Perhaps the most attractive feature
of 401(k) retirement plans to employees is the investment opportunities it can
provide them. With 401(k) plans, employees have the opportunity to
significantly grow their retirement savings with various investment options. In
fact, through a 401(k) plan, employees often have the ability to make investments
that they wouldn't be able to make as individuals.
Most employers hire a mutual fund,
insurance company or bank to assist with the record keeping and administration
of their 401(k) retirement plan. But you'll often find that in order for your
plan provider to offer you those services, you must agree to offer investments
only from their portfolio of funds. This restriction can be a deal-breaker for
some companies, but for others, it works well. Check with your plan provider to
see what restrictions, if any, apply.
If you want more flexibility or a
different set of investment options, you can hire a third-party administrator
(TPA) to help with the record keeping and administration of your company's
401(k) retirement plan. TPAs have generally formed alliances with fund
companies, which allow the TPA to earn commissions, rebates or other incentives
for directing clients to use funds from "partner" fund companies. If
this is the type of arrangement you choose, be sure to ask what your TPA what
the relationship is and how this might impact your 401(k) plan in terms of
cost, options, etc.
There are also brokerage firms, as
well as some mutual fund companies, that will allow your employees to choose
any fund they like (yes, this means any fund in the whole world). The drawback
though is that having too much to choose from can confuse employees and prevent
them from enrolling in your 401(k) plan.
According to guidelines in Section
404(c) or ERISA, an employer must offer a "broad range of investment
alternatives." In order to achieve that specification, you'll want to be
able to present your employees with a diverse range of investment funds that
have different risk and return characteristics. Employees can minimize the
overall risk of the portfolio by diversifying their contributions into funds
with varying levels of risk and return.
Regardless of the investment options
available, it is important that plan participants are properly educated on how
your company's 401(k) retirement plan works. In particular, your plan provider
or investment advisor should explain what investment options are available and
explain how those options work, what the risks are, how selections are made,
etc.
We recommend that you work with an
independent investment advisor to identify the right type of 401(k) retirement
plan and investment options for your company.
If you want to start a 401(k) plan
for your firm, or are exploring the various investment options, contact the
401(k) experts at Synergetic Finance for a complimentary consultation.
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