Supplemental Reading

[Guest caddieadmin]

Over the last 8 months I've been slowly putting together a 401k for my company. I have not outsourced to any of the seemingly endless companies out there in order cut costs and get a great sense of what my company might actually need instead of just picking up a prototype and running with it.

Are there any books or resources on the web (other than this incredible message board) that you would recommend for walking somebody through all of the steps required to construct a 401k plan from scratch?

I've looked everywhere and seen almost nothing but links to companies who would simply like to set one up for me.

And I've said it so many times already, but this message board is priceless. I hope it never goes away.

[Below Ground]

I suggest that you visit ASPPA.com at www.aspa.org. They have several publications, including the ERISA Outline Book. You may also wish to visit Aspen Publishers where you can find the "Answer Book Series".

I do, however, suggest that you rethink your position. The potential costs of mistakes and/or omissions can be be staggering. The task I think you are attempting is not a simple thing. Your use of "slowly putting together" may be an indications that the size of the endeavor is starting to become apparent. Why "reinvent the wheel", especially one that is so brain numbing in complexities?

Anyway, good luck. Hope the above helps.

[four01kman]

There are many people "out there" who would be happy to walk you through the process without a fee. Of course, if you like what they say and how they say it, you might want to hire them to do the tasks for you. They are consultants or brokers who specialize in 401k plans.

[WDIK]

I applaud your effort to become well-informed on the subject. I try to do the same thing before I get advice from various professionals (doctors, lawyers, plumbers, etc.) so that I am a better judge of those I may need to trust. In the end, however, I consider myself better off allowing someone with training and experience to perform surgery on me, represent me in court, or repair my gas furnace.

[SteveH]

caddieadmin:

Of course being in this business I can see the whole picture of what I think you are attempting to accomplish. I have been there myself. Years ago I worked for a small adminstration firm. We knew the market was shifting from pooled 401(k) plans to internet driven online access. We wanted to move our firm in that direction. We looked around and realized it was going to cost us $100,000 to buy the technology needed from a well known pension firm. So we started playing around with creating it ourselves. It was fun and I might even say a little exciting. But we quickly realized that the $100,000 was a bargain compared to the time and resources we would have to use to build it from scratch.

Now I personally have been in this business for just over 10 years now. If I ever decided to change careers and open a sports bar, even I wouldn't try and do it myself. And I think I know everything!

What I am saying is, I couldn't write my own plan document. There is no way I could recall and cover all of the legalities. I would have to hire a firm to prepare the legal documents. I would be looking at a cost of $1,000 to $4,000 most likely. Now I might perfrom the calculations myself. But that would only be if I had a very simple straight forward retirement plan. If I ever tried to exclude a group of employees or pay a different % of benefits to people in my firm I would either have to learn actuarial math or buy a software program. I would hope that I don't have enough free time to learn actuarial math, and I wouldn't want to pay 10s of thousands of dollars for pension software, so again I would have to hire a company that already has these resources. I would most likely turn to the same company that prepared my plan document.

Last but not least I might prepare the 5500 filing by myself. But then again I don't have software for the form. I would have to go to an IRS office, get their special paper (or order it), and writing device (they don't accept the kind of hand written forms that you would envision printing off the web and filling out). But this would be the task the lends itself to being self prepared the easiest. The IRS provides an instruction manual. If I were to hire an outside firm I would typically be looking at somewhere between $400 and $1,000 for the 5500 preparation.

Now I don't know what your company is in the business of doing, but I would think that trying to learn retirement plans on your own is not a cost efficient thing to do. There is a good chance that you have an outside firm providing IT services for you. You probably order your business supplies and have them delivered rather than send someone to go shop for them at the store. You might have someone come in and provide your company with bottled water service so that you don't have to stop by the Water N Ice store when you run low. You probably have an accountant the does your taxes and maybe the bookkeeping. How about a payroll company? You get the picture.

Trying to self educate is a wonderful thing. You should always try to keep learning. I just don't think you would want to chance it with something that if you mess up could potentially cost tens of thousands of dollars. The Department of Labor will charge over $1,000 a day for something as simple as a late form, even if you submitted it but in the wrong format! (Yes, I had an out of state client send in a faxed copy of their 5500 form on time and they got nailed with penalties, won't make that msitake again). I wouldn't take the chance. Pay a professional a couple thousand dollars and let them take care of you. OH and don't let someone offer you free administration services either. They will just take the fees out of the plan assets so that it appears free. You will end up broke and penniless in retirement.

Whatever you decide, good luck!

[Guest caddieadmin]

First of all, let me just say how much I appreciate the time and effort you guys have put into your responses. They gave me some great things to think about.

I guess to give you guys a better idea of my situation, I am not the owner of my company. I'm just one of the employees (with an economics/finance background) who was asked to see if I was able to set up this 401k (so as far as being "cost efficient," my boss is certainly trying to be). Basically what I've done is taken a prototype 401k and customized it for the needs of my company (so, in essence I've created an individualized 401k potentially awaiting a determination letter from the IRS). So I know I probably scared you guys with all that "from scratch" talk, but by working off of the prototype, I am trying to make the document as official as possible.

And over the last few weeks I've been running the plan through the IRS's "Alert Guidelines" (the various checklists IRS specialists use when checking over a document to see if it's eligible for a positive determination letter) to see where any deficiencies might be. I'm also getting in touch with a 401k specialist to see if he can read over my document and offer any suggestions or further solutions.

If upon meeting with this individual I find that what I have created is nowhere near being acceptable in the eyes of the IRS, DOL, etc, I will most certainly suggest that my boss outsource to someone who can accurately set up a proper plan document for our needs. It would be a horrible tragedy if I did anything less. Worst case scenario, I've learned a whole hell of a lot about the process.

But if there's any other thoughts/suggestions you guys have as far as advice goes, I'd love to hear them. I have gained a whole new respect for this industry through my research, and I would jump at any opportunity to pick your brains.

[Guest BXO]

"Basically what I've done is taken a prototype 401k and customized it for the needs of my company (so, in essence I've created an individualized 401k potentially awaiting a determination letter from the IRS)...

I'm also getting in touch with a 401k specialist to see if he can read over my document and offer any suggestions or further solutions."

Did you pay for the prototype that you customized and now call "my document," or was it a pre-approved document provided to you for free? Because the firm that provided the prototype would likely be a good candidate for help with reviewing the custom plan and filing the determination letter.

[John Feldt ERPA CPC QPA]

1 Does the company that provided you with the prototype continue to act as the sponsor of your document, meaning: have they kept it up-to-date with all IRS-required amendments (minimum distribution amendment, mandatory distribution amendment, final 401(k) / 401(m) amendment, etc.). If not, then your prototype determination letter has lost its reliance.

2 Have they timely provided you with the summaries of material modifications for these amendments for you to distribute to the participants and to include with the SPD whenever it is handed out to a new participant?

3 If your plan is a safe harbor plan (to avoid ADP and ACP testing, and possibly to avoid the top heavy test), have you been providing the required notice timely each year? If you have, did you make the necessary changes for your 2007 Safe Harbor notice when the language could no longer refer to the SPD for vesting and withdrawal provisions? If the plan is a safe harbor 401(k) plan, does the plan have allocation conditions for the company discretionary match (if you have a discretionary match)? - the Final 401(k) / 401(m) regulations would still require an ACP test for such match if you kept such conditions.

4 Speaking of testing, if the plan is not a safe harbor 401(k), are you doing your own testing? That would be the ADP, ACP, and top heavy tests? If so, does someone in your firm review these tests to make sure they are correct (peer review)?

5 Also, do you check the 415 annual addition limits, 402(g) deferral limits and the 404 deduction limits? Are those also peer reviewed?

6 Do you have someone annually review the operation of the plan to make sure that it conformed to the written language of the plan document? Is their work also peer reviewed?

Well, this list could go on for several more pages, but I think you get the idea. I am gald to see that you are having a specialist look at the plan. Remember, these things need to be done every year, not just once in a while.

For a very low annual fee, all of the above plus a whole lot more gets done and peer reviewed by professionals who make their living solely by loving the qualified plan code and regulations. Ok, maybe not really loving the code and regs, but enjoying the challenge at least! I would wager that your hourly billable rate multiplied by the number of hours it would take you to truly do all of the above correctly would far exceed the low price fee of most TPA firms.

Please be aware that the IRS has a correction program in place (EPCRS) and when they find something wrong upon audit that could have been voluntarily corrected by going to EPCRS, they are not always kind and gentle about the fee (sanction) for the plan's noncompliance. They usually start at the maximum and negotiate down from that point. If you find something wrong in the plan, be sure to read Revenue Procedure 2006-27 (my copy is a mere 116 pages long). This procedure explains how to minimize the cost to the company to fix a problem, be that a document failure, an operational failure, a demographic failure that causes you to fail a 401(a)(4), 401(a)(26), or a 410(b) test, or an overall employer eligibility failure (which is when a company adopts a plan that they are not truly eligible to adopt).

One thing that remains the same for qualified plans: change - the laws will change and the guidance provided by the IRS or by the DOL will also continually change how plans must be operated. Be sure to stay on top of these all the time (as you know PPA2006 added a lot of new law for qualified plans and the guidance has been trickling out ever since and will continue until at least 2011.

Have a nice day!