As the manager of a small to medium sized business, you’ve generally got a lot of responsibility on your shoulders. And as it happens, when it comes to weighing your 401(k) plan options - it’s really a case of “How much more responsibility do you want to take on?”
Let’s jump into the basics. At the highest level, you can put SMB 401(k) options into one of two buckets:
- “Do it for me” 401(k)s:
- This means a partner who provides a turnkey plan, in which you have control, but don’t have to deal with day-to-day tedium.
- “Do it yourself” (DIY) 401(k)s:
- This type of option can help you save a little money, in exchange for doing much of the work (and taking on the legal liability) yourself.
With programs like CalSavers putting pressure on California small to medium sized business managers to kick 401(k) plans into gear, the 401(k) decision becomes even more important. As a leader, you’ll have to find the right balance of value and service for your situation.
With that said, here are the details on DIY plans:
DIY Small Business 401(k)s
First, you have to get a sense of how much work is required to offer a 401(k). How much time will you spend tinkering with it? Below is just a partial list of your key fiduciary responsibilities. You be the judge.
With the DIY option, you can cut some costs (see this post for a discussion of 401(k) costs) if you take on most of that work as well as the legal liability for any mistakes.
But here’s the kicker - if you go the DIY route, you had better be 100% bought in. 401(k) plans aren’t simple to manage, and worse, they’re full of legal pitfalls that can easily overwhelm anyone who isn’t an expert.
Less-than-ironclad management often results in compliance issues and the potential for audits. Overall, 401(k)’s are a bit like explosives - if you don’t really know what you’re doing, things can easily go wrong.
Ask yourself, “How much time and energy do I want to spend becoming a 401(k) expert and managing the company’s 401(k)?”
If you’d rather focus on other things (like growing your business) then we highly recommend considering a “do it for me” small business 401(k) option. This means that 3(16) fiduciaries will manage much of the administration of your plan - reducing your workload and legal liability.
"Do it for me" Small Business 401(k)s
DIY is tough. Luckily, there are options that will do most of the work for you (and take on a lot of the legal liability). These solutions come with retirement experts that take care of the day-to-day operations, so you can focus on other things. They’ll also handle almost all the legal rigamarole and essential government filings for you.
In fact, not having to deal with something like employee contributions saves you 5 hours of work a week.1 Imagine everything else you could get done...
You’ll still need to be involved somewhat – you’ll need to select the right provider and make a few simple decisions about how you want the 401(k) to work. After that, they’ll do the rest, leaving you to sit back and monitor them from time to time. So, if you’re not interested in becoming a 401(k) plan administration expert, a “do it for me” 401(k) is a pretty smart choice.
But, finding out exactly how much work and liability providers will take on can be a challenge (all providers say they make it easy for you). Luckily, there is one simple question you can ask that will help cut through the marketing hype and get to brass tacks…
That simple question is: Are you a 3(16) and 3(38) fiduciary?
If they say no…
Then they likely won’t sign your IRS forms, won’t review and document hardship withdrawals, and may not take on liability for selecting investments, etc.
If they say yes…
Then you’ve found a solution that will likely take on most of the work for you and, hopefully, indemnify you in writing for much of the legal liability.
DIY 401(k) options for SMBs##
A DIY solution could be a good option if you are really familiar with the 401(k) market, 401(k) investments, and 401(k) plan administration rules (and oh boy, are there are a lot of them). This is like remodeling your kitchen yourself – you’ll be responsible for selecting the materials and assembling them to create a custom solution for you.
If you have a ton of time to spend (and the right expertise), you can save a little money by doing everything yourself.
But, to be clear, you’ll have a lot of work to do and it can be rather time-consuming. Here’s that partial list from earlier:
Failing to properly perform and document any of these (or other) tasks can result in significant penalties. So, cross those Is and dot those Ts. Well… you know what I mean.
If, after all this, you are eager to do it yourself, then you might want to consider a low-cost small business 401(k). Below are typical costs from a few different providers (again, our stodgy lawyers are making me hide their names, but email me and I’m happy to make referrals).
So what type of 401(k) do you think is best for you? If you’ve set one up yourself and manage the day-to-day operations yourself, how easy was it?
- Estimate made by the ForUsAll Payroll Operations Team and assumes 350 participants.