The Frugal Fiduciary Small Business 401(k) Blog
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If your 401(k) provider is an insurance, mutual fund or payroll company, there is a good chance your 401(k) fees are too high. If you’re a business owner, you have the power to lower them, but you may need to switch 401(k) providers to do it. This move can seem daunting if you have never done it before.
One of my favorite Warren Buffet investing principles is “never invest in a business you cannot understand.” I think the rule of thumb is helpful in mitigating risk. If you’re a small business owner, I recommend you extend this principle to managing your 401(k) plan – never hire a 401(k) provider you cannot understand. What you don’t know about your provider can hurt plan participants and increase your fiduciary liability
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According to the Government Accountability Office (GAO), about half of private sector workers in the United States are not covered by a workplace retirement plan. That’s a problem when you consider workers are 15 times more likely to save for retirement when a plan is in place. To expand coverage, Congress is considering ways to encourage plan sponsorship by employers. Two bills under current consideration are the Setting Every Community Up for Retirement Enhancement (SECURE) Act and Retirement Enhancement and Savings Act (RESA). They have similar 401(k)-related provisions. I have mixed feelings about them.
If you’re leaving your job for a new employer, you must decide what to do with your 401(k) account. To keep growing your savings tax-free until retirement, you could have up to 3 options: keep it where it is, roll it to a new employer-sponsored plan, or roll it to a personal IRA. It’s important to make an educated decision. Otherwise, you risk making your dream retirement more expensive than necessary.
Mutual fund companies usually make their funds available to 401(k) plans in multiple share classes. While all classes hold the same underlying securities, they can charge very different fees. In general, employers have a fiduciary responsibility to choose the lowest-priced share class available to their 401(k) plan – so participant investment returns aren’t reduced unnecessarily by avoidable fees.
In multiple lawsuits, Fidelity Investments is being accused of charging excessive, undisclosed 401(k) fees. At issue is an “infrastructure fee” the company demands from some third-party mutual funds in return for access to Fidelity 401(k) clients. Fidelity claims the fee is not 401(k)-related. The lawsuits claim otherwise, saying the fee represents indirect compensation – a form of 401(k) fee that must disclosed in a 408b-2 fee disclosure to be legal under the Employee Retirement Income Security Act (ERISA).