Common Pitfalls to 401k plans

Setting up a 401K plan is a great way to provide employee benefits and at the same time create some great tax deferral opportunities. However there are some things that need to be considering when starting up a plan. Many of these are items that your plan provider usually does not mention.

1. Fiduciary Responsibility: As a trustee of a 401K plan, you have a fiduciary obligation to the plan. Meaning that you are personally liable for this obligation. As the investment adviser to the plan you are have a responsibility to the participates, to providing the tools for investment advice, monitoring of the plan, replacement of money managers and selecting the funds the plan will have. This is a major responsibility that most 401K plan trustees have no idea about. Since the liability is a fiduciary responsibility a plan trustee is putting their own personal at risk by developing a 401K plan.

2. The Middle Men: It is important to know which organization are responsible for what with respect to the plan. Every plan usually has multiple companies involved. They are the plan administrator: the company that handles the record keeping of the plan. The custodian: the company that holds custody of the plan assets. The money managers: these are the organizations that are handling the actual investment funds. The plan advisors: This is organization that provides the guidance and investment knowledge for the participants and the trustees. It is important to know who is who and understand what each of the companies are actually doing for the plan and what their fees are. If you are paying fees to a plan administrator, but you do not know who they are or what they are doing – then you have an issue! You need to maximize the services that you receive since the plan is paying for them!

3. Tax Filings:Who is preparing the 5500? And do you know when it is due? This is a big concern as the IRS penalty for a late Form 5500 filing is $15,000. That is a big number. You need to know who is preparing the form (typically this is the plan administrator) and when they are mailing it to you for signature and filing. People would be shocked to learn about the number of companies that have a completed Form 5500 that is unsigned and not filed sitting in an old stack of mail because the plan trustee was not expecting the 5500 nor did they even know that they had a filing requirement. The IRS is making a point to crack down on non-filers and is being aggressive with issuing out penalties.

4. What are those 12b-1 fees? A 12b-1 fee is an extra fee charged by some mutual funds. The fees are used to cover promotion and marketing expenses related to the funds. The concept was that if the fund was advertised more and more people invested in the fund, the overall fees would drop and thus make it cheaper for everyone. However in practice, this theory has not been substantiated. Mainly these fee is used to reward intermediaries for selling a fund’s shares, thus they do nothing to enhance the performance of the fund. Some companies will credit this fee back to the plan in order to reduce the overall costs of the plan.