Home  >  Financial Articles and Q&A  >  When comparing 401k fees for new plan, what hidden costs...

When comparing 401k fees for new plan, what hidden costs would be easy to miss if I didn't ask specifically about them?

10 employee company is ending Simple401K Dec 2015, starting 401(k) Jan 2016. The 2 owners are 20-35 years older than employees and want a Safe Harbor plan w/New Comparability to maximize profit sharing for owners. Looking for plan offering funds with low expense ratio, low turnover & low asset management fees. Also want self-directed brokerage option. On the spreadsheet to compare 401(k) plans, the fees I've listed are: annual fee, tiered profit sharing/new comparability annual fee, annual fee per participant, safe harbor notices, doc maintenance fee, self directed brokerage fee, average fund expense ratio, asset management %, trading and transaction fees. Set up fees. What other potential fees would I be important to ask about specifically? What other questions would I ask to ascertain any other commissions or fees charged at the participant or employer level that might not be readily apparent? I'm also asking in detail about the services provided, and what additional work will be required on my part, that wasn't required with the Simple IRA. I'm looking for a plan that can be set up and managed online, contributions and forms filed electronically. Thank you!

Jul 01, 2015 by Refini in  |  Flag
2 Answers  |  4 Followers
Follow Question
19 votes

Hello Refini,

You are definitely on the right path and are asking the right questions. Here are a few suggestions that might make things easier. First decide if you want to have a advisor help with the creation, ongoing maintenance, and employee education of your plan. i strongly suggest having one but you are not required to have an advisor help you. A fair advisory fee for your plan should range from .25%-.75% depending on plan size and level of service provided. This fee can be paid by netting the percentage from all accounts equally or paid in the form of a bill. Second I would suggest using a TPA (third party administrator) to handle the compliance testing, new comp allocation, and administration. You can find a good local TPA who works with many different providers and I feel you will most likely have a better service experience with your plan.

With regards to the self directed brokerage in the 401k plan, many plan providers offer these brokerage windows but the transaction costs can vary. Typically the trading fees range from $7 per trade to as high as $25, please do your research.

Any plan provider you choose will have access to online resources to help manage your plan, but not all plan providers are created equal. Some plans have a narrow choice of investments that are typically proprietary and others will have a full open architecture of investments available, it all depends on what you are looking for. The admin costs can vary depending on what is offered, do your research and have your advisor provide some input to which options they feel are best.

Finally, 401k plans require a bit more work than with your SIMPLE but if you choose to work with a good TPA, advisor and provider they will walk you through all the details on what needs to be done. The big difference between the two is the reporting (5500 form, compliance testing )that needs to be completed annually for 401k plans. the benefits of a higher deferral amount and higher match structure will far outweigh the minor administrative burdens.

Good luck with setting up your plan!

Best regards,

Comment   |  Flag   |  Jul 02, 2015

1|600 characters needed characters left
2 votes
Salo Aizenberg Level 7

Thanks for the question. It looks like you covered most of the key fees and probably some that should not cost you anything (e.g. the existing fees should cover trades within a 401(k) plan, there should not be trading and transaction fees). There are always some one-time expenses like participant loans or if a participant wants periodic distributions. But these are ancillary and not core to a 401(k) plan fee. My firm creates and advises "open architecture" 401(k) plans through Charles Schwab and their preferred third party administrator for small businesses. With this model we can create a customized plan lineup that relies on low cost index funds (average fund fee of under 0.20%) as well as a self-directed brokerage window at Schwab. When ALL administrative and financial advisory fees are included, the total all-in fee can be in the 0.60%-0.80% of plan assets range (depends on total plan asset amount), which is very low for a 10 employee business. If interested in learning more (and happy to provide free proposal) please contact me. Recent Supreme Court rulings have placed heightened scrutiny on 401(k) plans and require annual monitoring -- which is why having a registered investment advisor, who is a true fiduciary, guide a plan is more important than ever.

1 Comment   |  Flag   |  Jul 01, 2015
Billy Defrance, CFP®

Good question by a prepared plan sponsor, and a good answer. The Fiduciary point at the end is spot on.

Flag |  Jul 02, 2015 near El Paso, TX

1|600 characters needed characters left