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
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
- 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.
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.
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
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
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
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.