The 401-k plan – for better or worse – has become the primary method for Americans to accumulate funds for later in life. And despite a few shortcomings, the fact is 401-k plans still offer big benefits: high contribution limits, tax benefits, loan access, Roth options, employer matching (sometimes) and more. Perhaps the biggest benefit is payroll deduction. Forced savings can make all the difference in our spend first, save later society. But some plans are just better than others. If you are an employer who offers (sponsors) a 401-k plan, here are three pillars that will ensure you have a solid plan:
An excellent fund line up: Diversification and low cost matter most. Be sure to offer funds from all asset classes, divvied up by size, style and geography – using both regular funds and ETFs with an emphasis on index funds.
Reasonable fees: Fees include – but are not limited to – fund expense ratios, recordkeeping, administration, asset management etc. Know what they are and keep them low (1% or lower “all in” if possible). It is now an ERISA requirement that fees be reasonable.
Transparency & open disclosure: A big change that took place in 2012 was fee disclosure regulations. Each provider must disclose information about fees charged and services provided for those fees - and although the 401-k providers generally prepare the statements, in the end the Department of Labor hold the plan sponsor (employer) responsible for the disclosure.
Just as we review our own personal financial goals and investments, employers (sponsors) that offer 401-k plans should do the same on a regular basis. And the three pillars: your fund lineup, reasonableness of fees, and level of transparency & open disclosure are a great place to start!
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