Tag Archives: 401k administration

What to Expect From Your 401k Administration

A 401k plan is a popular option that allows employees to contribute to their retirement funds and offers a reasonable level of customization. The formal definition by Investopedia is “a qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on a post-tax and/or pretax basis.”

There is also the option for employers to contribute to their employees’ 401ks, which can benefit both parties. If you’re new to this process, it can seem a bit confusing during the initial stages. Let’s now discuss the basics and what you can expect from 401k administration.

 

Getting a 401k Administration: Solutions for Employers and Employees

Having an administrator is necessary for three main reasons. First, they help employers come up with workable plans and prepare the legal documents. Second, they understand the laws and stay updated on changes to ensure that everything remains compliant. Third, an administrator will monitor a 401k on an ongoing basis to ensure that everything is in the best interest of both the employer and employees.

In some cases, the employee will pay for the administration fees, and other times it will be covered by the employer. The primary reason that an employer chooses to pay an administrator is because of the tax benefits it can provide. Most of the time, an employer will have some degree of contact with an administrator, but employees do not. While 401k administration involves several steps, here is the general breakdown of the services offered.

 

Consulting and Creating a 401k Plan

Because of the flexibility of a 401k plan, it’s necessary for an administrator to consult an employer to identify their specific needs. Some things that might be discussed include:

  • Who will be allowed to participate (e.g. individuals 21 years of age or older, full-time employees, etc.)
  • Whether the employer will contribute, and if so how much
  • Contribution limits
  • Arranging a trust for holding contributions

An administrator will then establish an appropriate plan while keeping in mind regulations. They will also need to develop a plan of action in case things don’t go as anticipated and problems arise.

 

Compliance Monitoring

Once a 401k plan has been set in place, it’s mandatory that the rules be followed. Otherwise, it could result in legal problems and tax issues, which isn’t good for anyone. Because of the ever-changing laws, it’s not all that hard for mistakes to be made, so an administrator will keep tabs on plan development on an ongoing basis. They will ensure that both the employer and employees are adhering to the guidelines and take into account any changes to laws. In some cases, they will make updates to a plan to ensure compliance.

 

Transaction Monitoring

An additional element of administration is consistently checking that contributions, loans and any other transactions are compliant with a 401k plan. The administer will be responsible for authorizing these transactions and making sure that there is no questionable behavior.

In many cases, it’s a good idea to offer this type of retirement plan because it’s an effective recruiting tool and can make employees more loyal. Although 401k administration can seem somewhat overwhelming, it should become easier to understand once you get a grasp of the basic concept.

Photo by Tax Credits