In Episode 49 of The 3 Wins Podcast, we kick off a new series on 401k plans. We discuss their importance, how to customize them for your company and employees, and what you need to know about managing them effectively.
Let’s dive in!
Today’s episode is brought to you by our new book, Collaboration Effect on Profit: Overcoming Founder’s Syndrome to Achieve Sustainable Success—now available on Audible.
Key Takeaways from Episode 49
1. Introduction to 401k Plans [00:00:22]
[00:00:48] 401k plans are specifically for for-profit companies
Not-for-profit companies and government entities have their own types of plans
[00:00:58] They are investment accounts allowing employees to invest pre-tax dollars from their paychecks
This reduces the employee's taxable income for the year
[00:01:06] Growth in these accounts is tax-deferred until retirement
Taxes are paid when funds are withdrawn, typically in retirement
[00:01:11] The goal is to help employees achieve financial independence and retirement readiness
2. Roles in 401k Plan Management [00:02:00]
[00:01:57] Government: Sets rules through IRS code Specifically, section 401k of the Internal Revenue Code [00:02:17]
Company: Offers the plan (optional but recommended)
Responsible for plan design and management
[00:02:25] Employees: Participate in the plan
Need to understand and utilize the plan for their benefit
[00:02:51] Support Group: Includes advisors, record keepers, administrators, accountants, and legal teams
Advisors: Co-fiduciary with the company, responsible for investment menu
Record keepers: Track performance and account details
Administrators: Handle compliance, forms, and notifications
Accountants: Ensure financial accuracy
Legal teams: Navigate ERISA laws and regulations like Secure 2.0
3. Best Practices for 401k Plans [00:05:00]
[00:05:38] Design plans based on employee demographics
Consider education levels, income ranges, and job types
[00:06:28] Consider automatic enrollment and auto-increase features
Help overcome employee inertia in joining and increasing contributions
[00:10:28] Regularly review and update plan design
Companies change over time, so should their 401k plans
Recommended review frequency: quarterly or semi-annually
[00:12:14] Establish a formal investment committee with a charter
Ensures proper documentation and decision-making processes
Should have a legal document (committee charter) with approved members
4. Investment Considerations [00:13:41]
[00:19:06] Aim for about 15 funds in the investment lineup
Too few limits options, too many confuses participants
[00:20:02] Include a mix of equity and bond funds
Equity: Ownership in companies (stocks)
Bonds: Debt investments
Consider offering various categories: large, mid, small-cap; value, growth, blend; domestic and international
[00:27:24] Consider offering target date funds for a "do it for me" approach
Automatically adjusts risk over time as the participant approaches retirement
Helps prevent inappropriate risk levels near retirement
5. Fee Management [00:15:12]
[00:15:42] Ensure all fees (advisor, record keeper, administrator, fund fees) are appropriate and transparent
Fees should be in line with market rates and government expectations
Participants need to understand they're paying fees for fund management
[00:16:33] Regularly review and benchmark fees
Avoid scenarios where fees are disproportionate to services provided
6. Automatic Features [00:28:08]
[00:29:06] Automatic enrollment helps employees start saving
Overcomes inertia in joining the plan
Employees can opt-out if they choose
[00:29:58] Automatic escalation gradually increases contribution percentages
Helps employees save more over time without active management
Can be designed to match company contribution limits
Additional Resources
Check out our new book, Collaboration Effect on Profit: Overcoming Founder’s Syndrome to Achieve Sustainable Success, here: https://legacyadvisorypartners.com/collaboration-effect-book/
Download our FREE whitepaper, “The 3 Wins: How to Unleash the Collaboration Effect on Profit in Your Company,” here: https://legacyadvisorypartners.com/3-wins-framework
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The 3 Wins Podcast is brought to you by Legacy Advisory Partners.
Discussions in this show should not be construed as specific recommendations or investment advice. Always consult with your investment professional before making important investment decisions. Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer member FINRA/SIPC. Advisory services through Investment Advisor Representatives of Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Legacy Advisory Partners are not affiliated. Perpetuate Capital is not affiliated with Cambridge or Legacy Advisory Partners.
🎙️E49: The 401k Blueprint: From Plan Design to Implementation