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When I started my 401(k) career in the mid-1990’s, employers who sponsored a 401(k) plan with little to no assets had few 401(k) provider options. The options they had – generally, brokerage and insurance companies – treated 401(k) plans like a one-size-fits-all product by restricting fund options to expensive funds (usually proprietary) that charged a minimum amount of hidden 401(k) fees and plan designs to basic options that could be administered cheaply. Because of their hidden fees, the value of these high-profit products was rarely scrutinized by 401(k) plan sponsors.
Today, small 401(k) plans have much better provider options available. Thanks to DOL fee disclosure rules and some high-profile 401(k) fee lawsuits, employers are scrutinizing 401(k) fees now more than ever and that’s forcing 401(k) providers to deliver more valuable services for lower fees. This trend has made providers that treat 401(k) plans like a service - not a product - affordable to 401(k) plans of any size. Instead of restrictions, these providers offer impartial fund advice, consultative plan design expertise and personalized customer service – often for lower fees!
However, providers that treat 401(k) plans like a product are still very common. If you’re a 401(k) plan sponsor, you should avoid them - their restrictions can easily result in excessive 401(k) fees or a plan that does not meet company goals. Below are some of the most common 401(k) provider restrictions today and how they can cost you and your employees.
Fund Selection
- Provider limitation – You must select your fund menu from a limited list of funds instead of the provider giving you impartial fund advice.
- Cost – Hidden fees and/or poor fund performance. There are thousands of funds available to 401(k) plans today. The funds on provider lists are rarely the best funds – they’re the ones that pay the provider a certain level of hidden 401(k) fees. These funds make excessive 40(k) fees and poor returns more likely.
Plan design
- Provider limitation – You must choose an off-the-shelf 401(k) plan design instead of the provider giving you consultative plan design advice based on company’s 401(k) goals and budget.
- Cost – Unnecessary plan expenses and/or upset employees. Choosing the wrong plan design can cost your company thousands of dollars in unnecessary contributions or result in contribution refunds for top employees due to failed testing. These issues can be easily avoided by having a 30-minute (or less) meeting with a plan design expert.
Customer service
- Provider limitation – You must phone a call center or submit an online ticket when you have questions about your 401(k) plan that need answering instead of the provider assigning you a relationship manager as a single point of contact.
- Cost – Bad guidance and/or frustration. When you sponsor a 401(k), there is a good chance you’ll need urgent plan advice about the plan occasionally. Call centers and online ticketing systems can rarely give this advice as timely and accurately as a trusted relationship manager you can reach directly.
Don’t settle for a 401(k) product!
You want to avoid 401(k) providers that treat 401(k) plans like a product because their restrictions can easily result in excessive fees, angry employees or unnecessary stress. The good news? You don’t need to settle for these providers anymore – even when your 401(k) plan has few assets. Greater 401(k) fee scrutiny by employers has made 401(k) providers that treat 401(k) plans like a service as affordable to 401(k) plans of any size.
