​401(k) Plans

401(k) Plans Help Prepare Employees for Retirement, but CEO’s Must Look to the Specialists to Sweat the Details

Are your employees sufficiently prepared for retirement? The U.S. Social Security Administration estimates that the average American will need from 70 to 80 percent of his or her pre-retirement earnings to maintain their standard of living after they leave the workforce. The Washington, D.C.-based Employee Benefit Research Institute reported in late 2011 that retirement plans were available to 62 percent of workers, including those in middle market companies. But as defined benefit pensions (a fixed amount guaranteed every month, until death) become more expensive for companies to maintain, and therefore less common, executives are turning increasingly to benefits like 401(k) plans as an alternative retirement savings tool. The employer often matches these contributions, which are invested in various financial products. Obviously, the potential exists for more employees to benefit from a 401(k), but before employers decide to roll out a new plan, they should understand the increased responsibilities involved.

When a company includes a tax-deferred 401(k) plan as part of its benefit package, it assumes the role of a fiduciary, or legal trustee, of the plan, and it must comply with a maze of daunting legislative and IRS requirements. “That’s why it’s important to seek the counsel of a specialist,” says Joe Fortino, vice president and retirement planning consultant at Comerica Bank. “Companies realize that they can’t go it alone because the requirements are so complex. With a consultative partner who understands the fiduciary role and shares the responsibilities, an employer can focus on its own operations.”

Here are some examples of what a company must do to keep its 401(k) plan in good standing:

  • The annual IRS Discrimination Test requires employers to ensure that both highly compensated employees (defined for the 2012 tax year as those with income greater than $115,000) and non-highly compensated employees benefit equally from a company’s retirement savings plan. The rule states that the average contributions of highly compensated employees cannot exceed the average contributions of other employees by more than 2 percent. If the contributions of the highly paid employees are greater than that and the employer fails to correct the imbalance, the plan could lose its tax benefits. “The spirit and intent of this rule is to ensure that employers aren’t setting up these programs to benefit the owners or highly compensated executives and ignore the rank and file,” says Fortino. “The government lets you set up these programs and gives you tax advantages, but they have to benefit all employees, not just certain groups.”
  • As of August 2012, section 408(b)2 of the U.S. Employee Retirement Income Security Act requires employers to disclose all costs involved in setting up a 401(k) plan, whether they are paid by the employer or the employee. These can include mutual fund expenses, statement fees, costs associated with borrowing from one’s account, or distribution fees charged if an employee leaves the company.
  • Employers must produce a “Summary Annual Report” that breaks down plan contributions and expenses. They must also disclose their plan’s financial condition, investments, and operations on IRS Form 5500. A Summary Plan Description that spells out features including employees’ rights must be given to employees at the beginning of their eligibility period and at any time a plan feature changes.
  • As part of its fiduciary role, an employer must ensure that the investments it offers employees through its 401(k) plan meet certain standards for performance, cost, and risk. Companies must also regularly benchmark their plans with others in the marketplace to confirm the competitiveness of their features and fee structure.

Partnering with a knowledgeable consultant can help businesses avoid running afoul of the many rules and regulations involved in setting up and managing a 401(k). “The big benefit for an employer is that you have someone looking over your shoulder making sure that you are properly executing your fiduciary responsibilities,” Fortino says. “The cost of engaging a consultant is very little compared to the overall cost of offering this benefit. It can actually save money by keeping costs competitive and helping your company avoid fees and penalties.”

To learn more about establishing or managing a 401(k) for your company, contact Joseph Fortino at 248-645-4123 or jmfortino@comerica.com.

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