Author Topic: Designing an ideal 401K plan for small business?  (Read 1749 times)

Rmt

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Designing an ideal 401K plan for small business?
« on: May 06, 2015, 05:01:47 PM »
One of my friends is in a job position which can influence which 401K provider their small business can move to.

If they look at moving to Vanguard 401K, what features should they look for to maximize the benefits for their employees (their owner is an employee too).
Looking for things like: after-tax contributions to 401K, available Roth 401K, in-service distribution without hardship

It will be also great if someone, who has gone thru this change, or assisted their company in moving to a better 401K provider, can chime in.

Thanks!

Rmt

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Re: Designing an ideal 401K plan for small business?
« Reply #1 on: May 13, 2017, 08:56:59 AM »
It took a while, but my friend is finally helping change the 401K provider at his company.

What features in a 401K are beneficial for early retirees? after-tax contributions to 401K ?

Systems101

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Re: Designing an ideal 401K plan for small business?
« Reply #2 on: May 13, 2017, 05:15:58 PM »
Let's be clear: I haven't done this as part of my job, but I have read multiple 401k (and 403b) plans cover to cover for various reasons.

(1) Make sure it's a safe harbor plan, if at all possible.  This will - I think - require some matching % by the company.  It should also help the company reduce compliance costs.  For employees, this allows what would otherwise be highly compensated individuals (set by salary amount or # of people depending on various things) to contribute the maximum amount without various quirks and potential issues of refunded money for those individuals.

(2) In service withdrawals: you noted this, and I agree, but check both (a) how often they are allowed - preferably at least once/6 months, better if more frequent is allowed and (b) What is the fee, if any?  Note also this means that the 401k has to hold after tax in a separate listing (not separate account, but they have to track sources to be able to do these correctly - some bad 401k providers don't do that)

(3) Contribution amounts: What % can be contributed before tax and after?  My plans have had some strange limits, so think about this and how could someone with a reasonable salary still get very high toward the yearly limit?  If the after tax is limited to 10% or 20%, it may be impossible to use that to maximum benefit.  Why it isn't possible to set either before or after tax to 100% is beyond my understanding.

(4) How specifically does matching work?  Some people want to do all before tax (and all after tax) at different points in the year, with the assumption that the after tax part is still matched.  Also, if you hit the limit in September and don't do after tax (or don't do any) contribution after that point, is there a "true up match" [I think this is the "term of art" for the feature] later in the year to make it as if the person contributed the amount more evenly in the year (or do they just lose those dollars - and thus have to plan more carefully across the year)?

(5) How do bonus contributions work and how are they matched?  This interacts with #4, and it can be VERY challenging to max our your 401k and get the max match if there is no true up and the bonus is received late in the year (my current situation is like this - argh)

(6) What can be transferred into the 401(k)?  Can you bring in an IRA? Another 401(k)/403(b) [or really any 401(a) plan]? All should be possible.

(7) Include Roth 401(k)

(8) Eligibility options: Is there a delay to matching (bad) or delay to when you can first contribute (bad)?  Any vesting period (like on a match) can also interact with in-service withdrawals in poor 401ks, so needs to be looked at/questions asked.

(9) Low cost options available (obviously not a problem with Vanguard, but needs to be included in an overall requirements list)

(10) Make sure the match occurs with the paycheck.  Some companies will do a match on like Jan 1 of the following year, and that basically steals away potential growth from the employees under the guise of ensuring they get the full match.  Better to have a "true up" if someone doesn't contribute evenly.

(11) Consciously consider if there is fee equalization.  I am NOT a fan of this, but it's becoming more popular.  IMHO this is not a great thing for folks into low cost funds.

IMHO Bonuses if:

(a) You can specify a precise dollar amount to contribute instead of just an integer percentage

(b) Auto-enrollment / auto-increase...but this gets into a very different thing than optimizing for early retirees.




Paul der Krake

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Re: Designing an ideal 401K plan for small business?
« Reply #3 on: May 13, 2017, 05:48:06 PM »
What I want for ME, selfish optimizer:

- let me contribute up to contribute up to 90% of my paycheck on day 1 of employment
- generous match, immediate vesting
- safe harbor in case the company starts hiring people who don't contribute
- after-tax contributions (not Roth), in-service rollovers
- no fees now, no fees after I leave the company
- Institutional and Institutional+ Vanguard funds
- let me rollover all of my IRAs

What I want for OTHERS, as an Omniscient Public Policy Wonk:

- all of the above, plus
- opt-out, not opt-in,
- training explaining why this stuff is important
- limited choice of diversified funds
- auto-increase program
- make it hard for people to take loans against it

Systems101

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Re: Designing an ideal 401K plan for small business?
« Reply #4 on: May 13, 2017, 05:51:07 PM »
- no fees now, no fees after I leave the company
- training explaining why this stuff is important

+1 each... important items I missed.

Babybalrog

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Re: Designing an ideal 401K plan for small business?
« Reply #5 on: May 15, 2017, 08:14:26 AM »
I totally agree with all that's being said.

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(7) Include Roth 401(k)

(8) Eligibility options: Is there a delay to matching (bad) or delay to when you can first contribute (bad)?
I defiantly like my Roth 401k at my job. Nice plus if I can stay in a low tax bracket. Which means I have to still make traditional 401k contributions to lower my AGI. One thing I find very useful (if a bit cumbersome) is I can set my Auto withholdings rate (25%) to my Traditional 401k, but i can submit a one page form to make a "one time" special contribution. For example I get to the end of the year, and the last two paychecks I want to put Roth instead of Traditional. I don't have to change how my contributions "normally" behave. I just submit a one time form for those two months.

(8) For me I obviously want both NOW! For others you should defiantly be able to contribute immediately. But I may let the vesting take 1 year, just to weed out all those people who leave after a month. 
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(4) How specifically does matching work?
As far as I know the IRS mandates that the match is pretax, but I could be wrong.I would say there is no Match on after tax contributions. Those "Technically" aren't being made by the employee, but are a salary reduction agreement that the employer then makes the contribution. I could very much be wrong. As long as you don't have people making over 300k the 18k limit is enough to get your 6% match. For me, I guess I want the company to set 6% of my salary into my account on January first each year =) Wake County NC, makes strait 5% contributions to the 401k regardless of if the employee puts in anything. For normal people, I would structure the match as something like 0.5% per % for the first 12% (6% total). To Hopefully encourage more savings, but since I've never heard of a company doing this the IRS may not let you.
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(b) Auto-enrollment / auto-increase...but this gets into a very different thing than optimizing for early retirees.
As long as you can opt out, who cares for early retirees. Better to do it for the 90% who can't save by themselves.
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(11) Consciously consider if there is fee equalization.
I'm not sure what that is. But something for you to look into is trying to get a flat fee instead of a % assets fee. That's what my company does. We pay $35/year in fees, but we use to pay 0.5%. This is not the Mutual Funes/ETFs but the account management fees. As somebody with over 7k in the plan I considered this a HUGE win. Umm, maybe it was 0.05%/year, still a win =)





Systems101

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Re: Designing an ideal 401K plan for small business?
« Reply #6 on: May 15, 2017, 09:37:41 AM »
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(11) Consciously consider if there is fee equalization.
I'm not sure what that is. But something for you to look into is trying to get a flat fee instead of a % assets fee. That's what my company does. We pay $35/year in fees, but we use to pay 0.5%. This is not the Mutual Funes/ETFs but the account management fees. As somebody with over 7k in the plan I considered this a HUGE win. Umm, maybe it was 0.05%/year, still a win =)

It's a term of art in the 401(k) world, and yes, your additional comments are right on point as to how does the administrative cost of the 401(k) get covered - what is most appropriate in terms of balance of costs on the company and the participants?

As far as fee equalization: Imagine a 401(k) where 50% of the money is in low cost funds and the other 50% is in target date funds.

In both cases, a cut of the fees in the underlying funds may be being paid back to the 401(k) administrator to cover their costs.  (There are some employers that directly foot the bill, but others spread the cost across the employees)

In the scenario above, something like 75% of the administrative fees will be paid by those in the target date funds, simply because they are higher fee funds (as they are funds-of-funds that also have to pay the costs to the underlying index funds they use). 

Some consider this imbalance unfair.  Others would consider it appropriate to charge more of those that want the additional service. 

Fee Equalization usually results in a dollar fee (above and beyond the fund cost) on the people invested in low cost funds, and a "rebate" is provided to those in the target date funds.  This result in a "more equal" fee being applied across all participants in the 401(k).  [Note this doesn't mean the fees are then totally equivalent.  It means the administrative "kickback" from the funds to the 401(k) administrator is equalized to the dollar amount rather than equalized to what the funds can afford to kick back based on their own fees... so expenses might be 0.04 and 0.08 and would become more like 0.045 and 0.075 just to make up numbers]

Another method would be like what you describe with everyone being charged a flat fee (or a % of assets).  All of these are various methods of spreading the charges of the 401(k) across the participants... again, I said "consciously consider" because it's really a good discussion on what is "fair" - and the actual dollar amounts involved and other options to spread costs really requires the investigation by the individuals who have access to all of those details on what options are really available or even necessary to investigate (which means the OP's friend and the person from Vanguard need to talk about it)