Clever Geek Handbook
3 November 2025

Beyond Viral

Recommendation

Kevin Nalty, affectionately known as “Nalts” by YouTube fans, is one of the website’s most-viewed personalities. He’s also an experienced marketer who has worked with Coca-Cola, Microsoft, Starbucks and Fox Broadcasting. Here he helps fellow marketers use the evolving world of online video sharing to promote their brands. Not surprisingly, a dominant underlying theme is the wisdom of collaborating with established “weblebrities” who already have a large, loyal audience – such as Nalts himself. The book offers gems of knowledge, but it’s quite disorganized, so they’re tricky to find. BooksInShort suggests that the book may be more helpful to webstar wannabes who are already familiar with the subject.

Take-Aways

  • Online video sharing offers marketers opportunities to promote their brands.
  • Promotional options include branded entertainment, sponsorships, product placement or collaboration with video creators.
  • YouTube advertising includes pop-ups, “InVideo” ads and inserted hyperlinks.
  • Videos range from professionally produced to user-generated content (UGC).
  • Viral videos capture viewers’ attention, inspiring them to share with friends and family.
  • The chances of your video going viral are a long shot, at best.
  • Successful viral videos are short, engaging, surprising, entertaining and imaginative.
  • YouTube’s debut in 2005 has given rise to a new breed of star, the “weblebrity.”
  • “Webstars” are talented, determined, and persistent, and they have a passion for creating videos.
  • To maximize your YouTube success, create partnerships with established online video creators who know the medium and have an audience.

Summary

YouTube 101

The standard definition of “online video” refers to video content people view on their computers. However, this definition is evolving with smart phone technology that allows individuals to view videos on their mobile devices. The world’s number two search engine, YouTube, is the dominant video-sharing site. Hulu is in second place, according to the market research company ComScore. Audiences for online video sites are growing steadily, while television and print continue to lose viewers, readers and also revenues.

“It’s not a viral video if people don’t want to share it.”

YouTube, which began as a community of creators and viewers, developed into a hugely popular social media site. It’s easier to access than Facebook and Twitter because you don’t have to register or create a profile. People using the Internet are more likely to watch a video than visit a social networking site.

“Online video is the most visceral, engaging and persuasive form of mass entertainment and marketing.”

Content created by “webstars,” musicians and professionals generate most of YouTube’s revenue. Webstars, also known as “YouTube Stars” or “weblebrities,” are amateurs whose videos gain a substantial, loyal audience. Many develop a cultlike following – supporters with whom they interact and build relationships. Devoted viewers develop feelings of kinship and intimacy with their favorite webstars, who wield significant influence.

Learning As You Go

Online video offers new opportunities to promote brands, although advertisers are still establishing the best practices. The old ways of advertising won’t work on this new medium as they did on older channels. Audience engagement is the most valuable asset of online videos. Attempts to engage audiences via branded entertainment, such as Budweiser’s Bud.tv, often fail. Marketers should form relationships with producers who are already generating popular content.

“Online-video viewing continues to grow, and advertising dollars are shifting to sites like YouTube.”

YouTube viewership garners a broad audience across all demographics. Although traditional display advertising has its place, video sponsorships, product placement and collaboration with video creators produce better results. Nielsen IAG and Microsoft conducted research and found online video ads more effective than television spots in terms of recall, awareness, and likability. Measuring results to determine your return on investment is not difficult. A variety of metrics can gather information that goes beyond cost per impression. You want to know not only if people clicked on a video but also if they watched it all the way through. YouTube offers free monitoring tools that track keywords such as your brand name.

“Keep your clip or video short, interesting, edgy and give us a surprise that makes us want to forward it to our friends.”

Marketers are experimenting with the best ways to advertise through online video. Agencies now use “seeding” – that is, providing videos to relevant bloggers and targeted websites. For example, a hotel chain may place a video on travel-related sites and blogs. YouTube offers other paid advertising formats, while smaller video-sharing sites provide pay-per-view options.

“The community will welcome you more if they don’t see you as a walking advertisement.”

One way to garner attention is to purchase ads surrounding videos that appear before, during or adjacent to popular content. Creators get paid to put annotation text over their videos showing hyperlinks to other related videos or to a YouTube channel. Advertisers can create original content and pay YouTube to promote their videos based on searched keywords. Pop-up ads and “InVideo” ads are hard for viewers to ignore, but they are more expensive than static banner ads.

“Creating a video in hopes for it to go viral is the gambler’s equivalent of roulette.”

As marketers learn how to use video to engage consumers, they often err. Television spots on video-sharing sites or product sites usually flop. Promotional contests can generate engagement if you handle them correctly, but they are becoming too common. Search engine optimization techniques, such as keyword loading and tagging, can draw viewers if you use them judiciously.

What You See

YouTube content comes from a variety of sources in the following three categories: “professional content, user-generated content (UGC)” and “hidden online-video flavor.” Marketers usually feel more comfortable buying ads within content produced by professionals. Amateur UGC may include such videos as film clips of cats skateboarding or babies laughing.

“There have been countless companies attempting to cash in on the growth of online video, and most have failed.”

Hidden flavor videos fall on the continuum between professional and amateur content. For example, producers and distributors of broadband videos have formed digital studios to create “short-form” content. Studios include Next New Networks, 15 Gigs, Mondo, Funny or Die, Take 180, Revision3 and Demand Media. Digital studios produced the successful web series Dr. Horrible’s Sing-Along Blog by Mutant Enemy Productions and The Guild by Felicia Day.

“Putting your videos on a bloated product.com site is the online equivalent to running television commercials on a kiosk hidden in an abandoned cemetery.”

Popular YouTube stars create content that draws a large, loyal audience, sometimes surpassing that of popular television shows. Hidden flavor also offers videos producers create to reach small, niche markets. The best tool for reaching targets at the far end of the long tail is focused amateur content. These ad-friendly videos are cheap-to-produce, cost-efficient advertising vehicles.

Going Viral

Viral videos are film clips that capture viewers’ attention so much that they share the video online. Eventually, thousands and even millions of people view a viral video. There’s little point in producing a video in hopes of it going viral. Nobody can foresee which videos might capture people’s imagination, although some of the most successful viral videos have features in common. They highlight practical jokes, dancing, music or song spoofs, children and animals, bloopers and goofs, political satire or humor, video blogging (vlogging), or teaching. For your video to go viral, you need good timing and good luck. Marketers need to know eight things about viral video:

  1. “The definition of viral video is that is goes viral” – If people don’t share a video, it’s not viral.
  2. “A viral video does not have to be good” – Don’t spend a lot of money on production. The film’s quality has little effect on audience engagement.
  3. “Nobody can predict what becomes viral” – Most successful viral videos are engaging, unexpected, entertaining, short and imaginative.
  4. “If you are trying to advertise via viral, dial down the marketing” – Savvy viewers will disregard the ad and demand transparency.
  5. “Topical is important” – Topical videos show up on popular YouTube searches.
  6. “New viral ideas rarely derive from old ones” – Imitation doesn’t work in viral video. Don’t try to copy other people’s success.
  7. The “duration of [the] video is vital” – Today’s viewers have short attention spans and prefer short videos.
  8. “Cheaters never win (at least in the long run)” – Videos must go viral organically. Trying to cheat the process can cause a negative backlash.

YouTube Doesn’t Share Its Secrets

Google owns YouTube and utilizes a ranking model for videos similar to its model for Google searches. YouTube promotes content it can monetize or that has high relevance to viewers as demonstrated by their keyword searches, ratings, view counts, and favorite status tags. Unlike Google listings, it’s hard to tell at a glance if a video is a paid placement or if it earned a high rank organically. YouTube is not transparent about how it ranks content, nor does it share its formulas and algorithms.

“The online-video viewer is leaning forward (versus leaning back while watching television) and is hovering his curser over the ‘close’ or ‘back’ button.”

YouTube star wannabes should produce relevant, topical content aimed toward a specific interest. The more popular you become, the easier it is to become more popular. Garnering a certain number of views qualifies you as a YouTube Partner, entitling you to share a percentage of the site’s revenues and enjoy prime positioning on the home page.

“Weblebrity”

Since its 2005 debut, YouTube has created a new breed of stars with a unique type of fame. Some of the most successful make a living producing YouTube content. The most-viewed personalities, who are listed on TubeMogul.com/marketplace, have certain characteristics in common:

  • “One-man bands” – YouTube stars handle every aspect of short-form video production including writing, producing, taping, editing, distributing and promoting.
  • “Persistence” – Some creators get lucky with one-hit wonders, but growing an online audience takes dedication and doggedness.
  • “Thick skin” – Putting your work on a social media site – where it becomes fodder for barbed criticism and review – is not for the faint of heart.
  • “Self-driven” – Weblebrities are inspired by the freedom of working independently.
  • “Marketers” – Webstars are savvy self-promoters, even if they market by instinct rather than traditional methods.

Working Knowledge

Ad and PR agencies are scrambling to figure out the best ways to use online video and other social media to promote their clients’ brands. Education is the first step. Marketers need a working knowledge of social media, even if they don’t use Twitter, YouTube or Facebook. Someone on the executive team should spearhead agency efforts to pursue new channels and study changes in consumer behavior online. The agency also needs an internal team to explore and create social media tactics that tie into clients’ strategies. Be ready to use consultants and external specialists to exploit opportunities as they arise. As the African proverb goes, “If you wait for the whole beast to appear before throwing the spear, you’re already too late.”

“As online video continues to mature...it will become almost as measurable as paid searches.”

Consider collaborating with established online video creators who know the medium and have an audience. For example, Fox Broadcasting formed a partnership with author Kevin Nalty and other weblebrities to promote the television series Lie to Me, Fringe, and Glee. Millions online viewed the video campaign and participated in a game. Sponsored video campaigns outperform display ads and paid search advertising on a cost-per-view basis. Their higher engagement rates generate greater impact. The creative challenge is to entertain viewers while promoting a brand.

“What we marketers really want is behavior change, and that happens when prospects give us time, attention, and engagement.”

YouTube offers several forms of paid advertising. You can purchase homepage placement, although viewers often distrust this tactic. Paying to become a “featured video” guarantees views. YouTube’s Partner Program attracts advertisers who place InVideo ads on videos from proven content producers. You can buy a “takeover” and have your brand splashed all over YouTube’s homepage. Deep pocket advertisers purchase branded channels, an expensive option that may garner higher traffic than posting a separate campaign site.

YouTube Stardom

YouTube is an online community. To become a star, abide by its unwritten rules. If you want people to watch your videos, watch videos others have posted and, crucially, make comments. Interacting with other YouTube creators fuels networking and promotes your content. Speak with creators online or meet them in person. Creators organize events in cities throughout the US that hundreds of online video producers attend. Collaborating with other YouTube users helps you gain an additional audience.

“YouTube is not just a video-sharing site; it’s a community.”

Search engine optimization techniques help Google find and rank your video. After uploading it to YouTube, place it on other video-sharing sites such as Metacafe, Dailymotion and Yahoo Video. Ensure that search engines can find your video on your website with a well-configured site map, smart use of keywords, and unique titles and descriptions. An attractive thumbnail – a still from your video – increases the likelihood that people will click on your video.

About the Author

Frequent public speaker Kevin Nalty, known as “Nalts” on YouTube, founded Nalts Consulting. He was marketing director at Merck and Johnson & Johnson.

Read summary...
Beyond Viral

Book Beyond Viral

How to Attract Customers, Promote Your Brand, and Make Money with Online Video

Wiley,
 


3 November 2025

UnMarketing

Recommendation

Traditional marketing strategies have lost steam as social networking and other tools provide companies with more options for engaging directly with potential and current customers. The “UnMarketing” way encourages connecting, listening and engaging. Scott Stratton delivers his unmarketing advice in a series of vignettes written in a personable, humorous style. Though the author breaks little new ground here, BooksInShort recommends his entertaining stories, examples and how-tos. They perfectly illustrate how to stop marketing and start unmarketing to make friends, attract new business and retain current customers.

Take-Aways

  • Customers prefer to connect to a company’s human aspects.
  • “UnMarketing” means building relationships by engaging with your market in an authentic, natural way.
  • Social media let people get to know each other and hold conversations online.
  • People will talk about your company and brand whether you join the conversation or not.
  • Using social media, businesses can garner detailed feedback from customers.
  • Client experience comes from engaging with your entire firm, including employees.
  • Happy customers provide your best marketing because they promote your business through word-of-mouth.
  • Salespeople must engage positively with everyone or risk losing sales.
  • Even with sound unmarketing, you still need a great product or service to succeed.
  • You are your company’s most important asset, so be genuine and transparent.

Summary

Create Customer Relationships with “UnMarketing”

Relationships build businesses. Unmarketing discards cold calling and other traditional techniques and embraces a method based on connecting and engaging. Unmarketing lets you gain trust and eventually turn prospects into customers.

No business instantly earns trust. Marketers advertising in the yellow pages hope customers will choose their company out of all the competitors listed. But why would prospects select a company they don’t know? A business applying unmarketing may instead suggest that prospects subscribe to an email newsletter or visit a blog for advice. This allows potential customers to get to know a firm and develop sufficient trust for the next step: a complimentary consult.

“People don’t care about your business until they know you care about them.”

Consider small-scale free offers. Which would more likely entice you to try a new restaurant: an ad or an invitation to sample a select dish for free? There is an initial outlay of costs and resources involved in inviting nearby residents for a limited seating tasting. But if they love the food, they’ll come back. An ad can’t convince them to pay for food they’ve never tried.

“You need people who will not only engage with others, but want to, because it shows.”

An artist who engages prospective clients doesn’t sit on the sidelines hoping an onlooker will fall in love with the art and buy it on the spot. The unmarketing artist asks prospects to sign up for an email that gives subscribers a preview of new art. This small commitment is a good first step in building a relationship, and it gives the artist permission to follow up. The artist can then thank the prospect for stopping by, enclose a few pictures and request feedback, thus building the relationship.

Working with Social Media

Posting ads on Twitter and asking people to join your Facebook page doesn’t build online conversations. Such activities send the wrong message and won’t produce any return on relationships (ROR). To join the online conversation the right way, help others, respond to their blog comments and solve the problems they mention in their Twitter messages (tweets). No one – companies included – can control what happens to a message online. And people will discuss your company whether you participate in the conversation or not. So be proactive and join in.

“Customers buy first from people they know, trust and like.”

To compel people to listen, work on building a platform using three steps: “traction, momentum and expansion.” To employ traction, start and join conversations on a regular basis. To connect with an ongoing conversation, ask questions, provide answers and share helpful resources.

Once you connect with people and they feel comfortable communicating with you, move into the momentum stage of your platform. This is where you shift relationships outside of the online social network and manage customer expectations. For example, Vistaprint [a maker of business cards, signage and other collateral print materials] has customers worldwide. Vistaprint alerts its followers when the company signs in and out of Twitter so customers don’t feel ignored after Vistaprint has signed off for the day.

“Blogs and tweets rank very well in search engines, and word of mouth is as easy to start as a single tweet.”

The final phase of building a platform is expansion, which entails continuing the conversation elsewhere online – for example, you can use a blog that engages readers with its information and comments.

Dealing with the Negative in Social Media

Negative publicity spreads quickly in social media, but your company can recover. The first step is to monitor social networks continually for any mentions and respond to them. For example, a Tufts University student used Twitter to complain about a bad food item from the school’s food service. The university’s dining team caught the tweet, apologized and asked questions. This immediately calmed the student who accepted the response and moved on. Tufts listened, acknowledged and engaged.

“Twitter is a community, a conversation, not a pitch platform.”

You must reply intelligently. Responding without showing understanding can be more harmful than ignoring a complaint. A coffee shop customer wanting to hang out and work on his laptop expressed frustration on Twitter about the shop’s lack of electrical outlets. The shop’s online spokesperson responded, “We are in the coffee business, not the office business. We have plenty of outlets to do what we need.” This conversation took place publicly on Twitter, and it undermined the coffee shop’s reputation.

“It’s not about how many followers you have, but your engagement with them.”

Such incidents justify the need for your company to heed online conversations. You will benefit from the time and attention spent responding to what you learn directly from your consumers. For instance, an unhappy pizza delivery customer tweeted about a disappointing experience. The company responded quickly and went the extra mile by creating a videotaped apology. The film clip went viral and resulted in turning a bad situation into a publicity coup.

Wrong Ways to Use Social Media

Social media are not meant for constantly linking to your content or repeating another person’s positive tweet (“retweeting”) about your company or other overtly commercial actions that reek of advertising. This communicates that you’re interested in yourself and you don’t care about engaging others. Be conscious of the implications of your content. For instance, messages that say “click here to get more followers” or “sign up for a fat camp event” reflect poorly on your brand. Posting statements about politics or religion also can affect a company’s reputation.

“Give people enough value on your site that they want to stay in touch and learn even more.”

Don’t use social networking to demand reciprocal endorsements or universal support for your cause. You wouldn’t write a testimonial for someone you don’t know, and neither will anyone else. Using the Internet to unleash anger is going to waste your time and can possibly damage your reputation.

“By building trusting relationships with people, you have at your disposal a potential large group of experts who can give you feedback when you need it most.”

Interacting through social media a few minutes every day is more effective than a few hours once a week because the timing of your communiqués matter. No one expects instant replies, but a delay of more than a few days makes your firm look unresponsive.

The Right Ways to Use Twitter

A tweet takes seconds to create and seconds to fall off the radar. So use Twitter often and consistently to improve your chances of being heard. How much you tweet doesn’t matter. Respond when you can assist others or provide tips that others will retweet.

“When people complain to you, they are first looking for validation, not compensation.”

It’s OK to talk about yourself and your activities, even those that have nothing to do with business, on social media platforms. Such tweets tell others why they should get to know you better. Using a photo of yourself instead of a corporate logo humanizes you and your organization. A realistic photo will help people recognize you when you attend events with other social networkers. A staged or inauthentic photo will only hurt your image and your business. Always strive to be as natural and true to your own personality as possible.

“We are a very forgiving culture if you own up to your mistakes.”

Offering to send free products to influential social media users can help or hurt your firm, depending on your approach. Personalize your messages and encourage influencers to provide honest reviews. Social media marketers at one firm found that they could measure the results of their campaign by looking at the number of times people talked about their product before and after the campaign.

Your Blog and Newsletter

Websites play a vital role in your social media strategy because they allow people to learn more about a company. To share information on a website and to keep its content fresh, create a blog with consistently high-quality posts, but don’t become paralyzed by trying to create perfect blog post.

“Satisfied customers are the best way to market your business, because they are the ones that become your word-of-mouth army – they are your customer evangelists.”

Businesses also can give away knowledge through an email newsletter, but many fail to draw consumers because they send newsletters containing only sales pitches. Like social networking messages, newsletters need to deliver information and be engaging. A website is a good place for firms to post testimonials from actual satisfied clients or your organization’s product or service. Be aware that the US Federal Trade Commission has changed its guidelines regarding testimonials. So if you operate in the US, be sure your website complies with those regulations.

Employee Engagement

Bringing in a new customer takes more effort than retaining a current one, so make sure you keep your existing clients happy. Send out a “Stop Start Continue” survey asking patrons what they think your firm should stop doing, start doing and continue doing to meet and surpass their expectations. When the survey responses come in, follow up by acknowledging and thanking respondents, and discuss the feedback.

“Even if you delete something on the web, the Internet never forgets.”

Your staff members can reach out to consumers by positioning themselves as experts, and by sharing useful content through audio, video, writing, seminars, teleseminars, telesummits and e-books, among other vehicles. A TV repairperson, for instance, can explain how to buy the right TV, while a chiropractor could give tips for doing stretches to avoid injuries. The trick is to apply the three P’s: “point, prove it, perform it.” Pointing identifies the key idea, proving backs up the idea with an example, and performing explains how to implement the idea.

Customer Service

Companies make mistakes, and people generally forgive them. But if customer service changes for the worse and errors persist, the company won’t hold on to its customers. For 20 years, author Scott Stratten started his morning by buying coffee from the same place and ordering it the same way. Eventually, he noticed that the employees didn’t make his coffee correctly. These changes exacerbated his irritation about other inconveniences – the shop wouldn’t take debit cards and the coffee came with an awkward lid – so he started buying his coffee at McDonald’s. McDonald’s offered more drive-through locations and accepted debit cards. Most customers won’t complain. Like Stratten, they’ll simply leave.

“I was in your store, you’ve got me through the door, what can you do to make sure that when I leave, I will come back later?”

Zappos, an online shoe retailer, is known for excellent customer service. It earns consumers’ trust by allowing them to return unsatisfactory shoes – no questions asked. FreshBooks also emphasizes customer care: The firm requires all new employees – no matter what their position – to work in customer support for at least two months.

“If you believe business is built on relationships, make building them your business.”

Walmart has a policy that all employees must greet every nearby customer. If your business has a similar policy, follow through on it or else customers will view your company as inauthentic. “People don’t care about your business until they know you care about them.”

Creating Something That Goes Viral

Viral marketing – the active buzz that happens when a message quickly spreads through any medium – is a good thing. To have a shot at going viral, first determine the type of message you want to use. It should have four characteristics:

  1. Your message should be funny, have a wow factor or stir people’s emotions.
  2. It should not be just about you.
  3. Define success. Your goal should be concrete, such as creating a list, building customer relationships or making sales.
  4. Pick the right medium for the message, such as Flash video, live video, streaming video or social media.

No one can predict what will go viral. You want to make sure that, whatever happens, your company’s technology is ready. A server or email newsletter service can crash if too many people try to view a video or subscribe to the service at the same time. Set an appropriate budget and plan for scalability so you can catch every opportunity.

About the Author

Scott Stratten, president of UnMarketing.com, is a consultant whose clients’ videos have garnered more than 60 millions views online.

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UnMarketing

Book UnMarketing

Stop Marketing. Start Engaging.

Wiley,
 


3 November 2025

401(k) Today

Recommendation

With all the political strife surrounding the impending demise of the U.S. Social Security system, it’s refreshing to spend some time thinking about a retirement savings system that is an unqualified success - 401(k). This well-written book offers a clear and straightforward look at the ins and outs of 401(k) - and believe us, there are more of these than you probably know. Although author Stephen J. Butler kept the jargon minimal, this is not light summer reading, but you’ll be glad you upgraded. By the time you put it down, you will understand enough to make sure your 401(k) vendor isn’t pinching pennies from your nest egg. You’ll know what to ask for, what to invest in, and how plans should function. BooksInShort recommends this book to those responsible for designing and running 401(k) plans and to those participating in one. (Applies to United States tax laws only.)

Take-Aways

  • New regulations make selecting and maintaining a 401(k) plan more complex.
  • Seek updated information so you are not at the mercy of a vendor’s salesmanship.
  • Fees to vendors can vary by as much as 600%.
  • Many employees vote on vendor selection or form advisory committees that act like investment clubs.
  • 401(k) plan participants enjoy five times more retirement money than they would have had otherwise.
  • Be sure your 401(k) plan is structured for your benefit, not others’ convenience.
  • The average investment is 15% of salary. However, individuals may invest 25% or $10,000, whichever is less. The overall limit for the whole plan is 15%.
  • Often plan administrators apply the 15% maximum to individuals, even when the whole plan is below the 15% average. This penalizes employees who could contribute more.
  • 401(k) plan participants should review details of their plan.
  • Due to tax advantages and mutual funds, you could become a "401(k) millionaire."

Summary

So You Wanna Be A Millionaire?

There’s another way to become a millionaire besides convincing Regis that yes, that really is your final answer! 401(k) plans have made more millionaires than Regis ever will. With a lot of money hanging in the balance, it makes sense for you to know how to structure your retirement plan. The old reliable 401(k) has changed in several ways you should understand.

“Short of winning the lottery, nothing triggers a thirst for investment knowledge more effectively than an ever-growing 401(k) account balance.”

New laws complicate plan administration, but also create new opportunities. The new rules were supposed to make the plans easier to administer, but they accomplished the opposite. Competitive pressures have made plans that provide valuations daily (rather than quarterly) more affordable. Today, recapturing gives sponsors and participants an opportunity to negotiate lower administrative costs. Of course, the big advantage of the 401(k) is the special tax treatment. Your contributions reduce your salary, since the money you set aside goes into the plan. No state or federal taxes are paid on money deposited to a 401(k).

“The general rationale for all pension legislation is to force or encourage company owners and top managers to offer pension plans to their employees if the owners and managers want to enjoy the benefit of these plans themselves.”

The public is increasingly aware of the costs of participation in a 401(k) and now can feasibly compare the costs that different vendors pass along. Beware: Fees for services can vary by as much as 600%. With more than 50 million people now participating in 401(k) plans, it is critical to know what your plan can, and should, do for you.

The ABCs of 401(k)

One of the biggest myths is the limit on the maximum amount that you can contribute to your 401(k). If you’ve been told it is 15%, you should know more. Any participant can contribute up to $10,000 or 25% of annual income, whichever is lower. The limit exists for the plan as a whole: Including all participants, the average percent of payroll contribution cannot exceed 15%. That includes the participant’s contribution, plus any employer payments into a profit-sharing retirement plan. However, a corporate contribution to the plan does not cut the $10,000 maximum an employee can allocate. Because most people will not approach the maximums, most likely you could safely contribute more until you reach $10,000. Check with your administrator. Your plan may have been capped at 15% merely to make it easier to administrate - and someone else’s convenience could cost you big bucks.

“Studies indicate that we will have over five times more money at retirement than would have been the case in the absence of the 401(k) phenomenon.”

If you have an executive salary, you face an additional limitation. Tax law forbids the plan to discriminate against rank-and-file workers in favor of highly compensated employees (HCEs), defined as those who make more than $80,000 annually. HCEs cannot contribute at a level more than 2% above the average contribution of non-highly compensated workers (or NHCEs). So if NHCEs typically contribute 7% of their pay, the HCEs cannot contribute more than 9% of their pay, although at a high salary, the $10,000 cap may be what stops you anyway.

“When the information from vendors can be accurately assessed, you can know, beyond a shadow of a doubt, that you have chosen the plan that best satisfies the combined interests of your company and its employees.”

401(k) Constants All 401(k)’s have common elements. They are:

  1. Retirement plan trust - This legal entity manages the assets of a 401(k) plan. These assets must be separated from the assets of the corporation that sponsors the plan.
  2. Plan document - The plan document defines the plan, stating who is eligible, what matching contributions the company will make, and so forth. If this document is improperly signed, that alone can result in your plan being disqualified.
  3. Summary plan description - This is the layperson’s overview of the plan, other than promotional material, that prospective participants receive.
  4. IRS form 5500 - This is an annual report to the government. An IRS audit always will focus on form 5500.
  5. Investment choices - Generally, these are mutual funds selected by the plan trustees.
  6. Sponsor - This is the business organization that offers the plan to its employees.
“Sorting through the marketing hype contained in the stack of three-ring binders from all the vendors is next to impossible without some organization or methodology for making apples-to-apples comparison.”

401(k) Advantages To 401(k), or not to 401(k)? That is the question. The answer is that most investors receive better investment performance within the confines of a 401(k) plan for several reasons:

  1. Since the total amount in the 401(k) plan is substantial, it tends to get the attention of the best investment advisers. Financial planners who work with individual employees are not likely to be as skilled as the best experts.
  2. The trustees are successful business owners and executives who have proven their business acumen. 401(k) money gets more care than executives’ own investment decisions, because all of their colleagues will know how well their decisions paid.
  3. Since the trustees’ money is invested, they have a vested interest in the plan’s success.
  4. Contributions to the 401(k) reduce your taxable income.
  5. The income from the investment is tax deferred.
  6. Employees can borrow against money put in their 401(k). You can borrow up to half the value of your 401(k) account, up to a maximum of $50,000. There is no minimum on what you can borrow. Since the average participant has more than 20 years before retirement, a loan can help pay for a home or car, or a child’s college tuition. The interest that you pay returns to your account. So an average $15,000 automobile purchase would result in $10,000 worth of interest payments over five years, paid back to yourself. The loan must be paid back, usually via automatic payroll deductions. In practice, about a third of participants borrow money from their 401(k) accounts.
  7. You can get your money out of the 401(k) prior to retirement as a hardship distribution, but it isn’t recommended. While loans can be for any reason, hardship distributions are limited to "safe harbor" situations. These include the purchase of a primary residence, educational expenses for the participant or a dependent, and un-reimbursed medical expenses. This kind of payment may become a hardship to you, given the federal tax penalty of 10%, a state penalty of 2%, and an overall increase in federal and state income tax if the additional income puts you in a higher bracket. The cost of a hardship distribution approaches about 50% for most participants - now that’s a hardship!

Take Me to Your 401(k) Leader

Every 401(k) plan has an administrator who sells the plan and has specific responsibilities:

  • Plan Compliance - The administrator is responsible for making sure the plan is in compliance with federal regulations. Some problems with a plan, such as an accounting error, can be easily corrected. If the plan has an under-performing mutual fund investment, the administrator can simply change to a more successful fund. However, other situations are more serious. The number of IRS investigators auditing 401(k) plans for compliance has increased fivefold since 1990. If the IRS determines, for example, that a plan favors executives and owners unfairly, it can revoke the tax-exempt status of the funds. This form of enforcement has generated an additional $200 million for the government. Thus, the responsibility for plan compliance is quite serious.
  • Plan Changes - Changes in tax and employment law can call for continual adjustment of the plan. Willingness to review and update the plan is where many administrators fall short. Plan sponsors tend to focus on minimizing administrative costs instead.
  • Record Keeping - The administrator keeps track of the accounts of individual participants, pooling together all funds under the 401(k) plan and jointly investing them in mutual funds. The mutual funds cannot track the accounts of the individual 401(k) plan investors, so that important task falls to the plan administrator.
  • Participant Service - The 401(k) administrator has the ongoing task of educating the participants about the services available under the plan. The bottom line is that administering a plan is a demanding role, and the least-expensive administrator is unlikely to provide an adequate service level. With high maintenance being the foremost criticism of such plans, the lowest-cost provider can be more expensive in the long run.

Hidden Costs

You know how to avoid getting suckered, right? Here are some suggestions:

  • Keep money management costs below 1% of total assets.
  • Above-average expenses will not necessarily result in better returns.
  • The costs of broker-managed firms may be higher. Brokers naturally tend to exercise more trades as a way to generate commissions.
  • Watch for back-end loads, the costs of withdrawing the fund from the plan administrator. In one case, the back-end load was 20%, wiping out much of the plan’s investment gain.

Beware the Shifty Vendor

Your greatest exposure stems from having the government disqualify your plan, so be sure your service contract has waiver language that shifts liability from the plan administrator to the plan sponsor. Sometimes, clever administrators use questionnaires to elicit compliance and testing information from the sponsor. If the sponsor’s information is wrong, disqualification is no longer the fault of the plan administrator, who would merely take the data provided and perform qualifications. Make sure that you have reviewed the service contract before you stand up in front of employees and proudly announce the plan. At that point, you already have committed yourself. When 401(k) vendors try to persuade you of their fiduciary responsibility, direct the conversation toward compliance, and go through the service contract line by line. Review it carefully before moving on to the exciting investment options. As plan sponsor, you can protect yourself other ways. Make sure the plan administrator takes responsibility for:

  • Analyzing the raw payroll data;
  • Identifying company ownership, including year-to-year changes and family employment;
  • Conducting an annual sweep to insure that new acquisitions haven’t compromised the integrity of your plan, or altered the rules that apply to it;
  • Preparing all statements, testing, and compliance, including completion of the annual 5500 reporting form.
  • The service agreement also should guarantee operation of the plan in compliance with federal regulations. Demand sufficient evidence of errors and omissions insurance to make the guarantee meaningful.
  • Do not assume that an annual CPA audit protects you. The CPA only looks for accounting issues, and will not assume responsibility for IRS issues.

Recapture

You can recover some of the costs associated with the plan by recapturing. Recapture involves negotiating a free service contract for maintenance and service of the plan, in return for an agreement that lets the plan administrator charge competitive expense ratios against the plan’s earnings for the money management work the administrator performs. This becomes a trade-off between maintenance costs and money management costs. The goal is to avoid an aspect of administrative costs, without giving up anything in return. Vendors are willing to forego fees because of the profitability of mutual fund management. For plan participants to benefit from recapture, their company must pass along some portion of the savings in administrative fees, presumably through matching contributions.

The Path of Minimum Regret

Your goal in fashioning the ideal 401(k) plan is to forge a path of minimum regret. This means the right plan with the right administrator will offer an excellent return on investment with a minimal cost or risk. Carefully considering the opportunities and pitfalls of the 401(k) will keep you on the path to investment - and retirement - success.

About the Author

Stephen J. Butler is the founder of Pension Dynamics Corporation, a third-party pension administration firm in Northern California that specializes in implementing 401(k) plans. He also is a popular speaker who is well-known within the pension industry.

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