Business 401(k) Services / 401(k) Plan Optimization

4 Mistakes Small Businesses Make Choosing A Retirement Adviser

So, you’ve begun thinking about adding a 401(k) to your business’s benefits package. Congratulations! It's an attractive benefit for your company, your employees and you. There are many important decisions to be made when launching a 401(k) plan and the following recommendations will help you get off to a great start.

Perhaps you've done a few Google searches for “how to start a 401(k) for my business” that didn't seem to serve up easy answers. Or perhaps you’ve started and stopped your search a few times, even though it's a high priority on your to-do list. Well, you're not alone. Whether you've established 401(k) plans previously or this is your first time, it's common to get stymied by the number of providers and all the important decisions that come with setting up a plan.

Start By Choosing Your Retirement Adviser

Choosing a retirement adviser is the single most important decision that you can make for your 401(k) plan and a great place to start. Their role can vary broadly, so choose wisely. Once you select an adviser, they can help you navigate the process and the other service providers you’ll need to operate your plan. While an adviser will greatly simplify your process, they will also play a critical role in the overall success and quality of your 401(k) plan.

Below are four of the most common missteps we see along with some best practices to follow to find the right adviser for your company.

1. Choosing Someone I Know And Trust Seems Like A No-Brainer

Choosing someone you already do business with, like a friend or family member, can feel like a lower-risk decision and save you some time. A friend or family member likely has good intentions and wants to help. But there are common pitfalls with this scenario which you can avoid by asking these two questions:

  1. Is managing 401(k) plans for small businesses a primary focus of your practice?
  2. How many retirement plans do you manage today?

If they want to be helpful to you because of your existing relationship, but this is not their area of focus and expertise, they probably aren’t the right choice for your business. Ideally, the adviser you choose will manage at least 10 plans and consider this an area of primary focus for their practice.

2. My Payroll Provider Seems Like A Convenient Choice

Businesses using a payroll company have probably come across offers from their provider to “help” you set up a 401(k). They offer to set up your 401(k) as a convenient service—and to hopefully reduce your likelihood of switching payroll providers. This is a smart strategy for them, but what about your business?

Choosing a retirement plan adviser is the single most important decision that you can make for your 401(k).

Payroll companies require businesses to have a plan adviser in place or they will assign one to you. The adviser they select for you is likely based on the volume of business exchanged between the two companies and not based on what is the best fit for your business.

Knowing that the adviser is the most important decision you can make, you’ll want to ensure that you understand their resources and the expertise they offer to manage your plan.

3. I Can’t Go Wrong If I Choose A Big, Well-Known Brand

Like most things in life, not all advisers are created equal. Large broker/dealers tend to have a national presence and big name. You might also go with the local guy—the type of person you can look in the eye when you make a decision. While there’s no argument about the importance of a smooth start and single point of contact for your 401(k), the adviser’s proximity is only as good as his or her ability to serve as an ongoing resource to educate the team and administer the plan. Similar to the friend or family member, ask them if small business 401(k) is their focus and how many plans they manage to understand their experience and ability to administer your business’ plan.

Advisers can often be broken into three categories:

  1. Large broker/dealers: These advisers are generally connected to big Wall Street firms. Their role is to sell you products. Historically, they have not been fiduciaries, so the products they recommend did not have to be in their client’s best interest. This is different under the DOL Fiduciary rule, but beware of BICE contracts.
    Ideally, the adviser you choose will manage at least ten plans and consider this an area of primary focus for their practice.
  2. Local adviser, affiliated with national organization: This local adviser appears to provide services independently; marketing and promoting under their own business. More commonly, however, their services are provided through a larger national affiliation that is invisible to you. Despite their appearance as an independent adviser, their affiliate network can create some of the same conflicts of interest issues as a broker/dealer.
  3. Local adviser, without a national affiliation: These advisers are not part of a larger national network. Since they are not associated with a large brand, they may have slower response times for you and your employees, and a lack of 401(k) expertise if they don’t specialize in retirement plans.

The business structure for each of these adviser types is important because it affects the fees you pay, the investment options offered, and in many ways, determines whether the advisers are looking out for your business’s best interest or their own.

4. Do I Need To Have A 3(38) Investment Manager?

If you decide to select a 3(38) Investment Manager, your company 401(k) plan will have the highest level of fiduciary protection under law. A 3(38) Investment Manager will take on your legal responsibility for recommending, selecting, and updating your investment lineup, which helps to reduce your liability as a business owner.

When it comes to retirement advisers, choosing the wrong one could have a significant impact on the level of personal liability you assume for the 401(k) plan. If reducing your risk is important to you, make sure you consider hiring a 3(38) Investment Manager to accomplish this. You’ll still be an acting fiduciary on the plan, with other duties not related to the investment choices.

It’s no secret that establishing a 401(k) plan is one of the best benefits that you can offer your employees. These four considerations can help you get you off to a smooth start with your adviser, so you and your employees can begin reaping the benefits. If you still have any questions about starting a 401(k) for your company or would like more detail about the process, please contact a Fisher 401(k) Retirement Plan Consultant.

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