Can I use Schwab, Fidelity, Vanguard or E*TRADE to administer my safe harbor 401(k) plan?

Administering a solo 401(k) plan is a straightforward process. It’s designed to cover just the owner (and possibly a spouse), which means there are minimal integration tasks. The owner can easily manage their own investments, making the process even simpler.

But once eligible employees come into the mix everything changes. Employees must have 401(k) deferrals deducted from payroll. They also must select and manage their own investments. This is where the complexity lies.

In this post, we will discuss safe harbor 401(k) plans and show you how the large custodians support them.

Why are 401(k) plans with employees so challenging?

The integration and administrative tasks increase substantially once you add employees. The most significant issues are:

• Employees must be able to manage their own investments. This requires an investment platform where they can select from investment options and log in through an app or a website to review and make changes.
• Employee deferrals are elections made through payroll. As a result, your plan must be integrated with your payroll system.

The above integration tasks substantially increase the administration workload.

Can’t Schwab, Fidelity, Vanguard or E*TRADE handle the integration?

Please be aware that investment custodians like Schwab, ETrade, Vanguard, and Fidelity are primarily investment platforms. They do NOT have a cost-effective solution when you have employees.

While you can use those platforms in some situations, the integration tasks will likely fall on you. This process is often manual, and most clients find it challenging. You are welcome to contact Schwab, Fidelity, Vanguard, or E*TRADE if needed.

What is the difference between a Solo 401(k) plan and a Safe Harbor 401(k) plan?

The key differences between a Solo 401(k) plan and a Safe Harbor 401(k) plan are:

Solo 401(k):

• Designed for self-employed business owners with no full-time employees other than a spouse.
• No requirement for employer contributions.
• Easy to set up and maintain with minimal administrative costs.
• Avoids complex non-discrimination testing since there are no employees.

Safe Harbor 401(k):

• Intended for businesses with employees.
• Requires mandatory employer contributions in one of two ways:
  1. Matching employee contributions up to 4% of compensation, or
  2. Non-elective contribution of 3% of compensation for all eligible employees.
• Employer contributions must be immediately 100% vested.
• Automatically satisfies annual non-discrimination testing (ADP/ACP tests).
• More costly and complex to administer compared to a Solo 401(k) due to mandatory employer contributions and employee eligibility tracking.

In essence, a Solo 401(k) allows self-employed individuals to maximize retirement contributions without employer contributions or non-discrimination testing, while a Safe Harbor 401(k) requires mandatory employer contributions but exempts the plan from complex annual testing for businesses with employees.

The choice depends on whether the business has employees and can afford the required employer contributions for a Safe Harbor plan.

What is a Surety Bond?

A surety bond serves as a financial guarantee that the principal will fulfill their contractual duties or legal obligations. Essentially it acts like insurance and protects plan participants against losses caused by acts of fraud or dishonesty. ERISA mandates that every person who “handles funds or other property” of an employee benefit plan, including 401(k) plans, must be bonded unless specifically exempted.

Bonding is NOT required for a solo 401(k) plan. This is because you can’t steal from yourself.

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*Emparion is not affiliated with, endorsed by, or sponsored by these institutions.*

However, bonding is a mandatory requirement for safe harbor 401(k) plans under ERISA to protect participant assets from fraud or mishandling of funds.

The key points regarding bonding requirements for safe harbor 401(k) plans are:

• The bond must cover at least 10% of the funds handled by the plan fiduciary as of the first day of the plan year, subject to a minimum of $1,000 and a maximum of $500,000 (or $1 million if the plan holds employer securities).
• The bond must have a term of at least one year and cannot have a deductible.
• Persons who must be bonded include the plan administrator, officers, employees of the plan or plan sponsor who handle plan funds, and any service providers with access to plan funds or decision-making authority over plan assets.
• The bond can be paid from plan assets or by the plan sponsor.
• Failure to meet ERISA’s bonding requirements can trigger a plan audit by the government and potential liability for plan fiduciaries.

Most of our clients use Colonial Surety. You can find them here: https://www.colonialsurety.com/

Contact Numbers for Schwab, Fidelity, Vanguard, or E*TRADE

Below are the numbers for the custodians:

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