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I have a small company with 65 employees and want to switch to the lowest cost 401K plan possible to give my employees the highest return on their 401k and not lose a significant amount of money long term due to high expenses. Can someone please recommend a plan with low costs?

Aug 01, 2012 by Ty in  |  Flag
11 Answers  |  16 Followers
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13 votes

Ty,

I appreciate you taking the time to do your due diligence when selecting a low cost, yet robust plan for your employees. We manage plans for companies of your size and there are a handful of things that I recommend.

-Start by identifying a Registered Investment Advisor who is willing to take on the role of a 3(38) advisor. As your company grows, this will become even more important as a 3(38) advisor will help relieve you of the investment liability when selecting the investments for your company. Short of hiring a 3(38) advisor, you will shoulder the burden of selecting the menu and thus maintaining full liability for those choices.

-Stay away from insurance-based plans, as they are generally more expensive and have multiple layers of fees.

-Work with an advisor who is proactive in the plan design and is willing to analyze your plan to determine if you are maximizing the value that you receive from offering this employee benefit. The design of your plan can affect your company’s ability to recruit and retain qualified employees.

-A good advisor/investment firm will run an analysis of your plan design, have access to ERISA attorneys and other experts to ensure you are maximizing your company dollars, and ensure you are compliant given the new 408b2 regulations as well as the soon to be in place 404a5 requirements.

-Make sure your plan includes index funds or exchange traded funds which are substantially less expensive than actively managed mutual funds.

While this list is far from complete, these tips will get you started. If you would like to chat about his question in more detail, I am always willing to talk retirement planning. Feel free to reach out to me at 541-770-1311.

2 Comments   |  Flag   |  Aug 01, 2012 from Medford, OR
Ty

Keegan, thank you for your advice. I need an expert to help me select the right plan and appreciate the help here.

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Flag |  Aug 01, 2012
Don

Hi Ty, this is far and away the best answer here. As an advisor who is active in this space, I strongly recommend you contact a local RIA who has experience in small business 401k plans and puts an emphasis on participant guidance. A low cost platform is important, but so too is solid advice and fund selection to help your employees make the most of it. A couple of platforms that your advisor should consider that are excellent include Employee Fiduciary and 401k-Direct, which are both open (you can choose from virtually any mutual fund or ETF) and low cost. Good luck!

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Flag |  Aug 02, 2012 near Middlebury, VT

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7 votes

Ty,

As the company owner and plan sponsor, you will either pay some or all of the costs or pass them through to your employee participants with a fiduciary obligation to control costs. Consequently, under any arrangement, costs will be a very important consideration for you.

In evaluating the costs of various alternative providers, you need to consider one-time setup and recurring administrative costs as well as the costs incurred by the underlying investment options which you choose to offer.

For plans of your size, we have had good results with Daily Access Corporation, www.dailyaccess.com. There are many qualified, non-commission advisors who could help you select and design the best plan for your employees.

1 Comment   |  Flag   |  Aug 01, 2012 from Morristown, NJ
Ty

Much appreciated, I will look at them. Thanks.

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Flag |  Aug 01, 2012

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5 votes

Ty, as a retirement plan sponsor, you must protect your plan participants while also being held personally responsible for your choices as a fiduciary.

A great place to start is with a publication “Selecting and Monitoring Pension Consultants: Tips for Plan Fiduciaries” which can be found on the US Securities & Exchange Commission website http://www.sec.gov/investor/pubs/sponsortips.htm

Unlike legal, medical and accountancy professions, the investment advisory industry requires no defined criteria or specific educational requirements so to effectively delegate any fiduciary responsibilities, you must investigate the advisor’s qualifications and make certain that reliance on the his advice is reasonably justified under the circumstances.

The SEC has a great website that will provide detailed information about the advisor and his firm http://www.adviserinfo.sec.gov/IAPD/Content/Search/iapd_Search.aspx.

Before you entrust your employees’ retirement money, we recommend a five-step process for evaluating service providers:

Establish a prudent process;
Develop criteria for evaluation;
Review the findings and make the selection;
Document the process; and
Monitor the selected provider.

A diligent, documented process should be the foundation for any professional relationship because the consequences of being wrong make trial and error an unacceptable process.

1 Comment   |  Flag   |  Aug 02, 2012 from Gastonia, NC
Ty

Thank you very much for the helpful input

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Flag |  Aug 05, 2012

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4 votes

Ty, all good information so far - but you may be able to get to where you want to go without changing any of your current providor(s)! Conversion of the entire plan is no fun and if you could reduce FEE's and improve the plan while staying with your current providor(s) that would minimize the distraction. Even if you are currently with an insurance based or other "expensive" plan now, these providors are not stupid and are developiong diffrent ( Lower cost ) versions and want to keep your business. I would not elimanate any options untill your current arrangements have been thoroughly vetted and reviewed by a knolewdgable and independant firm- then go from there. Good luck, Evan (516) 240-6161

1 Comment   |  Flag   |  Aug 02, 2012 from Port Washington, NY
Ty

Evan, yes my current provider is now offering me a lower cost plan with funds that have lower fees.

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Flag |  Aug 05, 2012

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3 votes

Hi Ty, Lots of great direction. I agree with Ty as far to the importance of 3(38) protection. As consultants, my partner and I actually do presentations to the local business community along with the DOL (Department of Labor). We feel that the best way to go about this is to benchmark your plan against plans of your size, industry and geographic location to analyze fees and plan design solutions best suited for your company size. If you agree that an independent analysis of multiple carriers is a proper way to go about this process, give me a call @ 877-988-7722 and we'll be happy to discuss how we can prepare a customized report for your company. I would also be more than happy to email you a sample benchmark report to review. You can email me at marty@familywealthadvisory.com Regards, Marty

Comment   |  Flag   |  Aug 01, 2012 from Marlton, NJ

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3 votes

The info already shared is great, but I would say that I am not sold that the 401k is the right way for you to go. There are several other types of retirement plan designs, and your stated objective might not mesh with a 401k. If you want to give your employees' the highest return possible and not have them pay expenses that cause them lose a lot of money long term, then maybe you could take the responsibilty to fund a defined benefit plan instead. There are many other options beyond the 401k.

2 Comments   |  Flag   |  Aug 01, 2012 from Austin, TX
Ty

Todd,

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Flag |  Aug 05, 2012
Ty

Todd, thanks I will look into defined benefit plans and see what they offer.

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Flag |  Aug 05, 2012

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3 votes

Ty - I am active in this space as an advisor to plan sponsors and plan participants, so my advice is based on my experience with clients and influenced by how we have chosen to structure our business.

I would recommend that you interview several independent advisor / consultants and consider, at a minimum, the factors listed below. As with choosing any advisor, you will want to ensure that the advice you receive is free of conflicts. For this reason, I highly recommend that you select a consultant who provides advice and counsel utilizing non-affiliate service providers. There are many bundled offerings from the big names in investment management and insurance. I question how plan sponsors can receive objective advice from a firm that has a proprietary product and sales agenda.

I suppose one could say that independent firms such as mine have a sales agenda too, insofar as we are in the business of selling advice. But the point is that independent advisors do not receive higher compensation for recommending one service provider over another. In fact the opposite incentives are in place, because an independent advisor has an incentive to deliver the best possible suite of solutions, which usually includes lower costs whenever possible.

Here are the questions I would ask prospective advisors:

(1) Quality of investments - how are the plan investments selected? Are the investments institutional-quality, broadly representative, and free from conflicts with the plan service providers? When are plan investments changed?

(2) Quality of service - do the service providers offer a high level of service to the plan sponsor and plan participants? What is the delivery mechanism (online, call center, named contacts)? What about additional advisory services for plan participants?

(3) Range of plan features - can the service providers offer a ROTH option? Brokerage option (if this is desired)? Loan option? At what cost?

(4) Fees and expenses - what are each of the costs for the various service elements? Is there a high degree of transparency regarding fees? Are they reasonable given (1), (2), and (3) above?

Please do not hesitate to call me 1 888 625 7768 or email jdowd@northcapital.com if you would like to discuss any of the foregoing points in more detail. Good luck in your search.

1 Comment   |  Flag   |  Aug 02, 2012 from San Francisco, CA
Peter

whilst I disagree with the concept of going with the "big names" these questions are very sound.

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Flag |  Aug 02, 2012 near Milwaukee, WI

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2 votes

Hello Ty,

While I do not "sell" or advise on these plans, we did significant research and due diligence in order to establish our own 401(k) for our firm.

Here is not a recommendation - but a place you may start to LOOK:

Fidelity has a robust 401(k) platform if your plan is large enough. Typically, they become very competitive at total plan amounts over 10 Million.

Since we were not in that playing field, we then turned to the ING Sharebuilder Plan. It is one of the first plans to use only Exchange Traded Funds as investment vehicles - which are extremely low cost -and we found their setup and admin fees to be very low. That is the one that we chose.

Again - that is not necessarily a recommendation - but I would begin to LOOK there if cost is a paramount consideration. There are enough investment options to build a solid core portfolio based upon market indices.

Jon Castle http://www.wealthguards.com

1 Comment   |  Flag   |  Aug 01, 2012 from Jacksonville, FL
Ty

Thank you for your input. I will look at them both.

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Flag |  Aug 01, 2012

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2 votes

Ty,

Another way to look at plan providers, is to utilize a service that individually benchmarks plans. One that is completely independent.

There are a few, but the one I like is Fiduciary Benchmarks. They can analyze your plan directly.

http://www.fiduciarybenchmarks.com/

Department of Labor regulations under ERISA, and specifically section 408(b)(2), require that plan sponsors obtain fee disclosures for their plan and that all such fees be “reasonable” for the services provided.

Fiduciary Benchmarks, Inc. was launched to support plan sponsors, advisor/consultants, recordkeepers and other plan service providers in addressing this obligation.

Fiduciary Benchmarks Reports can help you document a thorough and objective process and reach well-informed decisions.

2 Comments   |  Flag   |  Aug 01, 2012 from Lititz, PA
Peter

Price is what you pay, value is what you get. "What's the cheapest option?" isn't a question you should be asking yourself. The Department of Labor themselves stipulate this. What you need is a plan that works not a plan that is cheap. If you want a cheap plan then Paychex will take some beating, but good luck with your participants getting any kind of decent advice on what they should be doing with the money they're putting in. your workers are working for one reason, to NOT work anymore and buy themselves a paycheck in retirement. There is a LOT more to achieving this than having a cheap 401k plan. You could pay 0.8% a year or 1.2% a year and the difference to your participants after 30 years of saving will be marginal even though on paper this looks like they'd pay 50% more. A 27 year old putting 4% of their salary away for 40 years at 0.8% has a 75% chance of getting to where he/she needs to be, with a 1.2% expense ration it drops to 72% so the difference is tiny. IF however they put in another 3% of their salary then their chance of success goes to 87%. You need the best platform, a knowledgeale independent advisor (which doesn't just mean someone who looks at the investments, there's more to being a 401k advisor than that), and most importantly, someone who you trust who can review the plan on a regular basis and educate your staff on why they're saving, where they are in the scheme of where the need to be and what action they can take to get there. 3(38) liability or 3(21) liability relief doesn't take responsibility off you to do the best for your employees.

3 likes | 
Flag |  Aug 02, 2012 near Milwaukee, WI
Ty

We are spending close to $20K a year on expenses & fees now. That seems high to me and I feel we are all losing a lot of money long term. I guess thats why price is so important to me right now. I don't get any advice and make my own decisions on what funds to choose so I dont see the advantage of paying more.

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Flag |  Aug 05, 2012

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2 votes

Hi Ty, I understand your concern about cost. However, I would recommend to consider also a plan offers the best for your employees. The total return on your 401k plan is also how happy your employees are with their retirement plan and benefits, which can impact your business as a whole. I have seen business owners make this mistake and the effects on the overall when employees are not happy.

Comment   |  Flag   |  Sep 17, 2012 from Miami Beach, FL

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