There are thousands of 401(k) providers in the U.S. – many with very different fees, services and expertise. This abundance of choice can make choosing a competent 401k provider with reasonable fees seem overwhelming for small business 401(k) fiduciaries.
This problem is made worse by the highly technical nature of 401(k) services – which give providers an asymmetrical information advantage over 401(k) fiduciaries. That advantage can make it easy for a smooth salesperson to sell overpriced or unnecessary services to unwitting fiduciaries.
In the past, I recommended a 3-step process to help 401(k) fiduciaries overcome these issues and hire qualified providers with reasonable fees. I would like to supplement this guidance with 4 key traits of the best small business 401(k) providers. Fiduciaries should look for these traits when shopping for a new provider.
1. They treat 401(k) plans like a service, not a product
Lots of providers treat 401(k) plans like an off-the-shelf product by limiting investment or plan design options. The consequences of these limitations are often severe. When investment options are limited, they’re generally limited to expensive funds that pay hidden provider compensation. When plan design options are limited, administration expenses can explode unnecessarily.
Other providers take a different approach. They treat 401(k) plans like a service, helping fiduciaries choose the best options available to their plan. A 401(k) fiduciary’s need for expert advice doesn’t stop once a plan is up and running either. They often need to tweak their plan over time due to up-and-down corporate profitability, changing goals, or failed annual testing.
The best 401(k) providers do not treat a plan like a box of cereal. Instead, they continually keep 401(k) fiduciaries on track to meet plan goals or lower administration expenses.
2. They don’t make promises they can’t keep
If a 401(k) provider says they will remove fiduciary liability from you – run! Regardless of what a provider might say, a 401(k) plan sponsor can never fully outsource their fiduciary liability due to a plan’s fiduciary hierarchy. When a provider is hired, 401(k) fiduciaries retain a fiduciary responsibility to monitor the provider’s job performance – regardless of whether the provider is a fiduciary themselves.
The best small business 401(k) providers don’t make promises their services can’t keep. Instead, they’ll make their role in meeting fiduciary responsibilities clear. The good news? There are only a handful of fiduciary responsibilities that can result in material liability. An expert provider can help you avoid fiduciary liability easily.
3. They don’t just ask for your trust; they earn it
Small businesses have a fiduciary duty to monitor their 401(k) provider for job performance. This job is made more difficult when a provider’s services are not transparent or understood. Given the fiduciary liability that can result from poor 401(k) provider oversight, I recommend fiduciaries only hire providers with easy to understand services.
The best 401(k) providers don’t say “I’ve got this, trust me.” Instead, they’ll make your fiduciary oversight duty easy by demonstrating how their services meet your 401(k) fiduciary responsibilities.
4. Their fees match their value
Too many 401(k) providers still charge 401(k) asset-based fees for administration services – which includes asset custody, participant recordkeeping and Third-Party Administration. The problem with asset-based administration fees is that plan assets have little to do with a provider’s level of service, meaning a 401(k) plan with lots of assets can pay way more than a 401(k) plan with fewer assets for the exact same administration services. That’s not right and a potential source of liability for fiduciaries with a responsibility to keep 401(k) fees reasonable.
The best 401(k) providers for small businesses do not charge high asset-based fees for administrative services. Instead, they charge fees that match their level of service.
Don’t be overwhelmed when shopping for a 401(k) provider!
Shopping for a new 401(k) provider can be a challenge for 401k fiduciaries, given the thousands of providers in the U.S. - each with different fees, services, and expertise. Making matters worse is the technical nature of 401(k) services, which can make it hard for fiduciaries to pick a provider they can trust.
To keep shopping simple, I recommend 401(k) fiduciaries use a 3-step process to evaluate quantitative provider attributes while looking for the 4 key traits of the best small business 401(k) providers.