I am the plan admin for a small business 401k. We have 5 participants, total assets around $30k. We just started the plan recently using a broker. I think the expenses may be too high for our current plan (Mass Mutual), they range up to 2.61% on some funds, but are there any other options for someone small like me? Can I go direct to a big company like Vanguard without using a broker? I want to minimize costs for my employees.
Thank you for providing some information on your current 401(k) plan. A start-up plan can be a bit more expensive than one that has at least a few hundred thousand in assets. As plan assets grow there is more leverage in pricing. It is difficult to determine if the Mass Mutual fund fees are excessively high without seeing the entire fund menu to determine the share class being used as well as knowing what the broker’s compensation is that may be included in the fund costs. There are some lower cost options available and you can have a plan without a broker. As an experience corporate retirement plan advisor, this is not something we would recommend given the regulations and fiduciary liability associated with sponsoring a qualified retirement plan. We would be more than happy to discuss options with you to help reduce the costs to you and your employees. Our offices are in the San Francisco Bay Area.
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Depending on your goals for the plan you my want to consider a SIMPLE IRA for your employees. You can do this with little to no costs and you could use Vanguard or Charles Schwab to give your employees quality investment options. Yes, you could do without a broker.
I'm glad to hear your employer is looking to help employees with their retirement, even if it is a small group! Yes, there are other, probably more inexpensive options for you. Insurance companies do tend to have higher fees and their structure may work better for larger firms. Vanguard offers small business 401k services, but you should also check out Betterment Business 401k. They have a great client interface, inexpensive funds, and easy onboarding. It's worth a look.
This is a very good question that you are asking. There are two things that I would tell you about your question. It is not uncommon to be charged so much when you first start your plan. The reason for this is that 2.61% on $30,000 is a little less than $800/ year. So while the % seems high, the actual dollar amount is fairly minimal. There are other alternatives. We use an index lineup where the avg. expense is .17% and then we charge .50% which goes down over time as the plan grows. If you were to add those up and compare them, you are looking at .67% on an annual basis instead of 2.61%.
The second thing that stands out to me is that you said you started using a broker. To be straight up and honest with you, brokers are currently held to a lower standard than what an RIA (Registered Investment Advisor) is held to. Check this article out to gain a little more insight and what I mean by that. https://www.brightscope.com/financial-planning/advice/article/30794/The-Big-F-Word/ If you really want to take care of your plan, you should look for a financial professional that is a Fiduciary. That way you know you will be taken care of and have someone who is responsible for the investments of the plan.
V, we are happy to help you. Feel free to reach out to me. You can reach me by going to https://www.brightscope.com/financial-planning/advisor/860835/Chace-Taylor-Cannon/ and looking for the contact information. I am happy to just talk, no pressure and help you figure this out and to feel better about it as well.
Enjoy the rest of your day!
Great question. A tip of the hat to you for looking into this further. What was it that prompted you to look at the fees closer?
While you will very likely find a cheaper option, I would be very concerned about the fiduciary protection you're going to receive with any advisor. In most instances, my clients will have two people sign as the fiduciary and we coordinate so that our company signs as a fiduciary as well. By doing so you are better insulated in the event of any fiduciary repercussion.
I'd also like to see your advisor offer a service that would help with getting the plan notices and communications out to participants so that your staff doesn't have to do so.
Going with Vanguard will lower your plan administration costs, but you may be opening yourself up to potential financial liability without the right plan advisor. This is the case with MassMutual as well, but you should be aware of how to protect yourself, your business and your employees.