Some Important Reminders Before You Select a 401K Service Provider
As a 401K sponsor, you know for a fact that one of the toughest challenges you’ll encounter is finding the ideal service provider. Know that finding one isn’t a cakewalk because it’s not like you’re looking for a locksmith to help you get inside your home when you’re locked outside. In fact, the services you expect to get from 401K providers significantly and quite expectedly will differ from one company to the other. What this means is that one service provider might be ideal for you based on your needs while the others aren’t. The most important consideration is for a 401K sponsor like you to try so hard to search and match the ideal services with respect to plan needs.
You have to realize that there have been so many instances in which small and medium-sized business 401K plans were forced to pay for services that participants didn’t really use. Obviously, paying for useless services will correspond to bringing down participant investment returns and could even lead to personal fiduciary liability for you, the sponsor.
With this in mind, it is pretty clear that in order to sponsor a 401K plan successfully, you first need to have an absolute understanding of the service that comprise the 401K plan. After you’ve done your homework, it’s time to figure out which of them services will actually need professional assistance in order for them to be successfully delivered.
When it comes to understanding specific 401K services, it is imperative for you to acknowledge the fact that every single type of 401K plan is in need of multiple services to succeed. The services are usually categorized into two; one is called plan administration while the other is investment management. Plan administration, for the most part, includes that of recordkeeping, third-party administration, and custody. Meanwhile, investment management services are classified as either plan-level or participant-level services.
At this point, you also will have to understand and recognize the fact that practically all 401K plans nowadays lean towards outsourcing plan administration services to a professional service provider. Well, it’s actually a practical move because outsourcing could mean you’ll be more cost-effective. So the more relevant question to ask isn’t really whether you need a professional plan administration provider.
So once you finally determine what services your 401K plan really needs and if you’ve reached the decision to hire professional services, there’s no more reason to delay the search for those service providers. But don’t get easily impressed by the initial interview. Obviously, you want them to make the best pitch and once they do, ask them directly if they indeed are capable of delivering the services you need from them.