by the compliance complexities of your firm’s 401(k) plan. Your dedicated consultant at DCM has the expertise to navigate the IRS regulations so your plan can maintain its tax qualification status. DCM can also design and implement policies and procedures for effective compliance with ERISA. In order to minimize plan costs DCM provides e-communication services that comply with the DOL’s current and proposed regulations of electronic communication.
Contact us to see how DCM can provide an innovative solution for your firm’s 401(k).