Key Concepts in Choosing a Consultant and Designing a Plan

In choosing a benefits consultant and designing a plan, the smaller employer should consider these important factors:

            Avoid "bundled" investment/design packages

            Benefit programs should be a tool of business success

            Plan design should derive from your objectives and situation 

            Special opportunities and challenges are presented to smaller employers

            Information and services should be tailored to your needs

            Small plans can benefit greatly from today's technology

            The best prototypes offer design flexibility and ease of amendment

            No services are free, and hidden fees are often the most costly

  • Obtain unbiased advice

Avoid "bundled" investment/design packages.  Several problems can arise if the provider of the investment products is also providing design or administration services.  These problems include:  design services provided by persons with expertise in sales or investments (rather than plan design and administration); a lack of involvement of the design personnel once the plan is in place; limitations on investment choices to funds offered by the "bundle" provider (instead of a trustee option to offer those funds with or without others); and, most importantly, a compensation scheme that reflects inherent bias, at best (or at worst a conflict of interest).

Consider for example two plan designs: one puts money precisely where desired and meets employer objectives with a contribution of $100x (an efficient plan); and the other, which meets the same objectives, but requires an employer contribution of $200x. Most employers would prefer the less costly plan. But which would the seller of investments prefer? Is the seller of the investments really the best choice to design the plan?

  • Seek creative opportunities in planning

Benefit programs should be a tool of business success.  The currently popular "solutions" metaphor implies that businesses confront a series of problems to be overcome by "solution providers."  We have found that most "problems" become opportunities when viewed creatively.

Attracting, retaining, and motivating employees are traditional goals of benefit programs.  Those objectives are not realized by pouring increasingly scarce benefit dollars into unfocused benefit arrangements. The structure of benefit programs will determine whether these dollars are well spent.  Companies that pay attention to this point are capitalizing upon the opportunities, to their competitive advantage.

Not all employees view the retirement plan to be as important as current cash compensation.  Rather than offer uniform benefits to all employees, it is often possible to adjust participation and benefit features of a plan to target contributions based upon ownership, age, position, longevity, division or profit-center. 

  • Base the design upon the fundamentals

Plan design should derive from your objectives and situation.  No two employers face precisely the same business circumstances. We believe that the most effective plan designs come about from a clear understanding of the employer's objectives in establishing the plan, and the business context of the plan.

The business context involves many features, including:  other benefits and plans; the employer's compensation budget; tax characteristics of the employer (e.g. type of business entity, tax bracket); workforce characteristics (e.g. age, longevity, location, educational level); availability of financial data (e.g. the types of information produced by payroll software); communication channels (the means of providing information to employees and plan administrators); and, competitor benefit offerings.

Employer objectives in establishing the plan may encompass a number of important issues, including:  tax savings; incentives or rewards for particular employee groups; ease of administration; the desire to make contributions in the form of corporate stock; and, the use of the plan to raise capital (as with an Employee Stock Ownership Plan or ESOP).

  • Choose an advisor with experience and expertise in small plans

Special opportunities and challenges are presented to smaller employers.  Many large-employer plans, for example, are not subject to "top heavy" requirements regarding contributions, and do not have difficulty in insuring that highly-compensated employees can participate fully in 401k deferrals. Smaller employers often do face these challenges, and the design "solutions" offered to big companies will not be appropriate in this context. The smaller employer can, however, take advantage of design opportunities that would be cumbersome to manage on a large scale. Skill in capitalizing upon these opportunities is ordinarily best found in benefits consultants who specialize in smaller plans.

  • Look for flexibility

Information and services should be tailored to your needs.  If your consultant is able to suggest a design before you have discussed your objectives and business context, you are discussing a "product":  a design that suits the consultant, but may not be appropriate for you business.  The information and suggestions offered by a benefits consultant should be responsive to your questions and circumstances.   While common patterns are present in any industry, not every medical practice (or retailer, or manufacturer, etc.) is the same.  The advisor should be flexible enough to respond to these differences.

  • Require technological aptitude

Small plans can benefit greatly from today's technology.  The design process is based upon the effective exchange of information between the employer and the benefits consultant. Company and employee information must be obtained and analyzed, and recommendations must be illustrated and evaluated. Facility with current technology -- from payroll software, to electronic spreadsheets, to presentation media -- is a valuable tool in making the design process efficient, timely, and effective.

  • Use versatile prototype plans

The best prototypes offer design flexibility and ease of amendment.  If you were a large institution, offering plan documents that could be designed by simply checking boxes and filling in blanks, you would probably choose to limit the number of choices, so that less-experienced staff, with multiple responsibilities, would be less likely to make a serious mistake.  Each such limitation, however, means that the company using that prototype is deprived of choices that could make that plan better meet their needs.  Most of such limitations tend to increase the cost of the plan, direct benefits to employees who do not value them, and place additional administrative burdens upon the employer.

Some prototype plans, including those we sponsor, are designed for use by experienced professionals.  They contain more options than are customarily considered in the drafting of individually-designed plans.  Yet, they are pre-approved by the Internal Revenue Service and are easily and inexpensively modified if needs or objectives change.

  • Know and understand fees

No services are free, and hidden fees are often the most costly. Design services require time and personal attention. Obviously, the provider expects to be paid, either in a disclosed, ascertainable fee, or in a fee that is buried in other charges or commissions.   Some providers "include" their fees in the investments provided, and do not disclose what they are. This of course does not mean that the services are free. It is false economy to ignore fees that will reduce investment results, weighing most heavily upon those with the most invested, and growing as plan assets grow.

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