How Can a Small Business 401(k) Be As Good As A Large Company 401(k)s
Unfortunately, a survey last year by Deloitte for the Investment Company Institute found the average "all-in" fee for 401(k)s with fewer than 100 participants came to 2.03% of assets in the plan a year, compared with 0.49% of assets for plans with more than 10,000 participants. (The all-in fee includes administrative and investment costs borne by both the company and by workers.) The great news is that there is no reason your plan can't be as good and inexpensive than most large company plans out there. Here are a few things I look at that will help your plan become better and more competitive:
There are so many plan providers that it is worth your time to find an independent investment advisor to “shop” your plan around. An independent investment advisor will be able to analyze all the options available without bias and then tell you the pros and cons of each provider. There are many great options that have just become available in the last year for those plans that have under $50 million in total assets. Here are two large providers that I have looked at for businesses and found to help tremendously:
Vanguard Small Business 401(k) - This is a great plan that doesn’t have restrictions to what investment options can be in the plan and has been able to reduce the internal fees associated with administering a 401(k), while keeping everything streamlined as far as compliance and disclosures.
Charles Schwab Business 401(k) – Another great plan without restrictions to investment options and, as of this year, allows small businesses to offer low-cost ETFs instead of higher-fee mutual funds.
“Shopping” your plan around doesn’t mean just moving to a new plan provider, it can also mean fighting for lower fees. Again, I would recommend using an independent investment advisor, not a broker, for this. The independent investment advisor isn’t restricted to certain investments or plan providers and will act as your advocate to the plan provider. Just by having the advisor call and ask, the plan provider may reduce the fees without much argument.
The fastest way to reduce the fees is by changing the share classes of already existing investment options. Take one of the most popular investment options, American Funds Growth Fund of America. There are over 11 different share classes that can be used and they all have a different internal fee, ranging from 1.44% to 0.27% annually. That alone could save you and your employees 1% per year!
I’ve alluded to it throughout but I would recommend looking into who you use, how much it is costing you and your employees, and what services they provide. An advisor is great to have as long as they are acting as a true fiduciary, meaning they are providing unbiased advice and annually they evaluatethe plan design and compliance issues, benchmark total plan costs, provide fee disclosures and notices, and adhere to the 404© notices. If they aren’t or their fees are too high, there’s no reason to not interview other advisors.
The Department of Labor continues to update the information they provide and have a great website full of information worth looking at: http://www.dol.gov/ebsa/publications/401kplans.html
I hope this has been helpful. As always, please feel free to contact me with any questions you have,