Reviewing Your Company's 401(k) Plan: How Self-Storage Owners Can Avoid Trouble and Maximize Plan Benefits

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By William H. Black Jr.

Fall is here, and before you know it, year end. This is the time when self-storage owners wrap up their fiscal year, think about ways to minimize the tax bite, and arrange their business affairs for the upcoming year.

One business area they should definitely be thinking about is their company 401(k) plan. A well-executed plan can be a tool for recruiting and retaining talented employees, but it can also provide several tax benefits for small-business owners.

You may have enacted your 401(k) plan several years ago. Since then, there have been legislative changes. In addition, your employee demographics have likely changed or maybe even your objectives. It’s time to review your 401(k) plan to ensure it’s still providing your business and employees with the maximum benefits.

The Review

There are many reasons to conduct a compliance review of your 401(k) plan, but there's one thing that can be virtually guaranteed: If your plan was implemented by a payroll or mutual-fund company or is any form of bundled plan (also known as a “cookie-cutter” plan), it’s likely that a custom design can save you tens of thousands of dollars in employee costs. It can also save you a good deal of effort. Many bundled plans require the sponsor to prepare his own Form 5500 and other administrative duties, while a full-service administration firm performs all those tasks on his behalf.

The custom design generally beats the cookie cutter every time, and by a significant margin. But there are other reasons to review your 401(k) plan. ERISA, the Employee Retirement Income Security Act of 1974, requires employers to meet certain requirements. Ignoring or neglecting the rules can lead to plan disqualification, fines and other unpleasantness. The most common areas of trouble include:

Plan design. The first thing to realize about a 401(k) plan is the tax benefits. Contributions are income-tax deductible and growth is tax-deferred. In addition, plan assets are protected from the claim of judgment creditors. One’s account balance is, generally speaking, eligible for an IRA rollover when one separates from the plan.

While those benefits are favorable for the business owner, the task is to determine if the plan has maximized those benefits for the plan’s sponsor. No one is advocating taking away from participating employees, but if there's a way to amend the plan to put away more for the favored group without increasing costs for others, would it not make sense to do so? There are many ways to do this, but only through a custom design.

Fees. Fees must be “reasonable.” Though there's no specific definition of the term, one way to measure is to compare the fees your plan pays to the actual cost of the funds themselves if purchased retail—in other words, a benchmark. Is the difference reasonable for the services provided?

Under the new ERISA Regulation 404(a)(5), fees and costs must be disclosed to all participants. Most investment houses are sending the disclosures to the plan sponsor, requiring the sponsor to make the disclosure to participants. This is new and everyone must comply.

Employee meetings. Is your plan administrator’s representative meeting with participants at least semi-annually (preferably quarterly) to revisit the benefits and merits and investment performance?

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