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Evaluating your 401(k) plan

Buying a BusinessIt is fast approaching that time of year when employers will be re-evaluating their existing retirement plans. With the recent fee disclosure requirements set forth last year, employers will be scrutinizing the fees associated with their plans and looking for ways to cut costs. Here are 5 tips to help you select your 401(k) plan.

1) Select the right type of plan provider.

a. Broker-Sold Plans – These plans are sold through brokers that represent a single mutual fund family. The benefit is familiarity with one company and usually a list of funds along the risk spectrum. A word of caution: these families do not contain the best of all the sectors. The family may include an outstanding large-cap fund but lack in the mid- or low-cap fund. It may also lack sector-specific funds which offer great diversification in different economic cycles.

b. Insurance Companies – Insurance companies offer a very different type of investment in 401(k) plans. They use mirrored funds—instead of being directly invested in that fund, they credit/debit your account based on the performance of that fund. The downside of these plans is that they carry high annuity expenses and usually termination costs. The reason the costs are higher is that the plan is also covering mortality expenses in addition to asset management expenses.

c. Fee-only Investment Advisory Firms – These firms allow the plan sponsor to choose from the world of investments and tailor them specifically to the objectives of the plan. The benefit is that the advisor can choose the best funds from different fund families, and being independent, the firm receives no commission or revenue-sharing from the investments that are selected. This way the advisor is a true advocate for the plan. Synergetic Finance is a fee-only investment advisory firm.

2) Educate your employees.

When selecting a plan, consider your employees’ needs but on an investment option basis. Employees need to be educated about the investments available and how to properly allocate their accounts. By providing them with an investment advisor like Synergetic Finance, you can shift the burden onto the advisor and reduce your fiduciary liability as plan sponsor.

3) Leverage managed accounts for everyone’s benefit.

Everyone would love access to professionally managed money, but doing so is often expensive. Employees also find that being given a list of mutual funds can be daunting, and they may choose to avoid the process. Within 401(k) plans, it is now easy to include managed accounts because the aggregation of monies allows the investment professional to properly diversify the portfolio, reducing everyone’s costs.

4) Know your service team.

Make sure to find a 401(k) that provides a team dedicated to your plan that will continuously monitor your plan and provide support. This team can also educate your employees annually or semi-annually, depending on your needs.

5) Create a Plan.

When you design your plan, make sure you have an Investment Policy Statement and a Due Diligence Plan. These will help reduce your fiduciary liability because you will have a clear statement on how funds are chosen, why fees are being charged for certain services, and how often you will review your current plan. By clearly stating these criteria, your employees will better understand their 401(k) plan and how it works.

We recommend that you follow these five tips when re-evaluating your company’s 401(k) plan this fall. If you have questions, or would like a confidential, complimentary 401(k) plan review, please call us at 206-386-5455 or email us.

To your success,

Benjamin Melton
Synergetic Finance






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