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Key factors to consider when choosing a retirement plan

Gain a solid understanding of basic retirement plan design principles and parameters to effectively manage plan costs and decide on a plan that works for your business. There are four main considerations when it comes to choosing a retirement plan: Competitive bidding, plan automation, plan design, and cost considerations. Read on to learn more about each consideration before selecting a plan.

Compare plans

To better assess your options, you should compare options from different plan providers. This will help you control costs when setting up a 401(k) plan. Different providers might excel in different areas, like working with small businesses of a particular size or offering certain investment options. By exploring your options, you will learn about the strengths and weaknesses of various plan providers while finding the best possible solution for your business.

  • Learn about provider strengths and weaknesses
  • Ask pointed questions about services and related costs
Plan automation

While retirement planning can be complex, technology is making it easier. There has been a tremendous shift toward automated plan features in recent years. Automatic plan features include:

  • Auto-enrollment: Each participant is enrolled in the retirement savings plan unless the participant “opts out.”
  • Auto-escalation: The savings amount is incrementally increased unless participant elects otherwise.
  • Auto-rebalancing: The plan automatically rebalances investments unless the participant elects otherwise.

You can typically choose whether to implement various automatic plan features. Implementing some automation features can lead to greater participation rates among your employees, higher deferral rates for yourself, and better investment decisions. However, it’s important to remember that automated features are only as good as the plan design features. For example, too low of a default deferral rate can result in employees contributing less than they would have voluntarily contributed, while too high of a default deferral rate can result in employees simply opting out of the plan.

Plan design considerations

There are several factors to take into account when considering your retirement plan options. 

  • Participation criteria: In most cases, you must offer participation if the employee is at least 21 years old, or has worked for you for more than a year.
  • Contribution allocation formulas: In some retirement plans, o all employees who participate receive the same percentage of their salary contributed towards their retirement savings–regardless of their position. Other plans allow for the owner and senior management to contribute a larger percentage of their salary toward their retirement savings. 
  • Potential use of “Safe Harbor” design options: Safe harbor designs will allow you to avoid certain types of compliance testing, whereby the IRS requires that retirement plans don’t unfairly benefit higher ups. Generally, a safe harbor design includes:  
    • Nonelective contributions: The employer makes nonelective contributions on behalf of each employee, regardless of whether the employee is participating in the plan.
    • Matching contributions: Generally, the employer makes matching contributions of 3% of employees' eligible contributions.
    • Automatic enrollment: This design includes an auto enrollment feature for new eligible employees in which a predetermined amount of their salary is deferred to the plan unless they opt out.
Cost considerations

It's important to have an understanding of all the costs involved in setting up a retirement plan. Costs will vary based on the type of plan you select, and not all listed below will be included. Keep these considerations in mind and be sure to ask for a comprehensive outline of costs for the plan you choose.

  • Explicit costs
  • Funding
  • Recordkeeping and plan administration
  • Trustee/custodian fees
  • Consulting services
  • “Imbedded” costs
  • Investment-related fees/expenses
  • Human resources

Now that you have a better understanding of the key factors to consider when selecting a retirement plan, it's time to learn about the questions you should be asking retirement savings providers.