Employer Resources
Keeping you informed and up-to-date on 401(k) plans and employee financial wellness
Go to topic
Most Recent Posts
-
Everything You Need to Know about Form 5500
Everything You Need to Know about Form 5500 If you’d like to get a general idea of what it takes to file a Form 5500 for a 401(k) plan, here are the top five things you need to know. As you can imagine, the Internal Revenue Service (IRS) and the Department of Labor (DOL) like to keep tabs on employee benefit plans to make sure everything is running smoothly and there are no signs of impropriety. One of the ways they do that is with Form 5500. You may be wondering: What is Form 5500? Well, Form 5500—otherwise known as the Annual Return/Report of Employee Benefit Plan—discloses details about the financial condition, investments, and operations of the plan. Not only for retirement plans, Form 5500 must be filed by the employer or plan administrator of any pension or welfare benefit plan covered by ERISA, including 401(k) plans, pension plans, medical plans, dental plans, and life insurance plans, among others. If you’re a Betterment client, you don’t need to worry about many of these Form 5500 details because we do the heavy lifting for you. But if you’d like to get a general idea of what it takes to file a Form 5500 for a 401(k) plan, here are the top five things you need to know. 1. There are three different versions of Form 5500—each with its own unique requirements. Betterment drafts a signature-ready Form 5500 on your behalf. But if you were to do it yourself, you would select from one of the following form types based on your plan type: Form 5500-EZ – If you have a one-participant 401(k) plan —also known as a “solo 401(k) plan”—that only covers you (and your spouse if applicable), you can file this form. Have a solo 401(k) plan with less than $250,000 in plan assets as of the last day of the plan year? No need to file a Form 5500-EZ (or any Form 5500 at all). Lucky you! Form 5500-SF– If you have a small 401(k) plan—which is generally defined as a plan that covers fewer than 100 participants on the first day of the plan year—you can file a simplified version of the Form 5500 if it also meets the following requirements: It satisfies the independent audit waiver requirements established by the DOL. It is 100% invested in eligible plan assets—such as mutual funds and variable annuities—with determinable fair values. It doesn’t hold employer securities. Form 5500– If you have a large 401(k) plan—which is generally defined as a plan that covers more than 100 participants with assets in the plan—or a small 401(k) plan that doesn’t meet the Form 5500-EZ or Form 5500-SF filing requirements, you must file a long-form Form 5500. Unlike Form 5500-EZ and Form 5500-SF, Form 5500 is not a single-form return. Instead, you must file the form along with specific schedules and attachments, including: Schedule A -- Insurance information Schedule C -- Service provider information Schedule D -- Participating plan information Schedule G -- Financial transaction schedules Schedule H or I -- Financial information (Schedule I for small plan) Schedule R -- Retirement plan information Independent Audit Report Certain forms or attachments may not be required for your plan. Is your plan on the cusp of being a small (or large) plan? If your plan has between 80 and 120 participants on the first day of the plan year, you can benefit from the 80-120 Rule. The rule states that you can file the Form 5500 in the same category (i.e., small or large plan) as the prior year’s return. That’s good news, because it makes it possible for large retirement plans with between 100 and 120 participants to classify themselves as “small plans” and avoid the time and expense of completing the independent audit report. 2. You must file the Form 5500 by a certain due date (or file for an extension). You must file your plan’s Form 5500 by the last business day of the seventh month following the end of the plan year. For example, if your plan year ends on December 31, you should file your Form 5500 by July 31 of the following year to avoid late fees and penalties. If you’re a Betterment client, you’ll receive your signature-ready Form 5500 with ample time to submit it. Plus, we’ll communicate with you frequently to help you meet the filing deadline. But if you need a little extra time, Betterment can file for an extension on your behalf using Form 5558—but you have to do it by the original deadline for the Form 5500. The extension affords you another two and a half months to file your form. (Using the prior example, that would give you until October 15 to get your form in order.) What if you happen to miss the Form 5500 filing deadline? If you miss the filing deadline, you’ll be subject to penalties from both the IRS and the DOL: The IRS penalty for late filing is $250 per day, up to a maximum of $150,000. The DOL penalty for late filing can run up to $2,259 per day, with no maximum. There are also additional penalties for plan sponsors that willfully decline to file. That said, through the DOL’s Delinquent Filer Voluntary Compliance Program (DFVCP), plan sponsors can avoid higher civil penalty assessments by satisfying the program’s requirements. Under this special program, the maximum penalty for a single late Form 5500 is $750 for small 401(k) plans and $2,000 for large 401(k) plans. The DFVCP also includes a “per plan” cap, which limits the penalty to $1,500 for small plans and $4,000 for large plans regardless of the number of late Form 5500s filed at the same time. 3. The Form 5500 filing process is done electronically in most cases. For your ease and convenience, Form 5500 and Form 5500-SF must be filed electronically using the DOL’s EFAST2 processing system (there are a few exceptions). EFAST2 is accessible through the agency’s website or via vendors that integrate with the system. To ensure you can file your Form 5500 quickly, accurately, and securely, Betterment facilitates the filing for you. Whether you file electronically or via hard copy, remember to keep a signed copy of your Form 5500 and all of its schedules on file. Once you file Form 5500, your work isn’t quite done. You must also provide your employees with a Summary Annual Report (SAR), which describes the value of your plan’s assets, any administrative costs, and other details from your Form 5500 return. The SAR is due to participants within nine months after the end of the plan year. (If you file an extension for your Form 5500, the SAR deadline also extends to December 15.) For example, if your plan year ends on December 31 and you submitted your Form 5500 by July 31, you would need to deliver the SAR to your plan participants by September 30. While you can provide it as a hard copy or digitally, you’ll need participants’ prior consent to send it digitally. In addition, participants may request a copy of the plan’s full Form 5500 return at any time. As a public document, it’s accessible to anyone via the DOL website. 4. It’s easy to make mistakes on the Form 5500 (but we aim to help you avoid them). As with any bureaucratic form, mistakes are common and may cause issues for your plan or your organization. Mistakes may include: Errors of omission such as forgetting to indicate the number of plan participants Errors of timing such as indicating a plan has been terminated because a resolution has been filed, yet there are still assets in the plan Errors of accuracy involving plan characteristic codes and reconciling financial information Errors of misinterpretation or lack of information such as whether there have been any accidental excess contributions above the federal limits or failure to report any missed contributions or late deposits Want to avoid making errors on your Form 5500? Betterment prepares the form on your behalf, so all you need to do is review, sign, and submit—it’s as simple as that. 5. Betterment drafts a signature-ready Form 5500 for you, including related schedules When it comes to Form 5500, Betterment does nearly all the work for you. Specifically, we: Prepare a signature-ready Form 5500 that has all the necessary information and related schedules Remind you of the submission deadline so you file it on time Guide you on how to file the Form 5500 (it only takes a few clicks) and make sure it’s accepted by the DOL Provide you with an SAR that’s ready for you to distribute to your participants Ready to learn more about how Betterment can help you with your Form 5500 (and so much more)? Let’s talk.
-
Understanding 401(k) Annual Compliance Testing
Understanding 401(k) Annual Compliance Testing These yearly required tests are meant to ensure everyone is benefiting from your 401(k) plan. If your company has a 401(k) plan—or if you’re considering starting one in the future—you may have heard about annual compliance testing, also known as nondiscrimination testing. But what is it really? And how can you help your plan pass these important compliance tests? Read on for our explanation. What is annual compliance testing? Mandated by ERISA, annual compliance testing helps ensure that 401(k) plans benefit all employees—not just business owners or highly compensated employees. Because the government provides significant tax benefits through 401(k) plans, it wants to ensure that these perks don’t disproportionately favor high earners. We’ll dive deeper into nondiscrimination testing, but let’s first discuss an important component of 401(k) compliance: contribution limits. What contribution limits do I need to know about? Because of the tax advantages given to 401(k) plan contributions, the IRS puts a limit on the amount that employers and employees can contribute. Here’s a quick overview: Limit What is it? Notes for 2024 plan year Employee contribution limits (“402g”) Limits the amount a participant may contribute to the 401(k) plan. The personal limit is based on the calendar year.1 Note that traditional (pre-tax) and Roth (post-tax) contributions are added together (there aren’t separate limits for each). $23,000 is the maximum amount participants may contribute to their 401(k) plan for 2024. Participants age 50 or older during the year may defer an additional $7,500 in “catch-up” contributions if permitted by the plan. Total contribution limit (“415”) Limits the total contributions allocated to an eligible participant for the year. This includes employee contributions, all employer contributions and forfeiture allocations. Total employee and employer contributions cannot exceed total employee compensation for the year. $69,0002 plus up to $7,500 in catch-up contributions (if permitted by the plan) for 2024. Cannot exceed total compensation. Employer contribution limit Employers’ total contributions (excluding employee deferrals) may not exceed 25% of eligible compensation for the plan year. N/A This limit is an IRS imposed limit based on the calendar year. Plans that use a ‘plan year’ not ending December 31st base their allocation limit on the year in which the plan year ends. This is different from the compensation limits, which are based on the start of the plan year. Adjusted annually; see most recent Cost of Living Adjustments table here. What is nondiscrimination testing designed to achieve? Essentially, nondiscrimination testing has three main goals: To measure employee retirement plan participation levels to ensure that the plan isn’t “discriminating” against lower-income employees. To ensure that people of all income levels have equal access to—and awareness of—the company’s retirement plan. To encourage employers to be good stewards of their employees’ futures by making any necessary adjustments to level the playing field (such as matching employees’ contributions) Where do I begin? Before you embark on annual compliance testing, you’ll need to categorize your employees by income level and employee status. Here are the main categories (and acronyms): Highly compensated employee (HCE)—According to the IRS, an employee who meets one or more of the following criteria: Prior (lookback) year compensation—For plan years ending in 2024, earned over $150,000 in the preceding plan year; some plans may limit this to the top 20% of earners (known as the top-paid group election), which would be outlined in your plan document; or Ownership in current or prior year—Owns more than 5% of (1) outstanding corporate stock, (2) voting power across corporate stock, or (3) capital or profits of an entity not considered a corporation Non-highly compensated employee (NHCE)—Someone who does not meet the above criteria. Key employee—According to the IRS, an employee who meets one or more of the following criteria during the plan year: Ownership over 5%—Owns more than 5% of (1) outstanding corporate stock, (2) voting power across corporate stock, or (3) capital or profits of an entity not considered a corporation. Ownership over 1%—Owns more than 1% of the stock, voting power, capital, or profits, and earned more than $150,000. Officer—An officer of the employer who earned more than $220,000 for 2024; this may be limited to the lesser of 50 officers or the greater of 3 or 10% of the employee count. Non-key employee—Someone who does not meet the above criteria. What are the tests that need to be performed? Below are the tests typically performed for 401(k) plans. Betterment will perform each of these tests on behalf of your plan and inform you of the results. 1. 410(b) Coverage Tests—These tests determine the ratios of employees eligible for and benefitting from the plan to show that the plan fairly covers your employee base. Specifically, these tests review the ratio of HCEs benefitting from the plan against the ratio of NHCEs benefitting from the plan. Typically, the NHCE percentage benefitting must be at least 70% or 0.7 times the percentage of HCEs considered benefitting for the year, or further testing is required. These annual tests are performed across different contribution types: employee contributions, employer matching contributions, after-tax contributions, and non-elective (employer, non-matching) contributions. 2. Actual deferral percentage (ADP) test—Compares the average salary deferral of HCEs to that of non-highly compensated employees (NHCEs). This test includes pre-tax and Roth deferrals, but not catch-up contributions. Essentially, it measures the level of engagement of HCEs vs. NHCEs to make sure that high income earners aren’t saving at a significantly higher rate than the rest of the employee base. Specifically, two percentages are calculated: HCE ADP—The average deferral rate (ADR) for each HCE is calculated by dividing the employee’s elective deferrals by their salary. The HCE ADP is calculated by averaging the ADR for all eligible HCEs (even those who chose not to defer). NHCE ADP—The average deferral rate (ADR) for each NHCE is calculated by dividing the employee’s elective deferrals by their salary. The NHCE ADP is calculated by averaging the ADR for all eligible NHCEs (even those who chose not to defer). The following table shows how the IRS limits the disparity between HCE and NHCE average contribution rates. For example, if the NHCEs contributed 3%, the HCEs can only defer 5% (or less) on average. NHCE ADP HCE ADP 2% or less → NHCE% x 2 2-8% → NHCE% + 2 more than 8% → NHCE% x 1.25 3. Actual contribution percentage (ACP) test—Compares the average employer contributions received by HCEs and NHCEs. (So this test is only required if you make employer contributions.) Conveniently, the calculations and breakdowns are the same as with the ADP test, but the average contribution rate calculation includes both employer matching contributions and after-tax contributions. 4. Top-heavy determination—Evaluates whether or not the total value of the plan accounts of “key employees” is more than 60% of the value of all plan assets. Simply put, it analyzes the accrued benefits between two groups: Key employees and non-Key employees. A plan is considered top-heavy when the total value (account balance with adjustments related to rollovers, terminated accounts, and a five-year lookback of distributions) of the Key employees’ plan accounts is greater than 60% of the total value (also adjusted as noted above) of the plan assets, as of the end of the prior plan year. (Exception: The first plan year is determined based on the last day of that year). If the plan is considered top-heavy for the year, employers must make a contribution to non-key employees. The top-heavy minimum contribution is the lesser of 3% of compensation or the highest percentage contributed for key employees. However, this can be reduced or avoided if no key employee makes or receives contributions for the year (including forfeiture allocations). What happens if my plan fails these tests? If your plan fails the ADP and ACP tests, you’ll need to fix the imbalance by returning 401(k) plan contributions to your HCEs or by making additional employer contributions to your NHCEs. If you have to refund contributions, that money may be subject to state and federal taxes. Plus, if you don’t correct the issue in a timely manner, there could also be a 10% penalty fee and other serious ramifications. Why is it common to fail testing? Small and mid-size businesses may struggle to pass if they have a relatively high number of HCEs. If HCEs contribute a lot to the plan, but non-highly compensated employees (NHCEs) don’t, there’s a chance that the 401(k) plan will not pass nondiscrimination testing. It’s actually easier for large companies to pass the tests because they have many employees at varying income levels contributing to the plan. How can I help my plan pass the tests? It pays to prepare for nondiscrimination testing. Here are a few tips that can make a difference: Add automatic enrollment —By adding an auto-enrollment feature to your 401(k) plan, you can automatically deduct elective deferrals from your employees’ wages unless they opt out. It’s a simple way to boost participation rates and help your employees start saving. In fact, the government is getting more behind auto-enrollment; SECURE 2.0 mandates plans that launched after Dec. 29, 2022 add automatic enrollment to the plan by Jan. 1, 2025. Add a Safe Harbor provision to your 401(k) plan—Safe Harbor plan design typically makes compliance testing easier to pass. Make it easy to enroll in your plan—Is your 401(k) plan enrollment process confusing and cumbersome? If so, it might be stopping employees from enrolling. Consider partnering with a tech-savvy provider like Betterment that can help your employees enroll quickly and easily—and support them on every step of their retirement saving journey. Learn more now. Encourage your employees to save—Whether you send emails or host employee meetings, it’s important to get the word out about saving for retirement through the plan. That’s because the more NHCEs that participate, the better chance you have of passing the nondiscrimination tests. (Plus, you’re helping your team save for their future.) Add automatic escalation - By adding automatic escalation, you can ensure that participants who are automatically enrolled in the plan continue to increase their deferral rate by 1% annually until a cap is reached (generally 15%). It’s a great way to increase your employees retirement savings and to engage them in the plan. How can Betterment help? Nondiscrimination testing and many other aspects of 401(k) plan administration can be complex. That’s why we do everything in our power to help make it easier for you as a plan sponsor. We help with year-end compliance testing, including ADP/ACP testing, top-heavy testing, annual additions testing, deferral limit testing, and coverage testing. With our intuitive online platform, you can better manage your plan and get the support you need along the way. Ready to learn more? Let's talk. Any links provided to other websites are offered as a matter of convenience and are not intended to imply that Betterment or its authors endorse, sponsor, promote, and/or are affiliated with the owners of or participants in those sites, or endorses any information contained on those sites, unless expressly stated otherwise. The information contained in this article is meant to be informational only and does not constitute investment or tax advice.
-
Meeting Your 401(k) Fiduciary Responsibilities
Meeting Your 401(k) Fiduciary Responsibilities To help your business avoid any pitfalls, this guide outlines your 401(k) fiduciary responsibilities. If your company has or is considering starting a 401(k) plan, you’ve probably heard the term “fiduciary.” But what does being a fiduciary mean to you as a 401(k) plan sponsor? Simply put, it means that you’re obligated to act in the best interests of your 401(k) plan, its participants and beneficiaries. It’s serious business. If fiduciary responsibilities aren’t managed properly, your business could face legal and financial ramifications. To help you avoid any pitfalls, this guide outlines ways to understand your 401(k) fiduciary responsibilities. A brief history of the 401(k) plan and fiduciary duties When Congress passed the Revenue Act of 1978, it included the little-known provision that eventually led to the 401(k) plan. The Employee Retirement Income Security Act of 1974, referred to as ERISA, is a companion federal law that contains rules designed to protect employee savings by requiring individuals and entities that manage a retirement plan, referred to as “fiduciaries,” to follow strict standards of conduct. Among other responsibilities, fiduciaries must always act with care and prudence and not engage in any conflicts of interest with regard to plan assets. When you adopt a 401(k) plan for your employees as a plan sponsor, you become an ERISA fiduciary. And in exchange for helping employees build retirement savings, you and your employees receive special tax benefits, as outlined in the Internal Revenue Code. The IRS oversees the tax rules, and the Department of Labor (DOL) provides guidance on ERISA fiduciary requirements and enforcement. As you can imagine, following these rules can sometimes feel like navigating a maze. But the good news is that an experienced 401(k) provider like Betterment can help you understand your fiduciary duties, and may even shoulder some of the responsibility for you as we’ll explain below. Key fiduciary responsibilities No matter the size of your company or 401(k) plan, every plan sponsor has fiduciary duties, broadly categorized as follows: You are considered the “named fiduciary” with overall responsibility for the plan, including selecting and monitoring plan investments. You are also considered the “plan administrator” with fiduciary authority and discretion over how the plan is operated. As a fiduciary, you must follow the high standards of conduct required by ERISA when managing your plan’s investments and when making decisions about plan operations. There are five cornerstone rules you must follow: Act in employees’ best interests—Every decision you make about your plan must be solely based on what is best for your participants and their beneficiaries. Act prudently—Prudence requires that you be knowledgeable about retirement plan investments and administration. If you do not have the expertise to handle all of these responsibilities, you will need to engage the services of those who do, such as investment managers or recordkeepers. Diversify plan investments—You must diversify investments to help reduce the risk of large losses to plan assets. Follow the plan documents—You must follow the terms of the plan document when operating your plan (unless they are inconsistent with ERISA). Pay only reasonable plan fees—Fees from plan assets must be reasonable and for services that are necessary for your plan. Detailed DOL rules outline the steps you must take to fulfill this fiduciary responsibility, which include reviewing fees on an ongoing basis, collecting and evaluating fee disclosures for investments and service provider’s revenue, and comparing (or benchmarking) fees to help ensure they are reasonable. You don’t have to pay a lot to get a quality 401(k) plan Fees can really chip away at your participants’ account balances (and have a detrimental impact on their futures). So take care to help ensure that the services you’re paying for are necessary for the plan and that the fees paid from plan assets are reasonable. To determine what’s reasonable you may need to benchmark the fees against those of other similar retirement plans. And if you have an existing 401(k) plan, it’s important to take note of the “ongoing” responsibility to review fees to determine their reasonableness. The industry is continually evolving and what may have been reasonable fees from one provider may no longer be the case! It’s your responsibility as a plan fiduciary to keep an eye on what’s available. Why it’s important to fulfill your fiduciary duties Put simply, it’s incredibly important that you meet your 401(k) fiduciary responsibilities. Not only are your actions critical to your employees’ futures, but there are also serious consequences if you fail to fulfill your fiduciary duties. In fact, plan participants and other plan fiduciaries have the right to sue to correct any financial wrongdoing. If the plan is mismanaged, you face a two-fold risk: Civil and criminal action (including expensive penalties) from the government and the potentially high price of rectifying the issue. Under ERISA, fiduciaries are personally liable for plan losses caused by a breach of fiduciary responsibilities and may be required to: Restore plan losses (including interest) Pay expenses relating to correction of inappropriate actions. While your fiduciary responsibilities can seem daunting, the good news is that ERISA also allows you to delegate many of your fiduciary responsibilities to 401(k) professionals like Betterment. Additional fiduciary responsibilities On top of the five cornerstone rules listed above, there are a few other things on a fiduciary’s to-do list: Deposit participant contributions in a timely manner —This may seem simple, but it’s extremely important to do it quickly and accurately. Specifically, you must deposit participants’ contributions to your plan’s trust account on the earliest date they can be reasonably segregated from general corporate assets. The timelines differ depending on your plan size: Small plan—If your plan has fewer than 100 participants, a deposit is considered timely if it’s made within seven business days from the date the contributions are withheld from employees’ wages. Large plan— If your plan has 100 participants or more, you must deposit contributions as soon as possible after you withhold the money from employees’ wages. It must be “timely,” which means typically within a few days. For all businesses, the deposit should never occur later than the 15th business day of the month after the contributions were withheld from employee wages. However, contributions should be deposited well before then. Fulfill your reporting and disclosure requirements—Under ERISA, you are required to fulfill specific reporting requirements. While the paperwork can be complicated, an experienced 401(k) provider like Betterment should be able to help to guide you through the process. It’s important to note that if required government reports—such as Form 5500—aren’t filed in a timely manner, you may be assessed financial penalties. Plus, when required disclosures—such as Safe Harbor notices—aren’t provided to participants in a timely manner, the consequences can also be severe including civil penalties, plan disqualification by the IRS, or participant lawsuits. Get help shouldering your fiduciary responsibilities For most employers, day-to-day business responsibilities leave little time for the extensive investment research, analysis, and fee benchmarking that’s required to responsibly manage a 401(k) plan. Because of this, many companies hire outside experts to take on certain fiduciary responsibilities. However, even the act of hiring 401(k) experts is a fiduciary decision! Even though you can appoint others to carry out many of your fiduciary responsibilities, you can never fully transfer or eliminate your role as an ERISA fiduciary. Take a look at the chart below to see the different fiduciary roles—and what that would mean for you as the employer: Defined in ERISA section Outside expert Employer No Fiduciary Status Disclaims any fiduciary investment responsibility Retains sole fiduciary responsibility and liability 3(21) Shares fiduciary investment responsibility in the form of investment recommendations Retains responsibility for final investment discretion 3(38) Assumes full discretionary authority for assets and investments Relieves employer of investment fiduciary responsibility (yet still needs to monitor the 3(38) provider) 3(16) Has discretionary responsibility for certain administrative aspects of the plan Relieves employer of certain plan administration responsibilities Betterment can help Betterment serves as a 3(38) investment manager for all plans that we manage and can serve as a limited 3(16) fiduciary with agreed upon administrative tasks as well. This means less work for you and your staff, so you can focus on your business. Get in touch today if you’re interested in bringing a Betterment 401(k) to your organization: 401k@betterment.com.
Our library built for employers
Plan Admin
-
![]()
Everything You Need to Know about Form 5500
Everything You Need to Know about Form 5500 If you’d like to get a general idea of what it takes to file a Form 5500 for a 401(k) plan, here are the top five things you need to know. As you can imagine, the Internal Revenue Service (IRS) and the Department of Labor (DOL) like to keep tabs on employee benefit plans to make sure everything is running smoothly and there are no signs of impropriety. One of the ways they do that is with Form 5500. You may be wondering: What is Form 5500? Well, Form 5500—otherwise known as the Annual Return/Report of Employee Benefit Plan—discloses details about the financial condition, investments, and operations of the plan. Not only for retirement plans, Form 5500 must be filed by the employer or plan administrator of any pension or welfare benefit plan covered by ERISA, including 401(k) plans, pension plans, medical plans, dental plans, and life insurance plans, among others. If you’re a Betterment client, you don’t need to worry about many of these Form 5500 details because we do the heavy lifting for you. But if you’d like to get a general idea of what it takes to file a Form 5500 for a 401(k) plan, here are the top five things you need to know. 1. There are three different versions of Form 5500—each with its own unique requirements. Betterment drafts a signature-ready Form 5500 on your behalf. But if you were to do it yourself, you would select from one of the following form types based on your plan type: Form 5500-EZ – If you have a one-participant 401(k) plan —also known as a “solo 401(k) plan”—that only covers you (and your spouse if applicable), you can file this form. Have a solo 401(k) plan with less than $250,000 in plan assets as of the last day of the plan year? No need to file a Form 5500-EZ (or any Form 5500 at all). Lucky you! Form 5500-SF– If you have a small 401(k) plan—which is generally defined as a plan that covers fewer than 100 participants on the first day of the plan year—you can file a simplified version of the Form 5500 if it also meets the following requirements: It satisfies the independent audit waiver requirements established by the DOL. It is 100% invested in eligible plan assets—such as mutual funds and variable annuities—with determinable fair values. It doesn’t hold employer securities. Form 5500– If you have a large 401(k) plan—which is generally defined as a plan that covers more than 100 participants with assets in the plan—or a small 401(k) plan that doesn’t meet the Form 5500-EZ or Form 5500-SF filing requirements, you must file a long-form Form 5500. Unlike Form 5500-EZ and Form 5500-SF, Form 5500 is not a single-form return. Instead, you must file the form along with specific schedules and attachments, including: Schedule A -- Insurance information Schedule C -- Service provider information Schedule D -- Participating plan information Schedule G -- Financial transaction schedules Schedule H or I -- Financial information (Schedule I for small plan) Schedule R -- Retirement plan information Independent Audit Report Certain forms or attachments may not be required for your plan. Is your plan on the cusp of being a small (or large) plan? If your plan has between 80 and 120 participants on the first day of the plan year, you can benefit from the 80-120 Rule. The rule states that you can file the Form 5500 in the same category (i.e., small or large plan) as the prior year’s return. That’s good news, because it makes it possible for large retirement plans with between 100 and 120 participants to classify themselves as “small plans” and avoid the time and expense of completing the independent audit report. 2. You must file the Form 5500 by a certain due date (or file for an extension). You must file your plan’s Form 5500 by the last business day of the seventh month following the end of the plan year. For example, if your plan year ends on December 31, you should file your Form 5500 by July 31 of the following year to avoid late fees and penalties. If you’re a Betterment client, you’ll receive your signature-ready Form 5500 with ample time to submit it. Plus, we’ll communicate with you frequently to help you meet the filing deadline. But if you need a little extra time, Betterment can file for an extension on your behalf using Form 5558—but you have to do it by the original deadline for the Form 5500. The extension affords you another two and a half months to file your form. (Using the prior example, that would give you until October 15 to get your form in order.) What if you happen to miss the Form 5500 filing deadline? If you miss the filing deadline, you’ll be subject to penalties from both the IRS and the DOL: The IRS penalty for late filing is $250 per day, up to a maximum of $150,000. The DOL penalty for late filing can run up to $2,259 per day, with no maximum. There are also additional penalties for plan sponsors that willfully decline to file. That said, through the DOL’s Delinquent Filer Voluntary Compliance Program (DFVCP), plan sponsors can avoid higher civil penalty assessments by satisfying the program’s requirements. Under this special program, the maximum penalty for a single late Form 5500 is $750 for small 401(k) plans and $2,000 for large 401(k) plans. The DFVCP also includes a “per plan” cap, which limits the penalty to $1,500 for small plans and $4,000 for large plans regardless of the number of late Form 5500s filed at the same time. 3. The Form 5500 filing process is done electronically in most cases. For your ease and convenience, Form 5500 and Form 5500-SF must be filed electronically using the DOL’s EFAST2 processing system (there are a few exceptions). EFAST2 is accessible through the agency’s website or via vendors that integrate with the system. To ensure you can file your Form 5500 quickly, accurately, and securely, Betterment facilitates the filing for you. Whether you file electronically or via hard copy, remember to keep a signed copy of your Form 5500 and all of its schedules on file. Once you file Form 5500, your work isn’t quite done. You must also provide your employees with a Summary Annual Report (SAR), which describes the value of your plan’s assets, any administrative costs, and other details from your Form 5500 return. The SAR is due to participants within nine months after the end of the plan year. (If you file an extension for your Form 5500, the SAR deadline also extends to December 15.) For example, if your plan year ends on December 31 and you submitted your Form 5500 by July 31, you would need to deliver the SAR to your plan participants by September 30. While you can provide it as a hard copy or digitally, you’ll need participants’ prior consent to send it digitally. In addition, participants may request a copy of the plan’s full Form 5500 return at any time. As a public document, it’s accessible to anyone via the DOL website. 4. It’s easy to make mistakes on the Form 5500 (but we aim to help you avoid them). As with any bureaucratic form, mistakes are common and may cause issues for your plan or your organization. Mistakes may include: Errors of omission such as forgetting to indicate the number of plan participants Errors of timing such as indicating a plan has been terminated because a resolution has been filed, yet there are still assets in the plan Errors of accuracy involving plan characteristic codes and reconciling financial information Errors of misinterpretation or lack of information such as whether there have been any accidental excess contributions above the federal limits or failure to report any missed contributions or late deposits Want to avoid making errors on your Form 5500? Betterment prepares the form on your behalf, so all you need to do is review, sign, and submit—it’s as simple as that. 5. Betterment drafts a signature-ready Form 5500 for you, including related schedules When it comes to Form 5500, Betterment does nearly all the work for you. Specifically, we: Prepare a signature-ready Form 5500 that has all the necessary information and related schedules Remind you of the submission deadline so you file it on time Guide you on how to file the Form 5500 (it only takes a few clicks) and make sure it’s accepted by the DOL Provide you with an SAR that’s ready for you to distribute to your participants Ready to learn more about how Betterment can help you with your Form 5500 (and so much more)? Let’s talk. -
![]()
Understanding 401(k) Annual Compliance Testing
Understanding 401(k) Annual Compliance Testing These yearly required tests are meant to ensure everyone is benefiting from your 401(k) plan. If your company has a 401(k) plan—or if you’re considering starting one in the future—you may have heard about annual compliance testing, also known as nondiscrimination testing. But what is it really? And how can you help your plan pass these important compliance tests? Read on for our explanation. What is annual compliance testing? Mandated by ERISA, annual compliance testing helps ensure that 401(k) plans benefit all employees—not just business owners or highly compensated employees. Because the government provides significant tax benefits through 401(k) plans, it wants to ensure that these perks don’t disproportionately favor high earners. We’ll dive deeper into nondiscrimination testing, but let’s first discuss an important component of 401(k) compliance: contribution limits. What contribution limits do I need to know about? Because of the tax advantages given to 401(k) plan contributions, the IRS puts a limit on the amount that employers and employees can contribute. Here’s a quick overview: Limit What is it? Notes for 2024 plan year Employee contribution limits (“402g”) Limits the amount a participant may contribute to the 401(k) plan. The personal limit is based on the calendar year.1 Note that traditional (pre-tax) and Roth (post-tax) contributions are added together (there aren’t separate limits for each). $23,000 is the maximum amount participants may contribute to their 401(k) plan for 2024. Participants age 50 or older during the year may defer an additional $7,500 in “catch-up” contributions if permitted by the plan. Total contribution limit (“415”) Limits the total contributions allocated to an eligible participant for the year. This includes employee contributions, all employer contributions and forfeiture allocations. Total employee and employer contributions cannot exceed total employee compensation for the year. $69,0002 plus up to $7,500 in catch-up contributions (if permitted by the plan) for 2024. Cannot exceed total compensation. Employer contribution limit Employers’ total contributions (excluding employee deferrals) may not exceed 25% of eligible compensation for the plan year. N/A This limit is an IRS imposed limit based on the calendar year. Plans that use a ‘plan year’ not ending December 31st base their allocation limit on the year in which the plan year ends. This is different from the compensation limits, which are based on the start of the plan year. Adjusted annually; see most recent Cost of Living Adjustments table here. What is nondiscrimination testing designed to achieve? Essentially, nondiscrimination testing has three main goals: To measure employee retirement plan participation levels to ensure that the plan isn’t “discriminating” against lower-income employees. To ensure that people of all income levels have equal access to—and awareness of—the company’s retirement plan. To encourage employers to be good stewards of their employees’ futures by making any necessary adjustments to level the playing field (such as matching employees’ contributions) Where do I begin? Before you embark on annual compliance testing, you’ll need to categorize your employees by income level and employee status. Here are the main categories (and acronyms): Highly compensated employee (HCE)—According to the IRS, an employee who meets one or more of the following criteria: Prior (lookback) year compensation—For plan years ending in 2024, earned over $150,000 in the preceding plan year; some plans may limit this to the top 20% of earners (known as the top-paid group election), which would be outlined in your plan document; or Ownership in current or prior year—Owns more than 5% of (1) outstanding corporate stock, (2) voting power across corporate stock, or (3) capital or profits of an entity not considered a corporation Non-highly compensated employee (NHCE)—Someone who does not meet the above criteria. Key employee—According to the IRS, an employee who meets one or more of the following criteria during the plan year: Ownership over 5%—Owns more than 5% of (1) outstanding corporate stock, (2) voting power across corporate stock, or (3) capital or profits of an entity not considered a corporation. Ownership over 1%—Owns more than 1% of the stock, voting power, capital, or profits, and earned more than $150,000. Officer—An officer of the employer who earned more than $220,000 for 2024; this may be limited to the lesser of 50 officers or the greater of 3 or 10% of the employee count. Non-key employee—Someone who does not meet the above criteria. What are the tests that need to be performed? Below are the tests typically performed for 401(k) plans. Betterment will perform each of these tests on behalf of your plan and inform you of the results. 1. 410(b) Coverage Tests—These tests determine the ratios of employees eligible for and benefitting from the plan to show that the plan fairly covers your employee base. Specifically, these tests review the ratio of HCEs benefitting from the plan against the ratio of NHCEs benefitting from the plan. Typically, the NHCE percentage benefitting must be at least 70% or 0.7 times the percentage of HCEs considered benefitting for the year, or further testing is required. These annual tests are performed across different contribution types: employee contributions, employer matching contributions, after-tax contributions, and non-elective (employer, non-matching) contributions. 2. Actual deferral percentage (ADP) test—Compares the average salary deferral of HCEs to that of non-highly compensated employees (NHCEs). This test includes pre-tax and Roth deferrals, but not catch-up contributions. Essentially, it measures the level of engagement of HCEs vs. NHCEs to make sure that high income earners aren’t saving at a significantly higher rate than the rest of the employee base. Specifically, two percentages are calculated: HCE ADP—The average deferral rate (ADR) for each HCE is calculated by dividing the employee’s elective deferrals by their salary. The HCE ADP is calculated by averaging the ADR for all eligible HCEs (even those who chose not to defer). NHCE ADP—The average deferral rate (ADR) for each NHCE is calculated by dividing the employee’s elective deferrals by their salary. The NHCE ADP is calculated by averaging the ADR for all eligible NHCEs (even those who chose not to defer). The following table shows how the IRS limits the disparity between HCE and NHCE average contribution rates. For example, if the NHCEs contributed 3%, the HCEs can only defer 5% (or less) on average. NHCE ADP HCE ADP 2% or less → NHCE% x 2 2-8% → NHCE% + 2 more than 8% → NHCE% x 1.25 3. Actual contribution percentage (ACP) test—Compares the average employer contributions received by HCEs and NHCEs. (So this test is only required if you make employer contributions.) Conveniently, the calculations and breakdowns are the same as with the ADP test, but the average contribution rate calculation includes both employer matching contributions and after-tax contributions. 4. Top-heavy determination—Evaluates whether or not the total value of the plan accounts of “key employees” is more than 60% of the value of all plan assets. Simply put, it analyzes the accrued benefits between two groups: Key employees and non-Key employees. A plan is considered top-heavy when the total value (account balance with adjustments related to rollovers, terminated accounts, and a five-year lookback of distributions) of the Key employees’ plan accounts is greater than 60% of the total value (also adjusted as noted above) of the plan assets, as of the end of the prior plan year. (Exception: The first plan year is determined based on the last day of that year). If the plan is considered top-heavy for the year, employers must make a contribution to non-key employees. The top-heavy minimum contribution is the lesser of 3% of compensation or the highest percentage contributed for key employees. However, this can be reduced or avoided if no key employee makes or receives contributions for the year (including forfeiture allocations). What happens if my plan fails these tests? If your plan fails the ADP and ACP tests, you’ll need to fix the imbalance by returning 401(k) plan contributions to your HCEs or by making additional employer contributions to your NHCEs. If you have to refund contributions, that money may be subject to state and federal taxes. Plus, if you don’t correct the issue in a timely manner, there could also be a 10% penalty fee and other serious ramifications. Why is it common to fail testing? Small and mid-size businesses may struggle to pass if they have a relatively high number of HCEs. If HCEs contribute a lot to the plan, but non-highly compensated employees (NHCEs) don’t, there’s a chance that the 401(k) plan will not pass nondiscrimination testing. It’s actually easier for large companies to pass the tests because they have many employees at varying income levels contributing to the plan. How can I help my plan pass the tests? It pays to prepare for nondiscrimination testing. Here are a few tips that can make a difference: Add automatic enrollment —By adding an auto-enrollment feature to your 401(k) plan, you can automatically deduct elective deferrals from your employees’ wages unless they opt out. It’s a simple way to boost participation rates and help your employees start saving. In fact, the government is getting more behind auto-enrollment; SECURE 2.0 mandates plans that launched after Dec. 29, 2022 add automatic enrollment to the plan by Jan. 1, 2025. Add a Safe Harbor provision to your 401(k) plan—Safe Harbor plan design typically makes compliance testing easier to pass. Make it easy to enroll in your plan—Is your 401(k) plan enrollment process confusing and cumbersome? If so, it might be stopping employees from enrolling. Consider partnering with a tech-savvy provider like Betterment that can help your employees enroll quickly and easily—and support them on every step of their retirement saving journey. Learn more now. Encourage your employees to save—Whether you send emails or host employee meetings, it’s important to get the word out about saving for retirement through the plan. That’s because the more NHCEs that participate, the better chance you have of passing the nondiscrimination tests. (Plus, you’re helping your team save for their future.) Add automatic escalation - By adding automatic escalation, you can ensure that participants who are automatically enrolled in the plan continue to increase their deferral rate by 1% annually until a cap is reached (generally 15%). It’s a great way to increase your employees retirement savings and to engage them in the plan. How can Betterment help? Nondiscrimination testing and many other aspects of 401(k) plan administration can be complex. That’s why we do everything in our power to help make it easier for you as a plan sponsor. We help with year-end compliance testing, including ADP/ACP testing, top-heavy testing, annual additions testing, deferral limit testing, and coverage testing. With our intuitive online platform, you can better manage your plan and get the support you need along the way. Ready to learn more? Let's talk. Any links provided to other websites are offered as a matter of convenience and are not intended to imply that Betterment or its authors endorse, sponsor, promote, and/or are affiliated with the owners of or participants in those sites, or endorses any information contained on those sites, unless expressly stated otherwise. The information contained in this article is meant to be informational only and does not constitute investment or tax advice. -
![]()
Meeting Your 401(k) Fiduciary Responsibilities
Meeting Your 401(k) Fiduciary Responsibilities To help your business avoid any pitfalls, this guide outlines your 401(k) fiduciary responsibilities. If your company has or is considering starting a 401(k) plan, you’ve probably heard the term “fiduciary.” But what does being a fiduciary mean to you as a 401(k) plan sponsor? Simply put, it means that you’re obligated to act in the best interests of your 401(k) plan, its participants and beneficiaries. It’s serious business. If fiduciary responsibilities aren’t managed properly, your business could face legal and financial ramifications. To help you avoid any pitfalls, this guide outlines ways to understand your 401(k) fiduciary responsibilities. A brief history of the 401(k) plan and fiduciary duties When Congress passed the Revenue Act of 1978, it included the little-known provision that eventually led to the 401(k) plan. The Employee Retirement Income Security Act of 1974, referred to as ERISA, is a companion federal law that contains rules designed to protect employee savings by requiring individuals and entities that manage a retirement plan, referred to as “fiduciaries,” to follow strict standards of conduct. Among other responsibilities, fiduciaries must always act with care and prudence and not engage in any conflicts of interest with regard to plan assets. When you adopt a 401(k) plan for your employees as a plan sponsor, you become an ERISA fiduciary. And in exchange for helping employees build retirement savings, you and your employees receive special tax benefits, as outlined in the Internal Revenue Code. The IRS oversees the tax rules, and the Department of Labor (DOL) provides guidance on ERISA fiduciary requirements and enforcement. As you can imagine, following these rules can sometimes feel like navigating a maze. But the good news is that an experienced 401(k) provider like Betterment can help you understand your fiduciary duties, and may even shoulder some of the responsibility for you as we’ll explain below. Key fiduciary responsibilities No matter the size of your company or 401(k) plan, every plan sponsor has fiduciary duties, broadly categorized as follows: You are considered the “named fiduciary” with overall responsibility for the plan, including selecting and monitoring plan investments. You are also considered the “plan administrator” with fiduciary authority and discretion over how the plan is operated. As a fiduciary, you must follow the high standards of conduct required by ERISA when managing your plan’s investments and when making decisions about plan operations. There are five cornerstone rules you must follow: Act in employees’ best interests—Every decision you make about your plan must be solely based on what is best for your participants and their beneficiaries. Act prudently—Prudence requires that you be knowledgeable about retirement plan investments and administration. If you do not have the expertise to handle all of these responsibilities, you will need to engage the services of those who do, such as investment managers or recordkeepers. Diversify plan investments—You must diversify investments to help reduce the risk of large losses to plan assets. Follow the plan documents—You must follow the terms of the plan document when operating your plan (unless they are inconsistent with ERISA). Pay only reasonable plan fees—Fees from plan assets must be reasonable and for services that are necessary for your plan. Detailed DOL rules outline the steps you must take to fulfill this fiduciary responsibility, which include reviewing fees on an ongoing basis, collecting and evaluating fee disclosures for investments and service provider’s revenue, and comparing (or benchmarking) fees to help ensure they are reasonable. You don’t have to pay a lot to get a quality 401(k) plan Fees can really chip away at your participants’ account balances (and have a detrimental impact on their futures). So take care to help ensure that the services you’re paying for are necessary for the plan and that the fees paid from plan assets are reasonable. To determine what’s reasonable you may need to benchmark the fees against those of other similar retirement plans. And if you have an existing 401(k) plan, it’s important to take note of the “ongoing” responsibility to review fees to determine their reasonableness. The industry is continually evolving and what may have been reasonable fees from one provider may no longer be the case! It’s your responsibility as a plan fiduciary to keep an eye on what’s available. Why it’s important to fulfill your fiduciary duties Put simply, it’s incredibly important that you meet your 401(k) fiduciary responsibilities. Not only are your actions critical to your employees’ futures, but there are also serious consequences if you fail to fulfill your fiduciary duties. In fact, plan participants and other plan fiduciaries have the right to sue to correct any financial wrongdoing. If the plan is mismanaged, you face a two-fold risk: Civil and criminal action (including expensive penalties) from the government and the potentially high price of rectifying the issue. Under ERISA, fiduciaries are personally liable for plan losses caused by a breach of fiduciary responsibilities and may be required to: Restore plan losses (including interest) Pay expenses relating to correction of inappropriate actions. While your fiduciary responsibilities can seem daunting, the good news is that ERISA also allows you to delegate many of your fiduciary responsibilities to 401(k) professionals like Betterment. Additional fiduciary responsibilities On top of the five cornerstone rules listed above, there are a few other things on a fiduciary’s to-do list: Deposit participant contributions in a timely manner —This may seem simple, but it’s extremely important to do it quickly and accurately. Specifically, you must deposit participants’ contributions to your plan’s trust account on the earliest date they can be reasonably segregated from general corporate assets. The timelines differ depending on your plan size: Small plan—If your plan has fewer than 100 participants, a deposit is considered timely if it’s made within seven business days from the date the contributions are withheld from employees’ wages. Large plan— If your plan has 100 participants or more, you must deposit contributions as soon as possible after you withhold the money from employees’ wages. It must be “timely,” which means typically within a few days. For all businesses, the deposit should never occur later than the 15th business day of the month after the contributions were withheld from employee wages. However, contributions should be deposited well before then. Fulfill your reporting and disclosure requirements—Under ERISA, you are required to fulfill specific reporting requirements. While the paperwork can be complicated, an experienced 401(k) provider like Betterment should be able to help to guide you through the process. It’s important to note that if required government reports—such as Form 5500—aren’t filed in a timely manner, you may be assessed financial penalties. Plus, when required disclosures—such as Safe Harbor notices—aren’t provided to participants in a timely manner, the consequences can also be severe including civil penalties, plan disqualification by the IRS, or participant lawsuits. Get help shouldering your fiduciary responsibilities For most employers, day-to-day business responsibilities leave little time for the extensive investment research, analysis, and fee benchmarking that’s required to responsibly manage a 401(k) plan. Because of this, many companies hire outside experts to take on certain fiduciary responsibilities. However, even the act of hiring 401(k) experts is a fiduciary decision! Even though you can appoint others to carry out many of your fiduciary responsibilities, you can never fully transfer or eliminate your role as an ERISA fiduciary. Take a look at the chart below to see the different fiduciary roles—and what that would mean for you as the employer: Defined in ERISA section Outside expert Employer No Fiduciary Status Disclaims any fiduciary investment responsibility Retains sole fiduciary responsibility and liability 3(21) Shares fiduciary investment responsibility in the form of investment recommendations Retains responsibility for final investment discretion 3(38) Assumes full discretionary authority for assets and investments Relieves employer of investment fiduciary responsibility (yet still needs to monitor the 3(38) provider) 3(16) Has discretionary responsibility for certain administrative aspects of the plan Relieves employer of certain plan administration responsibilities Betterment can help Betterment serves as a 3(38) investment manager for all plans that we manage and can serve as a limited 3(16) fiduciary with agreed upon administrative tasks as well. This means less work for you and your staff, so you can focus on your business. Get in touch today if you’re interested in bringing a Betterment 401(k) to your organization: 401k@betterment.com.
Plan Setup
-
![]()
401(k) Glossary of Terms
401(k) Glossary of Terms Whether you're offering a 401(k) for the first time or need a refresh on important terms, these definitions can help you make sense of industry jargon. 3(16) fiduciary: A fiduciary partner hired by an employer to handle a plan’s day-to-day administrative responsibilities and ensure that the plan remains in compliance with Department of Labor regulations. 3(21) fiduciary: An investment advisor who acts as co-fiduciary to review and make recommendations regarding a plan’s investment lineup. This fiduciary provides guidance but does not have the authority to make investment decisions. 3(38) fiduciary: A codified retirement plan fiduciary that’s responsible for choosing, managing, and overseeing the plan’s investment options. 401(k) administration costs: The expenses involved with the various aspects of running a 401(k) plan. Plan administration includes managing eligibility and enrollment, coordinating contributions, processing distributions and loans, preparing and delivering legally required notices and forms, and more. 401(k) committee charter: A document that describes the 401(k) committee’s responsibilities and authority. 401(k) compensation limit: The maximum amount of compensation that’s eligible to draw on for plan contributions, as determined by the IRS. 401(k) contribution limits: The maximum amount that a participant may contribute to an employer-sponsored 401(k) plan, as determined by the IRS. 401(k) force-out rule: Refers to a plan sponsor’s option to remove a former employee’s assets from the retirement plan. The sponsor has the option to “force out” these assets (into an IRA in the former employee’s name) if the assets are less than $5,000. 401(k) plan: An employer-sponsored retirement savings plan that allows participants to save money on a tax-advantaged basis. 401(k) plan fees: The various fees associated with a plan. These can include fees for investment management, plan administration, fiduciary services, and consulting fees. While some fees are applied at the plan level — that is, deducted from plan assets — others are charged directly to participant accounts. 401(k) plan fee benchmarking: The process of comparing a plan’s fees to those of other plans in similar industries with roughly equal assets and participation rates. This practice can help to determine if a plan’s fees are reasonable per ERISA requirements. 401(k) set-up costs: The expenses involved in establishing a 401(k) plan. These costs cover plan documents, recordkeeping, investment management, participant communication, and other essential aspects of the plan. 401(k) withdrawal: A distribution from a plan account. Because a 401(k) plan is designed to provide income during retirement, a participant generally may not make a withdrawal until age 59 ½ unless he or she terminates or retires; becomes disabled; or qualifies for a hardship withdrawal per IRS rules. Any other withdrawals before age 59 ½ are subject to a 10% penalty as well as regular income tax. 404(a)(5) fee disclosure: A notice issued by a plan sponsor that details information about investment fees. This notice, which is required of all plan sponsors by the Department of Labor, covers initial disclosure for new participants, new fees, and fee changes. 404(c) compliance: Refers to a participant’s (or beneficiary’s) right to choose the specific investments for 401(k) plan assets. Because the participant controls investment decisions, the plan fiduciary is not liable for investment losses. 408(b)(2) fee disclosure: A notice issued by a plan service provider that details the fees charged by the provider (and its affiliates or subcontractors) and reports any possible conflicts of interest. The Department of Labor requires all plan fiduciaries to issue this disclosure. Actual contribution percentage (ACP) test: A required compliance test that compares company matching contributions among highly compensated employees (HCEs) and non-highly compensated employees (NHCEs). Actual deferral percentage (ADP) test: A required compliance test that compares employee deferrals among highly compensated employees (HCEs) and non-highly compensated employees (NHCEs). Annual fee disclosure: A notice issued by a plan sponsor that details the plan’s fees and investments. This disclosure includes plan and individual fees that may be deducted from participant accounts, as well as information about the plan’s investments (performance, expenses, fees, and any applicable trade restrictions). Automated Clearing House (ACH): A banking network used to transfer funds between banks quickly and cost-efficiently. Automatic enrollment (ACA): An option that allows employers to automatically deduct elective deferrals into the plan from an employee’s wages unless the employee actively elects not to contribute or to contribute a different amount. Beneficiary: The person or persons who a participant chooses to receive the assets in a plan account if he or she dies. If the participant is married, the spouse is automatically the beneficiary unless the participant designates a different beneficiary (and signs a written waiver). If the participant is not married, the account will be paid to his or her estate if no beneficiary is on file. Blackout notice: An advance notice of an upcoming blackout period. ERISA rules require plan sponsors to notify participants of a blackout period at least 30 days in advance. Blackout period: A temporary period (three or more business days) during which a 401(k) plan is suspended, usually to accommodate a change in plan administrators. During this period, participants may not change investment options, make contributions or withdrawals, or request loans. Catch-up contributions: Contributions beyond the ordinary contribution limit, which are permitted to help people age 50 and older save more as they approach retirement. You can check the allowances for catch-up contributions here. Compensation: The amount of pay a participant receives from an employer. For purposes of 401(k) contribution calculations, only compensation is considered to be eligible. The plan document defines which form, for example the W-2, is referred to in determining the compensation amount. Constructive receipt: A payroll term that refers to the impending receipt of a paycheck. The paycheck has not yet been fully cleared for deposit in the employee’s bank account, but the employee has access to the funds. Deferrals: Another term for contributions made to a 401(k) account. Defined contribution plan: A tax-deferred retirement plan in which an employee or employer (or both) invest a fixed amount or percentage (of pay) in an account in the employee’s name. Participation in this type of plan is voluntary for the employee. A 401(k) plan is one type of tax-deferred defined contribution plan. Department of Labor (DOL): The federal government department that oversees employer-sponsored retirement plans as well as work-related issues including wages, hours worked, workplace safety, and unemployment and reemployment services. Distributions: A blanket term for any withdrawal from a 401(k) account. A distribution can include a required minimum distribution (RMD), a loan, a hardship withdrawal, a residential loan, or a qualified domestic relations order (QDRO). Docusign: A third-party platform used for exchanging signatures on documents, especially during plan onboarding. EIN: An Employer Identification Number (EIN) is also known as a Federal Tax Identification Number, and is used to identify a business entity. Eligible automatic enrollment arrangement (EACA): An automatic enrollment (ACA) plan that applies a default and uniform deferral percentage to all employees who do not opt out of the plan or provide any specific instructions about deferrals to the plan. Under this arrangement, the employer is required to provide employees with adequate notice about the plan and their rights regarding contributions and withdrawals. ERISA: Refers to the Employee Retirement Income Security Act of 1974, a federal law that requires individuals and entities that manage a retirement plan (fiduciaries) to follow strict standards of conduct. ERISA rules are designed to protect retirement plan participants and secure their access to benefits in the plan. Excess contributions: The amount of contributions to a plan that exceed the IRS contribution limit. Excess contributions made in any year (and their earnings) may be withdrawn without penalty by the tax filing deadline for that year, and the participant is then required to pay regular taxes on the amount withdrawn. Any excess contributions not withdrawn by the tax deadline are subject to a 6% excise tax every year they remain in the account. Exchange-traded fund (ETF): Passively managed index funds that feature low costs and high liquidity. ETFs make it easy to manage portfolios efficiently and effectively. All of Betterment’s 401(k) investment options are ETFs. Fee disclosure: Information about the various fees related to a 401(k) plan, including plan administration, fiduciary services, and investment management. Fee disclosure deadline: The date by which a plan sponsor must provide plan and investment-related fee disclosure information to participants. The DOL requires you to send your participant fee disclosure notice at least once in any 14-month period without regard to whether the plan operates on a calendar-year or fiscal-year basis. Fidelity bond: Also known as a fiduciary bond, this bond protects the plan from losses due to fraud or dishonesty. Every fiduciary who handles 401(k) plan funds is required to hold a fidelity bond. Fiduciary: An individual or entity that manages a retirement plan and is required to always act in the best interests of employees who save in the plan. In exchange for helping employees build retirement savings, employers and employees receive special tax benefits, as outlined in the Internal Revenue Code. When a company adopts a 401(k) plan for employees, it becomes an ERISA fiduciary and takes on two sets of fiduciary responsibilities: “Named fiduciary” with overall responsibility for the plan, including selecting and monitoring plan investments “Plan administrator” with fiduciary authority and discretion over how the plan is operated Most companies hire one or more outside experts (such as an investment advisor, investment manager, or third-party administrator) to help manage their fiduciary responsibilities. Form 5500: An informational document that a plan sponsor must prepare to disclose the identity of the plan sponsor (including EIN and plan number), characteristics of the plan (including auto-enrollment, matching contributions, profit-sharing, and other information), the numbers of eligible and active employees, plan assets, and fees. The plan sponsor must submit this form annually to the IRS and the Department of Labor, and must provide a summary to plan participants. Smaller plans (less than 100 employees) may instead file Form 5500-SF. Hardship withdrawal: A withdrawal before age 59 ½ intended to address a severe and immediate need (as defined by the IRS). To qualify for a hardship withdrawal, a participant must provide the employer with documentation (such as a medical bill, a rent invoice, funeral expenses) that shows the purpose and amount needed. If the hardship withdrawal is authorized, it must be limited to the amount needed (adjusted for taxes and penalties), may still be subject to early withdrawal penalties, is not eligible for rollover, and may not be repaid to the plan. Highly compensated employee (HCE): An employee who earned at least $155,000 in compensation from the plan sponsor during 2024, or owned more than 5% interest in the plan sponsor’s business at any time during the current or previous year (regardless of compensation). Inception to date (ITD): Refers to contribution amounts since the inception of a participant’s account. Internal Revenue Service (IRS): The U.S. federal agency that’s responsible for the collection of taxes and enforcement of tax laws. Most of the work of the IRS involves income taxes, both corporate and individual. Investment advice (ERISA ruling): The Department of Labor’s final ruling (revised in 2020) on what constitutes investment advice and what activities define the role of a fiduciary. Investment policy statement (IPS): A plan’s unique governing document, which details the characteristics of the plan and assists the plan sponsor in complying with ERISA requirements. The IPS should be written carefully, reviewed regularly, updated as needed, and adhered to closely. Key employee: An employee classification used in top-heavy testing. This is an employee who meets one of the following criteria: Ownership stake greater than 5% Ownership stake greater than 1% and annual compensation greater than $150,000 Officer with annual compensation greater than $200,000 (for 2022) Non-discrimination testing: Tests required by the IRS to ensure that a plan does not favor highly compensated employees (HCEs) over non-highly compensated employees (NHCEs). Non-elective contribution: An employer contribution to an employee’s plan account that’s made regardless of whether the employee makes a contribution. This type of contribution is not deducted from the employee’s paycheck. Non-highly compensated employee (NHCE): An employee who does not meet any of the criteria of a highly compensated employee (HCE). Plan sponsor: An organization that establishes and offers a 401(k) plan for its employees or members. Qualified default investment alternative (QDIA): The default investment for plan participants who don’t make an active investment selection. All 401(k) plans are required to have a QDIA. For Betterment’s 401(k), the QDIA is the Core Portfolio Strategy, and a customized risk level is set for each participant based on their age. Qualified domestic relations order (QDRO): A document that recognizes a spouse’s, former spouse’s, child’s, or dependent’s right to receive benefits from a participant’s retirement plan. Typically approved by a court judge, this document states how an account must be split or reassigned. Plan administrator: An individual or company responsible for the day-to-day responsibilities of 401(k) plan administration. Among the responsibilities of a plan administrator are compliance testing, maintenance of the plan document, and preparation of the Form 5500. Many of these responsibilities may be handled by the plan provider or a third-party administrator (TPA). Plan document: A document that describes a plan’s features and procedures. Specifically, this document identifies the type of plan, how it operates, and how it addresses the company’s unique needs and goals. Professional employer organization (PEO): A firm that provides small to medium-sized businesses with benefits-related and compliance-related services. Profit sharing: A type of defined contribution plan in which a plan sponsor contributes a portion of the company’s quarterly or annual profit to employee retirement accounts. This type of plan is often combined with an employer-sponsored retirement plan. Promissory note: A legal document that lays out the terms of a 401(k) loan or other financial obligation. Qualified non-elective contribution (QNEC): A contribution that a plan is required to make if it’s found to be top-heavy. Required minimum distribution (RMD): Refers to the requirement that an owner of a tax-deferred account begin making plan withdrawals each year starting at age 72. The first withdrawal must be made by April 1 of the year after the participant reaches age 72, and all subsequent annual withdrawals must be made by December 31. Rollover: A retirement account balance that is transferred directly from a previous employer’s qualified plan to the participant’s current plan. Consolidating accounts in this way can make it easier for a participant to manage and track retirement investments, and may also reduce retirement account fees. Roth 401(k) contributions: After-tax plan contributions that do not reduce taxable income. Contributions and their earnings are not taxed upon withdrawal as long as the participant is at least age 59½ and has owned the Roth 401(k) account for at least five years. You can check annual limits here. Roth vs. pre-tax contributions: Pre-tax contributions reduce a participant’s current income, with taxes due when funds are withdrawn (typically in retirement). Alternatively, Roth contributions are deposited into the plan after taxes are deducted, so withdrawals are tax-free. Safe Harbor: A plan design option that provides annual testing exemptions. In exchange, employer contributions on behalf of all employees are required. Saver’s credit: A credit designed to help low- and moderate-income taxpayers further reduce their taxes by saving for retirement. The amount of this credit — 10%, 20%, or 50% of contributions, based on filing status and adjusted gross income — directly reduces the amount of tax owed. Stock option: The opportunity for an employee to purchase shares of an employer’s stock at a specific (often discounted) price for a limited time period. Some companies may offer a stock option as an alternative or a complement to a 401(k) plan. Summary Annual Report (SAR): A summary version of Form 5500, which a plan sponsor is required to provide to participants every year within two months after the Form 5500 deadline – September 30 or December 15 (if there was an extension given for Form 5500 filing). Summary Plan Description (SPD): A comprehensive document that describes in detail how a 401(k) plan works and the benefits it provides. Employers are required to provide an SPD to employees free of charge. Third-party administrator (TPA): An individual or company that may be hired by a 401(k) plan sponsor to help run many day-to-day aspects of a retirement plan. Among the responsibilities of a TPA are compliance testing, generation and maintenance of the plan document, and preparation of Form 5500. Traditional contributions: Pre-tax plan contributions that reduce taxable income. These contributions and their earnings are taxable upon withdrawal, which is typically during retirement. Vesting: Another word for ownership. Participants are always fully vested in the contributions they make. Employer contributions, however, may be subject to a vesting schedule in which participant ownership builds gradually over several years. -
![]()
What is a 401(k) QDIA?
What is a 401(k) QDIA? A QDIA (Qualified Default Investment Alternative) is the plan’s default investment. When money is contributed to the plan, it’s automatically invested in the QDIA. What is a QDIA? A 401(k) QDIA (Qualified Default Investment Alternative) is the investment used when an employee contributes to the plan without having specified how the money should be invested. As a "safe harbor," a QDIA relieves the employer from liability should the QDIA suffer investment losses. Here’s how it works: When money is contributed to the plan, it’s automatically invested in the QDIA that was selected by the plan fiduciary (typically, the business owner or the plan sponsor). The employee can leave the money in the QDIA or transfer it to another plan investment. When (and why) was the QDIA introduced? The concept of a QDIA was first introduced when the Pension Protection Act of 2006 (PPA) was signed into law. Designed to boost employee retirement savings, the PPA removed barriers that prevented employers from adopting automatic enrollment. At the time, fears about legal liability for market fluctuations and the applicability of state wage withholding laws had prevented many employers from adopting automatic enrollment—or had led them to select low-risk, low-return options as default investments. The PPA eliminated those fears by amending the Employee Retirement Income Security Act (ERISA) to provide a safe harbor for plan fiduciaries who invest participant assets in certain types of default investment alternatives when participants do not give investment direction. To assist employers in selecting QDIAs that met employees’ long-term retirement needs, the Department of Labor (DOL) issued a final regulation detailing the characteristics of these investments. Learn more about what kinds of investments qualify as QDIAs below. Why does having a QDIA matter? When a 401(k) plan has a QDIA that meets the DOL’s rules, then the plan fiduciary is not liable for the QDIA’s investment performance. Without a QDIA, the plan fiduciary is potentially liable for investment losses when participants don’t actively direct their plan investments. Plus, having a QDIA in place means that employee accounts are well positioned—even if an active investment decision is never taken. If you select an appropriate default investment for your plan, you can feel confident knowing that your employees’ retirement dollars are invested in a vehicle that offers the potential for growth. Does my retirement plan need a QDIA? Yes, it’s a smart idea for all plans to have a QDIA. That’s because, at some point, money may be contributed to the plan, and participants may not have an investment election on file. This could happen in a number of situations, including when money is contributed to an account but no active investment elections have been established, such as when an employer makes a contribution but an employee isn’t contributing to the plan; or when an employee rolls money into the 401(k) plan prior to making investment elections. It makes sense then, that plans with automatic enrollment must have a QDIA. Are there any other important QDIA regulations that I need to know about? Yes, the DOL details several conditions plan sponsors must follow in order to obtain safe harbor relief from fiduciary liability for investment outcomes, including: A notice generally must be provided to participants and beneficiaries in advance of their first QDIA investment, and then on an annual basis after that Information about the QDIA must be provided to participants and beneficiaries which must include the following: An explanation of the employee’s rights under the plan to designate how the contributions will be invested; An explanation of how assets will be invested if no action taken regarding investment election; Description of the actual QDIA, which includes the investment objectives, characteristics of risk and return, and any fees and expenses involved Participants and beneficiaries must have the opportunity to direct investments out of a QDIA as frequently as other plan investments, but at least quarterly For more information, consult the DOL fact sheet. What kinds of investments qualify as QDIAs? The DOL regulations don’t identify specific investment products. Instead, they describe mechanisms for investing participant contributions in a way that meets long-term retirement saving needs. Specifically, there are four types of QDIAs: An investment service that allocates contributions among existing plan options to provide an asset mix that takes into account the individual’s age or retirement date (for example, a professionally managed account like the one offered by Betterment) A product with a mix of investments that takes into account the individual’s age or retirement date (for example, a life-cycle or target-date fund) A product with a mix of investments that takes into account the characteristics of the group of employees as a whole, rather than each individual (for example, a balanced fund) The fourth type of QDIA is a capital preservation product, such as a stable value fund, that can only be used for the first 120 days of participation. This may be an option for Eligible Automatic Contribution Arrangement (EACA) plans that allow withdrawals of unintended deferrals within the first 90 days without penalty. We’re excluding further discussion of this option here since plans must still have one of the other QDIAs in cases where the participant takes no action within the first 120 days. What are the pros and cons of each type of QDIA? Let’s breakdown each of the first three QDIAs: 1. An investment service that allocates contributions among existing plan options to provide an asset mix that takes into account the individual’s age or retirement date Such an investment service, or managed account, is often preferred as a QDIA over the other options because they can be much more personalized. This is the QDIA provided as part of Betterment 401(k)s. Betterment factors in more than just age (or years to retirement) when assigning participants their particular stock-to-bond ratio within our Core portfolios. We utilize specific data including salary, balance, state of residence, plan rules, and more. And while managed accounts can be pricey, they don’t have to be. Betterment’s solution, which is relatively lower in cost due to investing in exchange traded funds (ETFs) portfolios, offers personalized advice and an easy-to-use platform that can also take external and spousal/partner accounts into consideration. 2. A product with a mix of investments that takes into account the individual’s age or retirement date When QDIAs were introduced in 2006, target date funds were the preferred default investment. The concept is simple: pick the target date fund with the year that most closely matches the year the investor plans to retire. For example, in 2020 if the investor is 45 and retirement is 20 years away, the 2040 Target Date Fund would be selected. As the investor moves closer to their retirement date, the fund adjusts its asset mix to become more conservative. One common criticism of target date funds today is that the personalization ends there. Target date funds are too simple and their one-size-fits-all portfolio allocations do not serve any individual investor very well. Plus, target date funds are often far more expensive compared to other alternatives. Finally, most target date funds are composed of investments from the same company—and very few fund companies excel at investing across every sector and asset class. Many experts view target date funds as outdated QDIAs and less desirable than managed accounts. 3. A product with a mix of investments that takes into account the characteristics of the group of employees as a whole This kind of product—for example, a balanced fund—offers a mix of equity and fixed-income investments. However, it’s based on group demographics and not on the retirement needs of individual participants. Therefore, using a balanced fund as a QDIA is a blunt instrument that by definition will have an investment mix that is either too heavily weighted to one asset class or another for most participants in your plan. Better QDIAs—and better 401(k) plans Betterment provides tailored allocation advice based on what each individual investor needs. That means greater personalization—and potentially greater investment results—for your employees. At Betterment, we monitor plan participants’ investing progress to make sure they’re on track to reach their goals. When they’re not on target, we provide actionable advice to help get them back on track. As a 3(38) investment manager, we assume full responsibility for selecting and monitoring plan investments—including your QDIA. That means fiduciary relief for you and better results for your employees. The exchange-traded fund (ETF) difference Another key component that sets Betterment apart from the competition is our exclusive use of ETFs. Here's why we use them: Low cost—ETFs generally cost less than mutual funds, which means more money stays invested. Diversified—All of the portfolios used by Betterment are designed with diversification in mind, so that investors are not overly exposed to individual stocks, bonds, sectors, or countries—which may mean better returns in the long run. Efficient—ETFs take advantage of decades of technological advances in buying, selling, and pricing securities. Helping your employees live better Our mission is simple: to empower people to do what’s best for their money so they can live better. Betterment’s suite of financial wellness solutions, from our QDIAs to our user-friendly investment platform, is designed to give your employees a more personalized experience. We invite you to learn more about what we can do for you. -
![]()
How to implement 401(k) auto-escalation
How to implement 401(k) auto-escalation Historically, employers have had the choice to add automatic escalation to their 401(k) plans, but now SECURE 2.0 is requiring it to help people save. If you are faced with implementing automatic escalation, we've got you covered with advice on how to approach the change, and most importantly, how to communicate it to your employees. How SECURE 2.0 approaches automatic escalation Under SECURE 2.0, in addition to requiring automatic enrollment at a default rate between 3% and 10%, 401(k) plans are required to automatically escalate contributions at 1% per year to at least 10% (but no more than 15%). As always, employees can change their contribution rate or opt out of the plan at any time. Automatic escalation is a requirement for plans with an initial effective date on or after December 29, 2022. Businesses in existence for less than three years, as well as those with 10 or fewer employees, are exempt. The provision itself is effective on January 1, 2025. Consider this when setting your maximum escalation rate When you implement automatic escalation, you’ll need to decide your maximum rate, from 10% up to 15%. We like to think about automatic enrollment and automatic escalation together. Consider your default automatic enrollment rate when determining the limit to your escalation rate. For example, if you have a default enrollment rate of 8%, then a 15% escalation maximum rate might make sense, giving employees more room to grow their savings. Whereas a plan with a 3% default enrollment rate may want to consider a lower maximum escalation rate. Also, consider your employer match, if you offer one. Experts recommend saving 10-15% of income each year for retirement, and this includes the employer match. For example, if you are matching 5% and your automatic enrollment default rate is 8%, any employee who does not change their default rate is saving 13% of their income. Every company is different. It’s important to review different potential scenarios and keep in mind what your employees will respond best to when setting these default enrollment and escalation rates. Employee communications When it comes time to implement automatic escalation, how you communicate the change, along with any other plan changes, to your employees is incredibly important. If an employee doesn’t understand why the change is happening, they may fear it or be surprised to see an increased contribution if they were not expecting it. Instead, take the time to explain the purpose of automatic escalation. Consider this sample language when implementing the change with your employees: Recently, a new law was implemented called the SECURE 2.0 Act. Its purpose is to help Americans save more for retirement. Part of the Act that we’ll be adopting is called automatic escalation. Automatic escalation increases an employee’s contribution rate to their 401(k) plan by 1% each year until the contribution reaches [INSERT YOUR PERCENTAGE]. It’s designed to help everyone participating in our 401(k) to build retirement savings. Experts recommend saving 10-15% of your annual income for retirement and automatic escalation helps get closer to that amount without additional effort. But don’t worry: If you are not comfortable with the escalation, you have the option to change your contribution rate or opt out of the plan at any time. We’re excited about this change and are proud to continue to evolve our 401(k) program to make saving easier. Feel free to edit this language to fit your organization’s needs, including any mandatory communications. What’s most important is that your employees see automatic escalation as a positive change.
Provider Shopping
-
![]()
Bridging the Gap: Benefits Employees Want vs Benefits Companies Offer
Bridging the Gap: Benefits Employees Want vs Benefits Companies Offer We explore new survey data that reveals where financial benefits typically fall short—and what you can do about it at your company. Table of Contents: 3 benefit themes for employers to consider How to conduct a benefits gap analysis Survey results: The employee/employer gap In our 2023 Retirement Readiness Annual report, Betterment at Work surveyed 1,000 full-time U.S. workers to learn more about how retirement readiness and financial well-being have evolved in the last 12 months. We asked survey respondents to review and rank 11 potential benefits to determine what financial benefits employees currently have access to and which matter most. The results? Survey findings showed clear gaps in employee desires and the benefits being offered by their employers. To help explore these gaps, we’ve bucketed benefits into three themes that arose from the report’s findings: 401(k), financial planning, and education savings. 3 benefit themes for employers to consider As we reviewed the survey results, three themes emerged that employers can use to explore potential gaps in the benefits they offer compared to the benefits their workforces want. Theme 1: 401(k) benefits These benefits include: 401(k) plans 401(k) matching programs A 401(k) plan is the #1 desired benefit among employees. However, only 59% of employers currently offer access to a 401(k), up seven percentage points from the previous survey. That is positive growth, showing companies are continuing to recognize this as a crucial need for employees. If you don’t offer a retirement plan, you may want to explore 401(k) options that can help attract and retain talent. A 401(k) matching program was the #2 most desired benefit among employees. Less than half of companies offer a 401(k) matching program, with only 47% percent of workers receiving a match from employers. Of that group, 86% contribute enough to get the full match. It’s no wonder that 92% of those without a 401(k) match wish their employer would offer a 401(k) match—since these programs can help fast-track retirement savings and retain employees. Key takeaway for employers: Offer an easy-to-use 401(k) plan with a competitive matching program to attract and retain employees. Theme 2: Financial health and planning benefits These benefits include: Employer-sponsored emergency fund Flexible spending account (FSA) or health savings account (HSA) Wellness stipend Budgeting and savings tools Access to a live financial advisor Childcare support Employer-sponsored emergency funds were the #3 desired benefit. Only 8% of employers offer an employer-sponsored emergency fund. As the third most valued benefit for employees, this is the largest gap on the list. Our survey also found that 49% of employees said an employer-sponsored emergency fund would help reduce their financial stress. With 46% of employees reporting that they used their emergency fund during the past year, there is a great opportunity for employers to address. Flexible spending account (FSA) or health savings account (HSA) ranked #4. At number four on the list of most desired benefits, FSAs/HSAs are only offered by 37% of companies, which could be another important avenue for employers to explore. Furthermore, we found that 31% of employees said they would be enticed to leave their jobs for an FSA or HSA. Wellness stipends were #5 on the most desired benefits list. Wellness stipends are one of the larger gaps employers should consider. We found that 32% of employees said they would be enticed to leave their jobs for a wellness stipend. However, only 9% of companies offer the benefit. The increasing interest in wellness benefits reflects a growing awareness around mental and physical health in society. Employers who are equipped to meet this need clearly demonstrate their support for well-being in the workplace. Budgeting and savings tools ranked #6 on the list. Only 12% of employees offer budget and savings tools to employees. Similar to other benefits, over a quarter (26%) of employees would consider leaving their jobs for budget and savings tools. Examples include savings calculators, online budgets, educational resources, and the ability to link multiple accounts to see all savings in one view. With 78% of workers reporting that their finances cause them anxiety, financial tools may help them gain clarity and reduce the stress of their financial lives. Access to a live financial advisor was #8. Only 17% of companies offer access to a financial advisor. However, our survey found that 55% of workers with access to a financial advisor have met with the advisor in the past year, and that number jumps to 75% among small business employers. The top two reasons employees meet with an advisor are: retirement planning and investment advice. This data supports the idea of packaging your 401(k) plan with a financial advisor for a valuable employee benefit. Childcare support was the #10 most important benefit. Child care is expensive for parents to afford and for employers to offer as a benefit, which is likely why only 8% of companies offer it. But if you can afford to offer childcare support as a benefit, you’ll be assisting your employees with both convenience and a huge financial benefit, as the average cost of childcare is $11,582. Key takeaway for employers: Offering a benefits package that helps meet critical needs can go a long way with your employees. But you don’t have to offer everything. Rather, it’s important to understand your workforce’s needs to pick and choose which benefits will have the most meaningful impact. Theme 3: Student loan and education benefits These benefits include: Student loan 401(k) matching programs Student loan financial assistance or repayment programs 529 college savings plan Student loan 401(k) matching programs were the #7 most desired benefit. This is where paying for education and saving for retirement collide. With the passage of SECURE 2.0 Act, qualified student loan repayments made by employees can count as elective deferrals and qualify for 401(k) matching contributions from an employer. At the time of our survey, no companies offered this type of benefit, yet we found that 40% of workers currently have student loan debt that they’re responsible for paying down. Now, through Betterment at Work’s industry-first solution, employers can provide 401(k) matches on student loan payments. Student loan financial assistance or repayment programs ranked #9 on the list. Only 11% of employers were reported to offer student loan financial assistance or repayment programs. On top of that, we found that 21% of employees would be enticed to leave their jobs for financial assistance on student loans. 529 college savings plans ranked #11 on the list of most desired benefits. Only 5% of employers currently offer 529 plans, which is surprising since, according to research, 70% of parents are concerned about having enough funds to pay for college. Our survey also found that 26% of employees are currently saving money for education expenses, and of that group, only 45% currently use a 529 to do so. One of the main reasons is a lack of awareness around this state-sponsored plan. Savvy employers can use 529 plans to support the education savings plans for their employees. Key takeaway for employers: To help retain employees, create benefits programs that align with your workforce’s education-related needs, taking student loan debt into account as well. Also, as your workforce evolves, consider future employees and the potential education needs they may have. How to conduct a benefits gap analysis Employers can take the following steps to identify gaps and then implement new benefits that fit their workforce’s needs. Step 1: Make a list of the benefits you don’t offer You likely offer some benefits already. To conduct a gap analysis, you’ll want to focus on what you don’t offer. At this point, make a list of benefits you don’t offer with a description of each. Then compare the benefits you currently offer with ones you might want to add. You’ll likely want to avoid offering a new benefit that is similar in nature to a current benefit. For example, you may want to offer only one type of student loan benefit. Step 2: Run a cost analysis Now, you need to know if you can afford additional benefits. Create a mock budget to illustrate the financial impact on your business for each benefit. Be sure to model the estimated impact that offering each benefit may have on employee acquisitions and retention. This can be difficult to calculate, so consider different scenarios. What you’re really trying to do is calculate the ROI of each benefit’s ability to retain employees. After you run a cost analysis, eliminate any benefits from the list that your business simply cannot afford. (Bonus: Download our planning guide to calculating the ROI of your 401(k) plan.) Step 3: Survey employees Bring your team into the conversation. Once you’ve determined what benefits you can afford, survey your employees to measure their interest in each one. Be sure to include a clear description of each benefit and how it would be administered. A simple approach is to have employees rank benefits in order of most likely to use to least likely to use, and give them a chance to submit open-ended comments. For larger companies, you can also use more sophisticated polling methods such as MaxDiff surveys to identify the ideal mix of benefits for your workforce. Implement your benefits… Once you understand which benefits you can afford to implement, and which ones your employees value most, you’ll want to decide if you can provide the benefits in-house or if you need to partner with a benefits provider such as Betterment at Work. Survey results: The employee/employer gap The chart below shows a snapshot of the top 11 benefits ranked in order of most desired by employees with the percentage of employers who offer each benefit. Use this data as a starting point to help identify gaps in your financial benefits program. Bridge the benefit gap at your company Betterment makes it easy for small and mid-market businesses to provide a scalable 401(k) plan, plus offer additional benefits like 529 plans, student loan payment 401(k) matches, and 1:1 advice from our financial advisors. See how Betterment at Work can enhance your financial benefits package. -
![]()
The key factors holding back your employees’ retirement readiness
The key factors holding back your employees’ retirement readiness And how the types of benefits you offer can help. Broadly speaking, the economy did alright in 2023. Inflation slowed, stocks rallied, and employment remained strong. But you wouldn’t know it by looking at the current mood of American workers. According to our latest annual survey of 1,000 full-time employees, their levels of financial wellness trended down in 2023 at the same time their financial anxiety climbed by seven percentage points. So what gives? We sifted through the data and saw several trendlines emerge. Explore them in full detail in our Retirement Readiness annual report – and keep reading below for a preview. Inflation’s ripple effect on retirement Inflation slowed significantly in 2023, but that’s not to say that all prices fell. The average American household spent $709 more per month in 2023 compared to 2021 on things like rent, groceries, and gas. Until wage growth catches back up to inflation, workers will continue to feel their paychecks pinched, and two casualties are taking shape as a result: Emergency funds: Although more than half (52%) of employees reported currently having an emergency fund, that’s a 7% drop from 2022, and 14% decrease from 2021. Retirement savings: A worrisome 3 in 10 workers tapped into retirement savings in the past year to pay for short-term expenses, a significant setback for their long-term goals. All of this has left workers feeling stressed. More than half (58%) went so far as to say the anxiety makes it hard for them to focus at work. But our research shows that some employer support and benefits can go a long way toward calming the waters. The growing role of financial benefits in retention If short-term expenses are depleting workers’ savings, it’s no surprise that a strong 401(k) and financial wellness benefits program remains at the top of workers’ wish lists. The importance of these benefits continues to grow as well, with 70% of workers saying financial wellness benefits are more important now than a year ago. A growing percentage of workers (60%) even say they’d be enticed to leave their job for better financial benefits. Student loan debt, however, continues to prevent the adoption of financial benefits for many. 64% of workers said student loan debt impacts their ability to save for retirement, and when asked why they don’t take advantage of their employer’s benefits, by far the most common reason was their paycheck simply won’t stretch that far. On this front, good news is just around the corner. Thanks to the SECURE 2.0 Act, employers will soon be able to offer a 401(k) match on their employees’ qualifying student loan payments, helping workers tackle two goals at once. -
![]()
ETFs and managed portfolios as options in your 401(k) Plan
ETFs and managed portfolios as options in your 401(k) Plan At Betterment, we use exchange-traded funds (ETFs) to build our managed portfolios. Learn about the different types of investment vehicles and how Betterment crafts our investment solutions. Mutual funds have historically dominated the retirement investment landscape. Over time, exchange-traded funds (ETFs) have received more attention due to their cost-effectiveness and flexibility. Here at Betterment, we use them to build our diversified managed ETF portfolios. Learn about the differences between the investment vehicles and the ways investments can be managed. What is active vs. passive (Indexing) investing? People often associate active or passive investing with certain investment vehicles (e.g. ETFs or mutual funds). However, active and passive are really two different management strategies. Characteristics Active Passive (indexing approach) Portfolio managers/team use their investment expertise in an attempt to outperform their benchmark or specified market index. x Portfolio managers/team seeks to match the performance of their benchmark, usually a market index such as the S&P 500. x Usually has relatively high turnover (meaning they will buy/sell securities more frequently) x Usually has low turnover x Tends to have higher management fees x Tends to have lower management fees x Higher tracking error (Greater volatility in returns as they deviate from the index to drive outperformance) x Lower tracking error (Lower volatility in returns as they try to replicate the index they are tracking and invest in the same securities) x Exchange-traded funds are: x x Mutual funds are: x x From the table above, notice how both ETFs AND mutual funds can be actively or passively managed. What’s the difference between mutual funds and ETFs? ETFs and mutual funds do have qualities in common. Both consist of a mix of many different assets, which helps investors easily diversify their portfolios. However, they have a few key differences: Mutual Funds ETFs Both Most are actively managed Tend to have higher fees, sales charges Less transparent, holdings typically disclosed monthly or quarterly Trades once per day, bought and sold directly with the mutual fund provider Mutual funds still remain the dominant investments in 401(k) plans Most are passively managed, but can be active Relatively lower fees Have clear goals and mandates Transparent Liquid, trades throughout the day (like a stock) ETFs are growing quickly Unique product structure with creation/redemption mechanism Easy diversification Easily access a variety of exposures, eg. stocks, bonds, commodities, alternatives, themes, etc. Costs have reduced over time Mutual funds are traditionally known for their active approach. It is a key reason why mutual funds tend to have higher fees and higher expense ratios than ETFs. Costs are also higher in instances where smaller retirement plans do not have access to institutional share classes. However, Index mutual funds, which are passively managed and lower in costs, have continued to become more popular. ETFs, on the other hand, are usually passively managed. More differentiated ETFs however, that are actively managed or use other fundamentals like factors (smart beta), have emerged over the years. Most ETFs are transparent, meaning you can see the underlying holdings daily. Mutual funds either report their holdings monthly or quarterly. ETFs can be traded like stocks whereas mutual funds may only be purchased at the end of each trading day based on a calculated price. ETFs have a unique share creation and redemption mechanism, which provides efficiencies such as reducing trade costs incurred by the fund, allowing tighter tracking to the index. Differences in costs between mutual funds and ETFs Another difference to highlight is costs. Both mutual funds and ETFs have some form of implicit and explicit costs. Here’s a breakdown of the different types: Types of Costs Mutual Funds ETFs Management fee Both include a stated management fee Trading costs N/A May trade at a price slightly more or less than NAV Transaction costs May include sales loads, redemption fees Similar to stocks, may be subject to brokerage commissions Revenue sharing agreements Agreements among 401(k) plan providers and mutual fund companies include: 12(b)-1 fees, which are disclosed in a fund’s expense ratios and are annual distribution or marketing fees Sub Transfer Agent (Sub-TA) fees for maintaining records of a mutual fund’s shareholders Revenue sharing agreements often appear as conflicts of interests. Soft-dollar arrangements These commission arrangements, sometimes called excess commissions, exacerbate the problem of hidden expenses because the mutual fund manager engages a broker-dealer to do more than just execute trades for the fund. These services could include nearly anything—securities research, hardware, or even an accounting firm’s conference hotel costs. These are the different types of costs that can ultimately drive the “all-in” mutual funds fees experience to be different from ETFs. What else didn’t I realize about mutual funds? Conflicts of interest Often, there are conflicts of interest with mutual funds. Some service providers are, at their core, mutual fund companies. And therefore, some investment advisors are incentivized to promote certain funds. This means that the fund family providing 401(k) services and the advisor who sells the plans may have a conflict of interest. Some mutual funds invest in a portfolio of ETFs Target-date funds have evolved to now include ETFs, so it is important to understand the way your TDFs are constructed and that ETFs are also being considered for a traditional mutual fund product like TDFs. Why is it unusual to see ETFs in 401(k)s? The 401(k) market is largely dominated by players who are incentivized to offer certain mutual funds. Plans are often sold through distribution partners, which can include brokers, advisors, recordkeepers or third-party administrators. The fees embedded in mutual funds help offset expenses and facilitate payment of every party involved in the sale. However, it’s challenging for employers and employees because the fees aren’t easy to understand even with the mandated disclosure requirements. Existing technology limitations prevent traditional recordkeeping systems from supporting ETFs. Most 401(k) recordkeeping systems were built decades ago and designed to handle once-per-day trading, not intra-day trading (the way ETFs are traded)—so these systems can’t handle ETFs on the platform (at all). How Betterment manages your investments Betterment combines managed ETF portfolios with personalized, unbiased advice to create an easy solution for today’s retirement savers. At Betterment, we use ETFs as the building blocks for our managed portfolios where you have the ability to choose from a menu of portfolio strategies that are managed over time. To select the ETFs that we use to construct our portfolios, we use our proprietary unbiased investment selection methodology that is based on qualitative and quantitative factors, always serving your employees’ best interest. Many retirement plans use target-date funds because they are often viewed as a one-stop solution. While having specific retirement date funds (2045 Fund, 2050 Fund, etc.) may satisfy most investors, it is important to consider options for those whose circumstances have changed (if someone decides to retire early, for example) and require flexibility. Betterment can tailor our advice to the exact year your employees want to retire. Our retirement advice adapts to your employees’ desired retirement timeline and can be customized for their risk appetite if they want to be more conservative or aggressive. Betterment can also tell your employees if they‘re on or off track, factoring in all of their retirement savings, Social Security, pensions, and more. Employees can also link outside investments, savings accounts, IRAs—even spousal/partner assets—to create a real-time holistic snapshot of their finances. It can make saving for retirement (and any other short- or long-term goals) even easier. At Betterment, we believe in providing investment options and retirement advice that allows for customization and flexibility in a cost-effective way. Interested in bringing a Betterment 401(k) to your organization? Get in touch today at 401k@betterment.com.
Dive deep on select topics
Ready to rethink your company's 401(k) plan?
Start with a personalized quote.
Getting started
-
![]()
Thinking of Changing 401(k) Providers? Here’s What to Consider
If you’re considering changing 401(k) providers, be sure to spend some time assessing your current ...
Thinking of Changing 401(k) Providers? Here’s What to Consider true If you’re considering changing 401(k) providers, be sure to spend some time assessing your current situation and prioritizing your criteria. If you’re reading this, you may have reservations about your current 401(k) provider—and that’s okay. It’s not unusual for companies to change their 401(k) provider from time to time or feel out potential alternatives. We’d argue it’s even best practice to periodically take stock of your current situation. You want to feel confident your plan is keeping up with industry best practices and that you and your employees are getting good value for your money. So how do you go about it? In this guide, we’ll walk you through: Four criteria to consider before switching providers How to switch providers, step-by-step What to expect when switching your plan to Betterment at Work Four criteria to consider before switching 401(k) providers Let’s start with a friendly reminder: because choosing a 401(k) provider is a fiduciary act, you should carefully evaluate your options and clearly document the process. Even just a few criteria can go a long way in that pursuit. Taken altogether, they can give you a better sense of whether you should make a move or stay put. So if you haven’t read through your current agreement recently, now’s a good time to re-familiarize yourself and see how those terms stack up with the following criteria. It isn’t an exhaustive list by any means, but if you find they fall short in these criteria, it may be time to assess other options. Cost 401(k) plan fees can be complicated, but we’ll simplify things a little by sorting them into three categories: Plan administration fees Plan administration fees are (in most cases) paid by you, the plan sponsor, and cover things like plan setup, recordkeeping, auditing, compliance, support, legal, and trustee services. Investment fees Investment fees are typically paid by plan participants and are often assessed as a percentage of assets under management. They come in two forms: - Fund fees, aka “expense ratios,” charged by the individual funds or investments themselves. - Advisory fees charged by the provider for portfolio construction and the ongoing management of plan assets. Individual service fees If participants elect certain services, such as taking out a 401(k) loan, they may be assessed individual fees for each service. Plan providers are required to disclose costs such as these—as well as one-off fees relating to events such as amendments and terminations—in fee disclosure documents. All in all, fees can vary greatly from company to company, especially depending on the amount of assets in their plans. Larger plans, thanks to their purchasing power and economies of scale, tend to pay less. While comparisons can be hard to come by, one source is the 401k Averages Book. You’ll just need to pay—ahem—a fee to access their data. Support Support can encompass any number of areas, but it really boils down to this: do you and your employees feel forgotten and left to fend for yourselves, or do you feel the comforting and consistent presence of a trusted partner? The quality of service received by both groups—both you the plan sponsor and the plan participants—matters equally, so be sure to ask your employees about their experience. How easy is the provider’s user interface for them to navigate? Was it simple to set up their account and get started toward their goals? What kind of education are they being served along the way? One indicator of good participant support is when a majority of them are making contributions at healthy rates. From the plan sponsor’s perspective, many of the same questions regarding setup and day-to-day operations apply. Crucially, however, your support should extend to matters of compliance and auditing: Are the documents provided for your review and approval accurate and timely? When you’ve needed to consult on compliance issues, do you receive clear and helpful answers to your questions? Does the provider deliver a comprehensive audit package to you if you need it and collaborate well with your auditor? There’s also the question of payroll integration. Does your current 401(k) provider support it? How smoothly have things been running? Betterment at Work supports both 360-degree integration, where your payroll system and 401(k) system can send information back and forth, and 180-degree integration, where the data flows only one way, from your payroll system to the 401(k) system. If payroll integration is something you’re looking for in a new provider, be sure you understand these different levels of integration and which responsibilities you may retain. Investment Options For starters, it’s worth thinking about the investment philosophy of your current provider and whether that approach aligns with the needs of your employee demographic. What sort of investment options and guidance do they provide your employees? Some providers could offer a handful of target date funds and mutual funds then call it a day. This could be less than ideal for several reasons. For one, target date funds are essentially a rigid, one-size-fits-all solution to the problem of 401(k) investors not adjusting their risk exposure as they near retirement. If, however, an employee wants to customize their allocation according to their risk appetite, or if they plan to work past their retirement date, the target date fund may no longer be suitable for them. They’re left to figure out for themselves how and where to invest. Contrast that with Betterment at Work, where our portfolios can be customized based on a participant’s planned retirement date or their appetite for risk in general. Mutual funds, meanwhile, tend to cost more, anywhere from 2.5x to 5x more on average, and perform worse over the long run. This is why Betterment builds and manages its portfolios with lower-cost exchange traded funds (ETFs). All things considered, our investment options are designed for the long-term to help your employees reach their retirement goals. Wherever your plan’s investment options land, you still have an obligation as a fiduciary to operate the plan for the benefit of your employees. This means it’s not about what you or a handful of managers want from an investment perspective, but what serves the best interests of the majority of your employees. Finally, one important consideration is whether the plan provider is an ERISA 3(38) investment fiduciary like Betterment. This alleviates the burden of you, the plan sponsor, having to select and monitor the plan investments yourself. Instead, the plan provider assumes the responsibility for investment decisions, saving you time and stress. We’ll touch on other forms of fiduciary responsibility in the section below. Plan design Changing providers doesn’t mean you’re terminating your 401(k) plan and starting from scratch. That has legal ramifications, including not being able to establish another 401(k) plan for at least a year. It does present an opportunity to consider changing the design of your plan, like adding a Safe Harbor match provision. There are also features like auto-enroll and auto-escalation, which Betterment at Work offers at no additional cost. Now’s also a good time to know what level of fiduciary responsibility your current provider assumes and whether you’d want a new provider to have that same level of responsibility, take on more, or whether you’re comfortable taking on more fiduciary responsibility yourself. In terms of investments, the provider may serve as the ERISA 3(21) fiduciary, which provides only investment recommendations, or the aforementioned ERISA 3(38) fiduciary (like Betterment at Work), which provides discretionary investment management. Or they may not be a fiduciary at all. In terms of administration, the provider may or may not provide ERISA 3(16) services (Betterment at Work does). There can be a wide range of functions that fall within that, so refer to your agreement to be sure you know exactly which services they are responsible for and which by default, fall to you as plan administrator. How to switch providers, step-by-step So you’ve done and documented your research and reached the conclusion that it’s time to make a change. What next? Better understanding the mechanics of a move can help you manage expectations internally and create reasonable timelines. Typically, changing providers takes at least 90 days, with coordination and testing needed between both providers to reconcile all records and ensure accurate and timely transfer of plan assets. Once you’ve identified your chosen successor provider and executed a services agreement with them, high-level steps include: Notify your current provider of your decision. You may hear them refer to this as a “deconversion” process. Establish a timeline for asset transfer and a go-live date with the new provider. Review your current plan document with the new provider. This will give you the chance to discuss any potential plan design changes. Be sure to raise any challenges you’ve faced with your current plan design as well as any organizational developments (planned expansion, layoffs, etc) that may impact your plan. Set up the investments. If your new provider is a 3(38) investment fiduciary, you’ll likely have nothing to do here since the provider has discretionary investment responsibilities and will make all decisions with respect to fund selection and monitoring. If your new provider is NOT a 3(38) investment fiduciary, then you’ll have the responsibility for selecting funds for your plan. The plan provider will likely have a menu of options for you to choose from. However, this is an important fiduciary responsibility, and if you (or others at your organization) do not feel qualified to make these decisions, then you should consider hiring an investment expert. Review and approve revised plan documents. Communicate the change to employees (including required legal notices), with information on how to set up and access their account with the new provider. Wait through the blackout period. The blackout period is a span of time—anywhere from 2 to 4 weeks depending on your old provider—when employees can’t make contributions, change investments, make transfers, or take loans or distributions. Participants’ accounts are typically still invested up until the old provider liquidates them and sends them to the new provider. From there, they’re re-invested by the new provider. Outstanding employee loans are also transferred from the old provider to the new provider. Confirm the transfer of assets and allocation of plan assets to participant accounts at your new provider. What to expect when switching your plan to Betterment at Work As you can see from the steps above, switching 401(k) plan providers isn’t as simple as flipping a switch. But that doesn’t mean some providers don’t make it easier than others. We pride ourselves on streamlining the process for new clients in a number of ways: As a 3(38) fiduciary, we handle all investment decisions for you. That’s one less thing to worry about when serving the interests of your employees. We also create accounts for eligible employees and participants, saving them the hassle. You can track the entire onboarding process, meanwhile, in your employer dashboard. Regardless of whether you end up making a switch, we hope the criteria above helped you take better stock of your current 401(k) offering. Before, during, or after that decision, we’re here to help. -
![]()
Understanding 401(k) Fees
Come retirement time, the number of 401(k) plan fees charged can make a major difference in your ...
Understanding 401(k) Fees true Come retirement time, the number of 401(k) plan fees charged can make a major difference in your employees’ account balances—and their futures. Did you know that the smallest 401(k) plans often pay the most in fees? We believe that you don’t have to pay high fees to provide your employees with a top-notch 401(k) plan. With Betterment, you can manage plan eligibility and coverage, which gives you more control over cost. We're transparent about our fees and don't hide future costs like some providers. Why do 401(k) fees matter? The difference between a 1% fee and a 2% fee may not sound like much, but in reality, higher 401(k) fees can take a major bite out of your participants’ retirement savings. Consider this example: Triplets Jane, Julie, and Janet each began investing in their employers’ 401(k) plan at the age of 25. Each had a starting salary of $50,000, increased by 3% annually, and contributed 6% of their pre-tax salary with no company matching contribution. Their investments returned 6% annually. The only difference is that their retirement accounts were charged annual 401(k) fees of 1%, 1.5%, and 2%, respectively. Forty years later, they’re all thinking about retiring and decide to compare their account balances. Here’s what they look like: Annual 401(k) fee Account balance at age 65 Jane 1% $577,697 Julie 1.5% $517,856 Janet 2% $465,894 Information is hypothetical and provided for educational purposes only. As such, these figures do not reflect Betterment’s management fee and do not reflect any actual client performance As you can see, come retirement time, the amount of fees charged can make a major difference in your employees’ account balances—and their futures. Why should employers care about 401(k) fees? You care about your employees, so naturally, you want to help them build brighter futures. But beyond that, it’s your fiduciary duty as a plan sponsor to make sure you’re only paying reasonable 401(k) fees for services that are necessary for your plan. The Department of Labor (DOL) outlines rules that you must follow to fulfill this fiduciary responsibility, including “ensuring that the services provided to the plan are necessary and that the cost of those services is reasonable” and has published a guide to assist you in this process. Generally, any firm providing services of $1,000 or more to your 401(k) plan is required to provide a fee disclosure, which is the first step in understanding your plan’s fees and expenses. It’s important to note that the regulations do not require you to help ensure your fees are the lowest available, but that they are reasonable given the level and quality of service and support you and your employees receive. Benchmark the fees against similar retirement plans (by number of employees and plan assets, for example) to see if they’re reasonable. What are the main types of fees? Typically, 401(k) fees fall into three categories: administrative fees, individual service fees, and investment fees. Let’s dig a little deeper into each category: Plan administration fees—Paid to your 401(k) provider, plan administration fees typically cover 401(k) set-up fees, as well as general expenses such as recordkeeping, communications, support, legal, and trustee services. These costs are often assessed as a flat annual fee. Investment fees—Investment fees, typically assessed as a percentage of assets under management, may take two forms: fund fees that are expressed as an expense ratio or percentage of assets, and investment advisory fees for portfolio construction and the ongoing management of the plan assets. Betterment, for instance, acts as investment advisor to its 401(k) clients, assuming full fiduciary responsibility for the selection and monitoring of funds. And as is also the case with Betterment, the investment advisory fee may even include personalized investment advice for every employee. Individual service fees—If participants elect certain services—such as taking out a 401(k) loan—they may be assessed individual fees for each service. Wondering what you and your employees are paying in 401(k) fees? Fund fees are detailed in the funds’ prospectuses and are often wrapped up into one figure known as the expense ratio, expressed as a percentage of assets. Other fees are described in agreements with your service providers. High quality, low fees Typically, mutual funds have dominated the retirement investment landscape, but in recent years, exchange-traded funds (ETFs) have become increasingly popular. At Betterment, we believe that a portfolio of ETFs, in conjunction with personalized, unbiased advice, is the ideal solution for today’s retirement savers. Who pays 401(k) fees: the employer or the participant? The short answer is that it depends. As the employer, you may have options with respect to whether certain fees may be allocated to plan participants. Expenses incurred as a result of plan-related business expenses (so-called “ settlor expenses”) cannot be paid from plan assets. An example of such an expense would be a consulting fee related to the decision to offer a plan in the first place. Other costs associated with plan administration are eligible to be charged to plan assets. Of course, just because certain expenses can be paid by plan assets doesn’t mean you are off the hook in monitoring them and ensuring they remain reasonable. Plan administration fees are often paid by the employer. While it could be a significant financial responsibility for you as the business owner, there are three significant upsides: Reduced fiduciary liability—As you read, paying excessive fees is a major source of fiduciary liability. If you pay for the fees from a corporate account, you reduce potential liability. Lowered income taxes—If your company pays for the administration fees, they’re tax deductible! Plus, you can potentially save even more with the new SECURE Act tax credits for starting a new plan and for adding automatic enrollment. Increased 401(k) returns—Do you take part in your own 401(k) plan? If so, paying 401(k) fees from company assets means you’ll be keeping more of your personal retirement savings. Fund fees are tied to the individual investment options in each participant’s portfolio. Therefore, these fees are paid from each participant’s plan assets. Individual service fees are also paid directly by investors who elect the service, for example, taking a plan loan. How can you minimize your 401(k) fees? Minimizing your fees starts with the 401(k) provider you choose. In the past, the price for 401(k) plan administration was quite high. However, things have changed, and now the era of expensive, impersonal, unguided retirement saving is over. Innovative companies like Betterment now offer comprehensive plan solutions at a fraction of the cost of most providers. Betterment combines the power of efficient technology with personalized advice so that employers can provide a benefit that’s truly a benefit, and employees can know that they’re invested correctly for retirement. No hidden fees. Maximum transparency. Costs are often passed to the employee through fund fees, and in fact, mutual fund pricing structures incorporate non-investment fees that can be used to pay for other types of expenses. Because they are embedded in mutual fund expense ratios, they may not be explicit, therefore making it difficult for you to know exactly how much you and your employees are paying. In other words, most mutual funds in 401(k) plans contain hidden fees. At Betterment, we believe in transparency. Our use of ETFs means there are no hidden fees, so you and your employees are able to know how much you’re paying for the underlying investments themselves. Plus, our pricing structure unbundles the key offerings we provide—advisory, investment, record keeping, and compliance—and assigns a fee to each service. A clearly defined fee structure means no surprises for you—and more money working harder for your employees. -
![]()
Betterment’s 401(k) Investment Approach
Helping employees make better decisions and providing choice to those who want it.
Betterment’s 401(k) Investment Approach true Helping employees make better decisions and providing choice to those who want it. Dan Egan, Betterment’s VP of Behavioral Finance and Investing, explains why Betterment’s investment approach is effective for all 401(k) participants Investment Approach Q&A Betterment’s 401(k) investment approach differs from that of traditional providers, but can you give us a little history about the 401(k) environment pre-Betterment? If I go back to the first job where I had a 401(k) probably about 20 years ago, there was a lineup of funds, and it was up to me as a 401(k) participant to figure out which funds to pick and in what ratios, how much to save and so on. The research coming from that period showed that people often ended up in an analysis paralysis state, where there was so much choice and so many things to consider. It was very difficult for people to know whether they were investing at the appropriate risk level, how much they were paying and so on. Many people were so overloaded that they decided to forego saving for retirement rather than risk making a “bad” decision. But as the industry matured, and everyone realized that more choice does not necessarily lead to better decision-making, the Pension Protection Act (PPA) was passed in 2006. The idea here was not to eliminate choice, but to encourage good defaults that would encourage 401(k) plan participation. How exactly did the PPA encourage more 401(k) participation? For one thing, it allowed for safe harbor investments in the form of QDIAs, or qualified default investment alternatives. The most popular QDIAs were target date funds, which are linked to an individual’s age so if you're 40, it’s assumed that you will be investing for the next 25 years and retiring at 65. Target dates have a glidepath so that the stock allocation becomes more conservative over time, so the employee doesn't have to do anything like managing a portfolio or rebalancing. After the PPA, it became much more common for employees to be auto-enrolled using a target date fund or something like it, and all of sudden, they no longer had to make choices. People were no longer worried about picking and choosing from a whole bunch of individual funds or even individual stocks. And the plan designs promoted by the PPA really worked: plan participation rates that had been languishing saw rates increase to more than 90% after implementing auto-enrollment. By the time Betterment started its 401(k) platform, the changes brought about by the PPA were already well established. So talk a little bit now about how Betterment's 401(k) investment approach differs from that of traditional 401(k) providers. Betterment takes and builds upon a lot of the ideas in a target date fund and goes further. Number one, we are not a fund provider. We are independent from fund companies. So part of our job as a 3(38) investment fiduciary is to be an investment advisor and financial advisor, and do the due diligence on all of the funds that we make available. If you're picking from amongst eight large-cap US stock funds, there's not a lot of variation in what their returns are going to look like and you can generally predict performance versus a benchmark knowing the fund costs. So part of our job is to actually do the work on the behalf of participants, to narrow down the field of funds towards just the ones that stand out within a given asset class and that are cost-effective. We then ask more specific questions including not just how old someone is, but also more personalized questions like when someone plans on retiring. Some people want to retire as early as possible. That might be 55, 57, 62 (which is the earliest possible age you can start collecting Social Security). Other people want to keep working as late as possible, which is 70 or 72. Those are extremely different retirement plans that should have different portfolios based upon those hugely different time horizons. So unlike a target date fund, which says, this is your age and you're done, Betterment is going to ask about your age, but also things like, when do you want to retire? Putting together a retirement plan might also involve your spouse or significant others, retirement assets, and even doing tax optimization across the account types that you have available to you. And how does that help the employee? A lot of it is about making it easy for consumers to make better decisions, not imposing a bunch of choices on them. You have to remember, the vast majority of people are not frequently thinking about stocks and investing. They don't want to have to look up prospectuses and put together a risk managed portfolio. So Betterment does the work for them to make it easy for them to understand how to get to where they want to be. I want to be clear that that's not necessarily about removing choice, it's about making it easy to get to a solution quickly. It’s also about minimizing the number of unnecessary choices for most people while maintaining choice for people who want it. At Betterment, 401(k) investors can still modify your risk level. You can say, "Yeah, maybe it makes sense for me to be at 90% stocks, but I'm not comfortable with it. I want to be at 30% stocks." Or they can modify their allocations using our flexible portfolio strategy, so that they can come in and say, "Actually I don't like international [investments] as much." So it's not about removing choice. And we let them see the consequences of that in terms of risk and return. So employees in Betterment 401(k)s have choice, but how do you respond to people who might already have a 401(k) or are already invested in funds outside of their 401(k), and have a favorite fund that they feel is an absolute must have? I’m not necessarily against people who have put time and effort into researching something and wanting to invest in it. But I think it is focusing on the wrong thing. When you look at long-run research statistics on funds, the predictability of fund success within a category is low. A fund that outperformed last quarter is unlikely to continue to outperform this quarter. So I would say that the fund is very rarely the most important aspect of the 401(k) plan or decision. And I’d guess most participants don't have a favorite fund. Again, going back to research we've looked at across a wide array of companies, most people are looking to minimize how much burden is imposed upon them in making decisions about what they should do for their retirement. There is generally a very small minority who have very strong views about what the right investments are. And that trade-off shows up in that we will generally look at low-cost funds, well-diversified funds. We do offer a range of choice in terms of portfolio strategy: do you want a factor-tilted portfolio or a socially-responsible portfolio or an income portfolio? Without necessarily saying that you're responsible for doing the fund due diligence yourself. It is true that we offer a trade-off: we're not the wild west where you can go out and get anything you want. And that is because that level of discretion is rarely used by plan participants. There's a lot of potential to do the wrong thing when somebody has a completely open access plan. Not to mention, all plan fiduciaries have an obligation to act in the best interests of their plan participants as a whole. So they have to evaluate what makes the most sense for the majority of plan participants, not a small, vocal minority. Somewhat related, what is your response to people who argue that Betterment’s all-ETF fund line-up is too limited? A 401(k) plan made up exclusively of ETFs is no less limiting than a 401(k) plan made up exclusively of mutual funds. Because mutual funds have been around much longer, it’s true that their universe is larger, but I think anyone would be hard pressed to argue that our expert-built and third-party portfolios are not enough to choose from. ETFs are critical to Betterment’s investment approach and a better alternative for 401(k) plans, in large part because mutual funds have complex fee structures and are typically more expensive than ETFs which have transparent and low costs. So why do so many plans still use mutual funds? We believe it’s not despite these issues but because of them, since fees embedded in mutual fund expense ratios are often used to offset the costs of 401(k) vendors servicing the plan. In addition, many legacy recordkeeping systems do not have the technology to handle ETF intraday trading and must restrict their clients to using funds that are only valued at the end of the day. Betterment’s 401(k) plan comes with a 0.25% investment advisory fee. What do employers and employees get for that? I think there's actually two levels to this. The first is “does this actually cost me more?” It’s definitely more transparent in its cost, but most 401(k) plans charge more via higher fund fees. The fund fees may even include embedded fees that go to pay for other plan services. In these more traditional models, the fees are hidden from you, the consumer. But trust me: everybody is getting paid. It's just a matter of whether or not you're aware how much and who you're paying. That also sets up the very important second aspect which is: what is this investment manager responsible for and what are they incentivized to do well? What does Betterment do for 25 basis points? Well, number one, that's how we make sure that we're independent from the fund companies; we don’t get paid by them. Every quarter, we go out and we look at all of the funds that are available in the market. We review them, independent of who provides them, looking at cost, liquidity, tax burdens, and more. And if we find a better fund, because we take no money from fund companies, we're going to move to that better fund. So one thing that you're paying for is, in effect, not only ongoing due diligence and checking, but you're paying for independence, which means that you know we’re unbiased when changes are made inside of your portfolio. The other thing you get is that we want to earn that 25 basis points by serving clients better. So we want to invest in things like personalized retirement portfolios (available to every 401(k) participant) where we are actually able to give better retirement advice that takes into account you, your partner, all the various kinds of retirement accounts you have: Roth, IRA, taxable, trust, and more. Or asset location, for example, which works across tax-advantaged retirement accounts so that employees can keep more of their money and enjoy higher levels of spending in retirement. Employees with a Betterment 401(k) can learn more about our investment options here; plan sponsors can explore them here. -
![]()
Getting Started with Betterment at Work
Welcome! Here’s your step-by-step guide to getting your 401(k) up and running.
Getting Started with Betterment at Work true Welcome! Here’s your step-by-step guide to getting your 401(k) up and running. You’ve done the due diligence. You’ve picked us as your 401(k) plan provider. You’ve signed a services agreement. Now what? Before we share the steps needed on your part to get your plan up and running, here’s another heartfelt thank you from us to you. Sponsoring a 401(k) plan is a big commitment on your part—the fiduciary responsibilities alone make it one. You’ve placed your trust in us as your plan provider, and we don’t take that lightly. It’s why we stay by your side every step of the way. Speaking of those steps, here are the first ones you’ll take after signing a services agreement: Step 1: Complete a questionnaire One business day after signing a services agreement, you’ll receive an email with a link to a questionnaire that confirms some basic information about your organization and sets up your plan in our system. This questionnaire can only be sent to one person at your organization, typically the person who’s been in contact with our Sales team. Step 2: Log in to your plan sponsor dashboard After completing the questionnaire, you’ll receive an email with a personalized link to your Betterment at Work plan sponsor dashboard, your home for ongoing plan management. After logging in, you’ll see a series of onboarding tasks to complete so we can finish setting up your organization’s plan. Let’s break down some of these tasks below. Step 3: Review and acknowledge the Investment Policy Statement (IPS) This outlines our general investing rules and can be found in your onboarding hub. Step 4: Purchase a fidelity bond Before your first payroll with Betterment at Work, you’ll need to purchase a fidelity bond. This is a form of insurance required of 401(k) plans that protects against acts of fraud or dishonesty. The bond must come from an insurance company certified by the Department of Treasury. While you’re completing steps 1-4, by the way, we’ll be simultaneously drafting your plan document and disclosure notices. Step 5: Review and sign your plan document Once your plan document is ready, you’ll receive an email to review and sign it. After you’ve signed the plan document, we’ll build out your plan on our platform. This can take up to two weeks to get all the details just right. Step 6: Tell your team about their new 401(k) provider! Right after you sign your plan document is a great time to let your team know about your company’s new 401(k) provider: Betterment! This gives employees ample time to get familiar with us before we email them directly with invitations to claim their accounts. It also helps ensure you give this notice the required 30 days or more before your first payroll with us. Not sure what to say? A suggested announcement message is available in your onboarding hub, and includes a link for your employees to register for our recurring Getting Started with your Betterment 401(k) webinar as well as select articles from our employee resource hub (betterment.com/my401k). Step 7: Add employees to your plan Once your plan is built out on our platform, the party really gets started. How employees are added to your plan depends on whether or not your payroll provider integrates with our platform: If your payroll provider is integrated with our platform, we’ll automatically sync employees. You’ll need to review and confirm the list is correct at least 30 days before payroll launch. If your payroll provider is *not* integrated with our platform, you’ll be asked to bulk upload a list of employees at least 30 days before payroll launch, then we’ll generate their accounts. Once your employees’ accounts have been created, we’ll send an email to each employee’s work email inviting them to claim their account and, in the process, create a login. If an employee already has a Betterment account via one of our individual products like an IRA, the claim email will go to their personal email address. Either way, they’ll need to use the unique link in this email to access their account the first time. Step 8: Prepare for your first payroll Check out your onboarding task hub for details on handling your first payroll. Step 9: Celebrate! Congratulations on uploading your first payroll with Betterment at Work! Your employees are now taking advantage of our clean design and straightforward tools to get more out of their 401(k)s. Their accounts will be funded once the ACH deposit is confirmed, which typically takes 1–3 business days depending on your bank. Once your onboarding process is complete, our Onboarding team will send you an email introducing you to our Plan Support team, who can help with all things related to your ongoing plan administration. To access your plan sponsor dashboard, log in here or by clicking "Log in" at the top of the page while visiting betterment.com/work.
