Is it time to look at your company's 401 (k) plan?

• Author: Palazzolo, Michael

When was the last time you took a hard look at your company's 401 (k) plan?

Many small and midsize business owners most likely haven't spent much time reviewing the plan since the day it was set up--3, 5, or maybe even 10 years ago. Most employers implement a plan and simply assume that even years later it will continue to do what is best for themselves, their company, and their employees.

Owners can begin the process by asking themselves if their plan offers good investment choices. Are there diverse investment options within the plan? Are the fees charged within the plan competitive or excessive? Do employees receive the necessary educational information on how best to use their 401 (k) plan to save for retirement?

Any owner or primary decision maker must be proactive in ensuring that their company has a quality plan. Employees deserve it and over the long term it can benefit the company. Financial problems, after all, can create an enormous amount of stress, leading to unproductive, unhappy employees. Conversely, employees who have built or are on the path to financial independence tend to be much more positive and productive.

By educating employees to start saving for retirement as early as possible and showing older employees it is never too late to get serious about their retirement, an owner can create an environment that lends itself to a more productive work force and fosters greater company loyalty. This education is perhaps even more important in the current difficult economic environment in which companies might be unable to give the raises or bonuses necessary to retain excellent employees.

Discovering high fees

Paying lower fees for the plan can give employees a significant benefit upgrade at little or no additional cost. Many older plans, as well as some newer plans, have high fees built into them. These fees tend to be hidden, which businesses never realize because they are built into the investments' expense ratios. Unless one scours through thick prospectus reports that may seem to be written in an ancient language, they remain hidden. Yet they can make a significant difference.

Take the case of a 35-year old employee who makes $80,000 per year, receives a 5% annual raise and saves 10% in his or her 401(k) each year. If the average annual return is 8% in plan A and only 7% in plan B because the fees in plan B are 1% higher, the difference in the amount saved between the two plans becomes significant at age 65. Although the...