Employee Retirement Plans

Employee Retirement Plans

How 401k Plans are Established

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According to the IRS, a 401K plan is a qualified profit-sharing plan that will enable employees to contribute a portion of their earnings into individual accounts. Employees will willingly defer a set amount of their salary that will be excluded from their taxable income; employers can also contribute to employee 401K accounts in matching contributions for retirement.

401K Plans

The purpose of a 401K plan provided by an employer in a nutshell is this: An attractive 401K plan can serve as a benefit to draw and retain skilled staff members. In a struggling economy, employees may be more likely to choose a company that offers long-term benefits in retirement investments.

It's possible to set up and maintain 401K plans in-house. But 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.

Unless managed in-house, all companies will pay for the administration of their 401K plans. Many firms pass on these costs to the 401K plan members which are usually not transparent on the employees' end-of-year statements. However, employers can protect employees by selecting the most cost-efficient method and administrator.

Generally speaking, there are two main aspects of setting up and maintaining a 401K plan:

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.

To remain compliant, 401K administration must monitor:

401K 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.

Federal Rules and Regulations

The Federal government takes management's role in providing safe and transparent 401-K's to their employees very seriously. According to their website, "Plan fees and expenses are important considerations for all types of retirement plans. As a plan fiduciary, you have an obligation under ERISA to prudently select and monitor plan investments, investment options made available to the plan's participants and beneficiaries, and the persons providing services to your plan. Understanding and evaluating plan fees and expenses associated with plan investments, investment options, and services are an important part of a fiduciary's responsibility. This responsibility is ongoing. After careful evaluation during the initial selection, you will want to monitor plan fees and expenses to determine whether they continue to be reasonable in light of the services provided."

Fee plans and expenses are complicated and you can find complete details regarding each type of investment on the government's website at http://www.dol.gov/ebsa/publications/undrstndgrtrmnt.html.

What types of companies administer 401-K accounts?

Insurance company


Mutual fund Company


Third party 401K administrators (TPAs)


401-K Plan Administrators do not advertise their fees. It is up to the employer to negotiate with the different providers. Some may waive one fee but increase another. A good way to judge is to assume a participant has $10,000 in his account at year's end and his stocks, mutual funds or T-bills gained 3% or $300. How much of that $300 is the participant going to realize? This is where the cost per participant can be calculated in real terms.

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