You already know that a self-directed 401(k) plan is an ideal fit for an individual who wants control of their retirement account and are self-employed with no common law employees. But, does the plan make sense for a multi-participant plan (e.g., small business plan) who MAY have employees?
Most any plan can be self-directed and, if an individual 401(k) plan can be self-directed, it would only make sense that any 401(k) plan can be self-directed.
However, while both the individual and small business 401(k) plans are 401(k) plans in the eyes of the IRS and DOL, there are different reporting requirements for plan assets with the small business plan and non-discrimination testing must be executed on the plan each year.
Further, the small business plan (even if you only have one full-time employee other than yourself as the business owner) must file an annual IRS Form 5500 each year for the plan. As a business owner, you want to establish a plan to benefit yourself to the largest extent possible, and introduce a plan that will help solidify employee recruitment and retention.
As the owner of your small business, you want a plan that can provide the maximum benefits to you. With most 401(k) plans, the structure provides maximum benefits for the business owner while at the same time not discriminating against your employees. The same is true with self-direction. As the business owner, you can elect to self-direct your retirement assets but you must still offer this option to the rank and file.
At this point in time, you may elect not to self-direct because of the perceived liability issues you may face by having employees requesting self-employment options with the Trustee (typically the business owner) still being responsible for plan compliance.
And, you would be correct that the compliance issues are important issues that must be thoroughly considered before establishing a 401(k) plan for your small business. However, what the business owner will typically experience is that very few employees, if any, will opt for this benefit and participants are never provided the retirement “checkbook” (explained below).
1) Many employees will not believe they have sufficient balances within their account to self-direct;
2) Many employees will not believe they have a sufficient level of expertise to self-direct;
3) In most cases, plan participants (not the business owner) will need to pay related fees for setting up their self-directed option and possibly additional fees to have an outside tax professional confirm that their self-directed request does not violate any IRS or DOL Prohibited Transactions.
4) The participant will become less enamored with the self-directed process as they will not be provided a retirement checkbook. This is an important note: the Trustee (typically the owner) of the plan is responsible for IRS and DOL compliance. As such, even when a participant self-directs, they will have to make any and all requests for investment funds through the Trustee. The employee may even need to pay additional fees to have the transaction reviewed for compliance purposes.
As a result, in most cases employees/participants elect not to participate in such offerings, but they must be provided every opportunity to participate.
With the assistance of FSD and its extremely qualified team of professionals, a small business owner can have a small business 401(k) plan established and utilize FSD services to establish, administer and account for the plan and its assets. This would include plan design, plan establishment, plan implementation, plan accounting and plan reporting. The business owner will know that the plan is being correctly administered and accounted for, and the small business owner will have the freedom and flexibility to self-direct their investments.