The Frugal Fiduciary Small Business 401(k) Blog
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American Funds (“AF”) is the third largest mutual fund company in the US and a dominant provider of small business 401(k) plans. Their plans are loaded with proprietary in-house funds. While there is nothing inherently illegal or unethical about that, the situation could create a conflict of interest that results in an overpriced 401(k) plan. To confirm their 401(k) participants are not harmed by a conflict, employers must ensure their AF fees are reasonable. To do that, employers must be able to total them – so they can then be benchmarked against competing 401(k) providers. AF doesn’t make this job easy.
In a May 2018 survey by The Pew Charitable Trusts, only 19% of small to midsize employers claimed to be “very familiar” with the expenses paid by their 401(k) plan, while 34% were “not at all familiar.” The remaining 47% said they were only “somewhat familiar.” These results are surprising when you consider employers have a fiduciary responsibility to pay only “reasonable” fees from 401(k) plan assets - and can be personally liable for restoring any excessive fees paid by participants.
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According to AARP, Americans are 15 times more likely to save for retirement when they can do so by payroll deduction through a 401(k) or other workplace retirement plan. However, while most large businesses – companies with more than 100 employees – sponsor a retirement plan, 51 to 71 percent of small businesses don’t. In recent years, Multiple Employers Plans (MEPs) have been floated as a way to close this small business coverage gap. I disagree for a simple reason - MEPs fail to address the specific reasons why small businesses don’t offer a retirement plan today. I think single-employer 401(k) plans modeled after the Federal Thrift Savings Plan (TSP) paired with tax credits would do a better job.
On August 31, President Trump signed an Executive Order on Strengthening Retirement Security in America. In the order, the President made it the “policy of the Federal Government to expand access to workplace retirement plans for American workers.” While I fully support the policy – not enough workers are covered by a workplace retirement plan – I don’t think the order’s proposals will motivate more employers to offer a retirement plan. Other changes would be more effective.
Too many 401(k) providers make it harder than necessary for employers to total and evaluate their 401(k) plan fees for ”reasonableness” – an important fiduciary responsibility - by not charging simple fees. One of these 401(k) providers is the payroll company ADP. Two weeks ago, I described my process for totaling ADP’s 401(k) fees using their DOL-mandated 408b-2 fee disclosure. Now, I’d like to do the same thing for Paychex - ADP’s largest payroll competitor.
One of the largest small business 401(k) providers in the country is the payroll company ADP. Due to my firm’s fee comparison service, I get the opportunity to evaluate ADP’s 401(k) fees regularly. As a result, I’ve become very familiar with their DOL-mandated 408b-2 disclosure – which describes the company’s services and fees. While its generally clearer than insurance company 408b-2 disclosures, it can hardly be called intuitive.