Retirement Plan Myths: BUSTED

We’ve all heard (and maybe believed) some common myths – from ostriches bury their heads in the sand (they don’t!), to lightning doesn’t strike the same place twice (it does!), to gum takes seven years to digest if you swallow it (it doesn’t!). While these might seem like silly, commonly repeated fables, there are some similar misconceptions floating around the retirement industry. Have no fear, EGPS mythbusters is here, and we’re ready to debunk some of the common retirement plan myths we hear regularly.

It’s too expensive to start a retirement plan.

The tax savings, along with employee retention and recruiting benefits, are huge cost savers to establishing a retirement plan, meaning the upfront and administration costs are made up plus some in value. In addition, legislation in the past few years provides significant tax credits for establishing a new plan for small business owners. This can reduce the cost of sponsoring a plan in a big way!

Sponsoring a retirement plan is too much work and a headache to administer.

While establishing and maintaining a plan does involve some additional tasks for employers, the right service providers can make plan management much easier and simpler. As a TPA, EGPS sends clear communications when any action is needed from a plan sponsor. In addition, if clients engage our 3(16) services, we take on most of these tasks for employers, removing much of the work associated with the plan for the plan sponsor.

My payroll provider can do this, too, and cheaper.

There are several reasons to think twice before using a payroll provider for retirement plan services, but the main one is that they are not retirement plan experts. Retirement plans require employers to adhere to a complex cross-section of rules and regulations. Plans must comply with the Internal Revenue Code, ERISA, Department of Labor regulations, and the terms of the plan document. To complicate matters, the government continually updates rules and regulations. SECURE 2.0, a follow-up and expansion of the original SECURE Act, made impactful changes in the industry across several types of retirement plans, provisions, and arrangements.

This is why it’s important for employers to have a team of retirement plan experts administering their plan. While payroll companies may be experts at their systems, their primary focus is not in retirement plan laws. EGPS boasts a team of knowledgeable staff that can keep employers’ plans in compliance. Our credentialed retirement plan experts, dedicated tenured employees, and ERISA Compliance team delight plan sponsors with thorough plan management and clear communication.

It’s so much easier to just bundle with my recordkeeper.

The bundled provider offers investments, recordkeeping services, a participant interface (website and/or call center), and plan administration (plan design, compliance testing, Form 5500 filing, etc.) as a package deal. However, bundled providers typically have limited plan design and document flexibility. This is due to their automation requirements and reliance on the employer’s involvement in day-to-day plan functions. Therefore, unless employers are confident in their ability to perform retirement plan responsibilities and only want a simple plan design, they should choose the unbundled option. 

Unbundled retirement plans feature the TPA and the recordkeeper bringing their unique expertise to the plan and working collaboratively in the best interest of the participants and employer.  The recordkeeper provides investment options, detailed recordkeeping and reporting services, and the participant platform. Alternatively, the TPA proactively consults on plan design and documents, performs compliance testing, and ensures timely government reporting. The TPA also customizes administration services to meet the needs of companies working in changing environments and guides the employer through plan enhancements that adapt to these needs. Furthermore, recordkeepers partnering with the TPA and plan advisor set appropriate checks and balances as a team focused on the plan’s success. Therefore, employers desiring custom plan design and a dedicated retirement plan consultant focused on their plan should opt for an unbundled service model.

I only have a few employees, so I should only have a SIMPLE or SEP IRA.

Choosing the right retirement plan for your business and employees isn’t typically driven by headcount.  401(k) plans allow for higher contributions than SIMPLE IRAs, and profit sharing plans offer flexible formulas that SEP IRAs do not.  Additionally, plan sponsors have more discretion over plan provisions, such as eligibility and distributions, and this can sometimes provide a compelling reason to implement 401(k) or profit sharing plans over the IRA-based plans.  The enhanced start-up tax credits that SECURE 2.0 provided have made typically higher fees for 401(k) and cash balance less of an impediment for plan sponsors, also.  Careful analyzation of your contribution and benefit goals, as well as your employee census, will allow industry professionals to compile the best plan options for your consideration.

Looking for more factual, mythbusting information on pricing, tax credits, 3(16) or bundled vs. unbundled options? Fill out this short form and we’ll send you more resources!

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