How to help your clients choose a 401(k) plan

Nicolle WillsonHead of Retirement Consulting, Guideline

90% of the 5.8 million American small businesses with 99 or fewer employees do not currently offer a 401(k). And of the 42 million Americans who are employed by these small businesses, 75% do not have access to a retirement plan.

This research shows a lot of people with a lot of missed opportunities. It’s no wonder many economists and public policy experts talk about a looming retirement crisis.

Accountants have a role to play in solving this. And at the same time, expanding the services they provide. As a trusted advisor, you can help your clients choose the 401(k) plan that's right for them, provide a new lens on your existing financial services, and increase the touch you have with clients.

A common barrier for firms providing this service is that it is perceived as a complicated space to provide guidance in. It is true that 401(k) providers and plans come with a lot of variables.

But thankfully, it is not as complex as it once was. Here's what to consider when recommending a 401(k) provider to your clients.

What should accountants look for in a 401(k) provider for their clients?

When a business chooses to offer a 401(k) plan, there are a number of responsibilities that need to be accounted for. Some full-service 401(k) providers handle most or all of these responsibilities, or plan sponsors can use multiple vendors and/or take on some of the work themselves.

These are the tasks that need to get done to offer a plan and keep it compliant:

Plan design and setup: Prepare required plan documents, coordinate contributions with your payroll provider and custodian.

Enrollment and education: Manage participant eligibility and enrollment, explain your plan to employees, educate them on investment options, and give them required information, notices and disclosures.

Administration and recordkeeping: Deposit contributions and deferrals with the custodian, and keep track of all transactions and balances.

Distributions & Benefit Payments: Administer participant and beneficiary benefit distributions, loans, hardship withdrawals, required minimum distributions and Qualified Domestic Relations Orders.

Compliance and reporting: Prepare and file IRS Form 5500 and schedules annually, perform annual nondiscrimination testing and manage any compliance-related refunds.

Investment management: Choose a diverse selection of investments. Ensure investments are selected and maintained with the best interests of employees in mind. 

In advising a client, you should be looking to help them find a provider that does all of these things well — and at a reasonable cost to the business and plan participants. \

For example, many providers pass a lot of their expenses on to employees through high fees on assets under management. Others charge additional fees for certain aspects of their service — like annual Form 5500 filing — or outsource portions of their service to other providers who charge their own fees.

In addition to these responsibilities, you may want to look for a provider that makes it easy to manage the 401(k) plans for multiple clients. Do they have a single interface to keep all of your clients organized? Or does their service automate some of the administration by integrating with the payroll software you use? 

As an example of what’s possible, see how Guideline helps accountants and bookkeepers.

What are the tax advantages of a 401(k)? 

Thanks to the 2019 SECURE Act, eligible businesses may be able to claim a tax credit of up to $15,000 over the first three years of their plan (previously $1,500). The IRS credit covers 50% of “ordinary and necessary” costs companies incur to set up a qualified retirement plan — up to the greater of $500 or $250 per participating NHCE (limited to $5,000) per year for three years.

The SECURE Act has also added a new Small Plan Auto-enrollment Credit of up to $500 per year for three years for plans that add an Eligible Automatic Contribution Arrangement (EACA) for the first time. The credit is not limited to plan expenses and is in addition to the start-up credit.

These tax credits can get a little complicated, so Guideline has built a tax credit calculator to help you estimate your clients tax credit and cost to start a Guideline 401(k). With the new tax credit changes and depending on your company makeup, it is actually possible to reduce the cost of a 401(k) to $0 for the first 3 years.

Nicolle Willson
Head of Retirement Consulting, Guideline

Nicolle is the Head of Retirement Consulting at Guideline. She is Certified Financial Planner™ and Certified 401(k) Professional™.