It's possible to set up and maintain 401k plans in-house, unless you're a large company with an adequate accounting
department, the detailed work involved is probably not worth the effort. Nevertheless, having a basic understanding
of how to set up a plan will help you more effectively choose a 401k plan provider.
Generally speaking, there are two main aspects of setting up and maintaining a 401k plan: administration and record-keeping.
401k Administration
401k administration primarily concerns compliance testing. Compliance testing is required to insure that employer contributions do not favor highly-compensated employees or exceed tax deductible limits.
It's extremely important that compliance testing is performed accurately, since noncompliance can lead to severe tax penalties and even plan disqualification.
Record-keeping
401k record keeping involves recording every transaction made. Primarily, these include contributions and account withdrawals.
Pension plans are most often set up through insurance firms, mutual fund companies, or third-party 401k plan administrators. Each of these providers has specific advantages and disadvantages, so you'll need to choose wisely for your firm.
Insurance Companies -- Pros
- Best for administration of complex plans for medium-sized firms.
- Unlike in the past, today's insurance firms offer a very wide range of investment options, including mutual fund investments for higher growth requirements.
Insurance Companies -- Cons
- May be on the expensive side for smaller companies that have simple requirements.
Mutual Fund Companies -- Pros
- A good choice for medium-sized firms (those with investment levels of at least $50,000 per year).
- Most firms have prototype plans available, with relatively low start-up and yearly costs for simple designs.
Mutual Fund Companies -- Cons
- Less appropriate for designing complex plans.
Third Party 401k Administrators (TPAs) -- Pros
- Especially good for smaller firms that may not receive as much attention from mutual fund or insurance companies.
- Employers using a TPA can pick and choose investment options across multiple companies, while those with mutual fund and insurance firms may be more limited in their investment choices.
Third Party 401k Administrators (TPAs) -- Cons
- Tend to be very small operations. This means more work on your part to check references to make sure the company is a reliable provider.
- Deal only in developing and administering pension plans. They do not invest pension funds, although they can suggest mutual funds or money managers you may want to contact.
