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Small Business – Reducing Taxes & Minimizing 401(k) Plan Liability

Our Client Story

Challenge:  An established business started a 401(k) plan for their team, but the plan was underutilized and they were unsure if they were complying with all regulations

Result:  3 Financial helped the management team understand their plan, create administrative systems to help minimize potential liability, and helped their staff make better use of the plan

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Our client is a successful small firm in the legal services industry.  Several years ago, the management started a 401(k) plan to offer a retirement savings benefit to their team.

The company that helped them set up the plan was a well-known brand name firm on the mainland.  That initially seemed like the right move, but when we first met, the team was second-guessing their pick.  The advisor assigned to them was hard to reach and they felt like they were “just a number” for that firm.  They received monthly reports by email but the reports were voluminous and difficult to understand.  The client simply wanted to know if they were doing things right or not.  Their concerns grew as they started reading about the increase in lawsuits against retirement plan sponsors.

The owners were concerned that they weren’t putting enough away for their own retirement and wanted to save more on their taxes.  Also, contribution rates were low, so their team was not taking advantage of the plan or receiving their full employer match.

They were referred to 3 Financial by their CPA, who recommended they work with a specialized fiduciary advisor to help mitigate their potential liability.   We started with a review of the plan and a meeting to see if it was the right fit.  After we were hired, we got to work. 

Our Strategy

First, we examined the plan and talked through questions and issues with our client.  It appeared that the previous advisor had not been very attentive or proactive, probably partly because they weren’t local.  We have seen that before and unfortunately, that lack of service can create significant issues for both the company sponsoring the plan and its employees.

Then, we saw that the plan had high fees, which is a risk since many lawsuits against plan sponsors center on excessive fees.  We worked with the client to benchmark their fees against similar size plans, then negotiated with their providers to reduce the charges.  One provider wouldn’t reduce fees, so we prepared a request for proposal and helped the client find a quality source with a better price point.

We also noticed there appeared to be no investment oversight after the funds were initially chosen.  Because this too has been a litigation hot point, we put together a strategy to keep tabs on fund performance and plan to swap out any funds that were underperforming their peers.

Next, we looked at what we could do to help educate their staff.  We made ourselves available to help employees sign up, choose investments, and answer their general financial questions.  We also organized a workshop to bring everyone up to speed on the benefits of the plan and how to make use of it, to ensure that our client fulfilled their responsibility to educate their team.

All of these functions were then put on a calendar, and we regularly revisited all these areas to make sure the plan stayed compliant.

Later on, we helped the firm put a profit-sharing plan in place.  That helped the owners get additional tax savings and also put in a new benefit to help encourage loyalty among their staff.

The Result

Today, the plan is managed according to best practices, which helps reduce the client’s potential liability.  3 Financial actively monitors the plan and keeps management fully informed.  Now that more help is available to employees, plan usage is up and more staff are making their maximum contributions.  Most importantly, our firm maintains responsibility for monitoring the plan so our clients can stay compliant, but focus on their business.

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Our firm maintains responsibility for monitoring the 401(k) plan so our clients can stay compliant, but focus on their business.