401(k) Plan Tips, 401(k) Plan Traps

401(k) plan installation and 401(k) plan maintenance can present problems for the unwary. This information on 401(k) plans will help you avoid them.

401(k) Plan Overview

401(k) Plan Tip: For a successful 401(k) plan each of the following six 401(k) plan functions must be well executed: design, investment, administration and compliance, recordkeeping, communication with employees and control of expenses.

401(k) Plan Trap: Rarely does a 401(k) plan service provider have expertise in all six functions. Mutual fund service providers, for example, may have expertise only in the investment function. Therefore, a consultant is usually needed to oversee 401(k) plan installation and prevent problems. A consultant can also provide alternatives to a 401k plan such as a Simple plan or a regular profit sharing plan, among others.

401(k) Plan Design

401(k) Plan Tip: A 401(k) plan must be carefully designed. A matching contribution is frequently used to encourage greater employee participation and decrease employer costs. 401(k) plans designed for smaller organizations must consider the possibility of the requirement of "top-heavy" contributions.

401(k) Plan Trap: Before a 401(k) plan is established, a survey should indicate the contributions that can be expected from employees. Without such planning, the 401(k) plan may require additional employer contributions, leading to plan redesign or termination.

401(k) Plan Investment

401(k) Plan Tip: Plan investment options must be carefully established and monitored. Providing investment information for employees, but not investment advice, is essential. Investment problems could lead to lawsuits by participants, difficulties with the DOL or other severe consequences.

401(k) Plan Trap: Few 401(k) plan investment alternatives may be offered, since it is often financially advantageous for the organization providing investment choices to limit them.

401(k) Plan Administration and Compliance

401(k) Plan Tip: 401(k) plan administration and compliance requirements must be assigned and monitored. A third party administrator will often be needed for this function since many 401(k) plan providers cannot provide the expertise required for plan administration and/or compliance. Nondiscrimination testing is only one dangerous area for which special expertise is required. A description of all necessary services should be indicated by the 401(k) plan provider when the plan is established.

401(k) Plan Trap: Contributions by "highly-compensated" employees must be monitored, since "excessive" contributions could result in large penalties by the I.R.S. or disqualification of the plan. Employers should not assume that the work of a third party administrator is correct and should review it.

401(k) Plan Recordkeeping

401(k) Plan Tip: A good tracking system is needed to ensure that 401(k) plan monies are properly allocated to the accounts of its participants.

401(k) Plan Trap: If recordkeeping is not properly maintained mistakes could occur that may ultimately result in plan disqualification by the I.R.S.. Employers should review records periodically.

401(k) Plan Communication with Employees

401(k) Plan Tip: Using matching employer contributions, improving plan design and strengthening employee communication programs can improve employees' appreciation and lower employer costs.

401(k) Plan Trap: Poor communication with employees could necessitate additional employer contributions to satisfy compliance requirements, jeopardizing the desire of the employer to continue the plan.

401(k) Plan Control of Expenses

401(k) Plan Tip: Expenses can arise from any of the five areas mentioned above. Employers should be cognizant of all expenses when plans are established and make provision for their periodic review.

401(k) Plan Trap: Investment charges can be difficult to ascertain and easily be "hidden", especially those within mutual funds . High or undisclosed expenses could endanger the plan's success.

401(k) Plan Further Assistance

  • If you are considering a 401(k) plan but have questions or need assistance, please complete our short form.

  • If you already have a 401(k) plan and would like a complimentary evaluation, please complete one short review questionnaire.

  • Please call us at 718-793-9885 for further assistance. Our web site home page. contains additional useful information about retirement plans.