Small Business Plan Design in Practice

Advisers and recordkeepers discuss plan design for the burgeoning small business 401(k) market.

401(k) startup tax incentives from SECURE 2.0 and state mandates have prognosticators forecasting robust plan growth in coming years. But what kind of retirement plan design will most benefit these starts ups?

In a post by Employee Fiduciary LLC, which offers 401(k) plans for small businesses, CEO and President Eric Droblyen lays out six key features that small businesses should consider: participant eligibility, compensation, contributions, vesting, distributions and loans. How the plan sponsor addresses these plan elements could be the difference in “thousands of dollars in plan expenses,” Droblyen notes.

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The objectives a small business has for setting up a 401(k) should always be the key driver of a plan design approach, says Andy Bush, partner and financial adviser with Horizon Financial group.

If a plan sponsor is small and looking for a tax shelter for savings, that will influence the setup toward being more basic. If the plan is a talent attraction and retention play, they’ll want to add more options and lean into an employer match.

“They need to first communicate what the objective is,” he says. “Then an adviser can decide from there what type of plan design to consider.”

Bush, whose practice advises in areas including health care, engineering and law firms, says the type of participant pool matters as well for design. The employer match, for instance, can be a major incentive for most plans, but the amount and style of match may vary depending on the workforce.

“They know their people,” Bush says. “They know who is going to participate and how to incentivize them to do so.”

Efficiency, Simplicity

Bush notes that, generally, small businesses are often focused on being “as efficient as possible,” so plan designs may veer toward the simplistic at least to start.

“The mega companies are usually more paternalistic than the smaller companies,” he says. The small business owner that “took a lot of risk to start the company wants to be rewarded for that; as they grow, they may become more culturally paternalistic.”

Chris Horne, vice president of customer success and operations at Human Interest, says the plan provider learned from working on small plan setup to focus on one key word: “simplicity.”

One result of that focus is its Fast Track 401(k), a retirement plan setup the firm rolled out in September of 2023 and that Horne says is designed to be “radically simple and efficient.”

“Plan sponsors are asking for simplicity,” he says. “They’re wondering what the minimum they need to know is to start a plan. We ask them if they want a match—yes or no—and give three types of safe harbor options at 4%, 5%, or 6% …. we’ve taken the analysis paralysis out of it.”

Horne, who came to Human Interest from the legacy recordkeeping space, compares the 15-minute process with Fast Track 401(k) to the other model of having a 2-hour plan design call, after which businesses “forget 90%” of what is said.

Today, he says, a “significant” number of customers go through Fast Track 401(k). Meanwhile, the call center—which Horne oversees—gets relatively few calls for questions compared to the legacy workflow, he says.

“In the grand scheme of things, support calls are fairly rare,” he says. When Fast Track 401(k) plan administrators do call for support, Human Interest prioritizes quick response so busy administrators and business owners who “wear many different hats,” can get the support they need immediately, Horne says.

Fee Focus

Droblyen of Employee Fiduciary says his firm does plan design studies for clients on request for a fee—most commonly when they are considering a profit-sharing plan, as employer contribution expenses can vary widely depending on the plan design. 

Meanwhile, an employer might adjust the plan in other ways to keep fees low while meeting business needs, with methods such as:

  • Choosing a 3% nonelective contribution if a “plan has high employee participation or a new comparability profit sharing contribution will be used to maximize owner contributions”;
  • Choosing a 4% safe harbor or 3.5% qualified automatic contribution arrangement match if a plan has low employee participation;
  • Using a “stretch formula” requiring employees to defer at a high rate to earn the full company match, which can also help a non-safe harbor 401(k) pass discrimination testing; and
  • Raising the involuntary rollover limit to the legal maximum to keep participant headcount to a minimum.

Bush of Horizon Financial says that, in the end, the goal is for businesses to provide retirement plans that work for them and their employees—with the best results coming to those who treat their employees as best as they can.

“Ultimately we want people to embrace putting a plan together,” Bush says. “We’ve seen from observation that people that treat their employees well tend to thrive. It’s not just a retirement plan, but about embracing your people and getting them excited to be there.”

Bechtel Faces 401(k) Suit Over Default Managed Accounts

The global engineering firm’s $5.1 billion retirement plan committee is sued for defaulting participants into managed accounts plaintiff alleges did not merit the fees.

Engineering and construction firm Bechtel, its board and its trust and thrift plan committee have been sued for allegedly defaulting plan participants into managed accounts that was not justified for the fees.

Plaintiff Debra Hanigan, a current participant in the plan, filed the suit Friday seeking class-action status in the U.S. District Court for the Eastern District of Virginia, Alexandria Division. The suit, Hanigan v. Bechtel Global, is being led by law firm Fitzgerald Hanna & Sullivan PLLC along with Walcheske & Luzi LLC; the plaintiffs are seeking payment including “all profits which participants would have made if the defendants had fulfilled their fiduciary obligations.”

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The allegations are of note as managed account use in retirement plans is seeing growth as plan sponsors seek to offer more personalized investing and advice in workplace plans. Proponents have made the case that managed accounts provide relatively low-cost access to personalized investing and advice access, though they are more often offered as an option and not a qualified default investment alternative for participants, according to data from Cerulli Associates.

The plaintiff argued, however, that without participant engagement the managed accounts did not produce results worth the additional fees, particularly when target date funds could have provided similar results at a lower cost.

“Without additional personalization of information from Plan participants, managed accounts are essentially expensive target-date funds, focused on the single demographic factor of age,” the plaintiff alleged. “Prudent fiduciaries would not automatically enroll plan participants, who tend to be disengaged and do not provide additional personalized information to the recordkeeper, in an expensive MA program when much less expensive target-date funds for that purpose are readily available.”

The suit also argued that setting up the managed accounts as a QDIA “significantly and imprudently” increased the administrative fees paid to the recordkeeper from participants when compared to defaulting them into TDFs.

The managed accounts were run by Edelman Financial Engines as provided by recordkeeper Empower, according to the lawsuit. Neither was named as a defendant in the suit, nor did they immediately respond to requests for comment. Brechtel also did not respond to a request for a response.

Bechtel’s plan had $5.1 billion in assets as of 2022 as held by 15,508 participants, according to the lawsuit. Participants allegedly paid an average annual rate of $320 for recordkeeping, administrative and managed account fees, according to the suit. Without the managed account, fees would have been between $24 and $29, allegedly.

The plaintiff claimed that the “vast majority” of plan participants were defaulted into the managed account program during the class period without being asked for personal information to further customize the offering to their needs, and thus, “were enrolled in essentially very expensive and imprudent TDFs.”

“Plaintiff did not receive any in-person financial planning advice as part of her enrollment in the Empower managed account program during the Class Period,” according to the lawsuit.

The plaintiff also alleged that recordkeepers are “economically incentivized” to use managed accounts as they can charge higher fees, with Empower and Edelman Financial Engines allegedly earning “tens of millions of dollars” as participants lost “tens of millions of dollars.”

Proponents of managed accounts, including providers, have argued that the service can both improve investment outcomes as well as provide holistic financial guidance to participants who otherwise would not be able to afford a financial adviser.

In addition to recordkeepers, many plan sponsors and advisers are seeing value in managed accounts, with 52% of consultant-intermediated plans offering managed accounts, according to a recent white paper from Cerulli Associates. Among those, 5% use it as a dynamic QDIA, in which participants are defaulted into the service when they hit a certain age; 3% use it as the plan QDIA.

In 2020, Shell Oil Company was sued for allegedly allowing participants to be charged excessive fees in part for use of managed accounts provided by Fidelity Investments. Fidelity was not named as a defendant in the case, which this November was suggested for trial by a federal judge, according to court records.

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