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Shopping For a 401(k) Plan Doesn’t Need To Be Overwhelming For Small Businesses; A Checklist Can Help

Eric Droblyen

on January 27th, 2016

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In my experience, 401(k) providers are like snowflakes – no two are alike. Their services can vary dramatically in breadth, depth and price. This variability can make it difficult for small business 401(k) fiduciaries to select providers with services that match their plan’s needs at a reasonable price.

That’s a problem. 401(k) plans should not pay for superfluous services participants won’t use. Excess services can be expensive, dragging down participant returns unnecessarily. When this happens, personal liability for 401(k) fiduciaries can result.

I discuss the first two steps in depth in my article Selecting 401(k) Service Providers: Determine the Professional Help You Need Before You Shop. For the third step, I recommend 401(k) fiduciaries develop a checklist that compares three provider attributes:

  1. Competence
  2. Value-added services
  3. Fees

Below is a sample checklist for plan administration services. If you are a 401(k) fiduciary, you can use this sample as a basis for your own checklist – adding or deleting the variables you want to compare.

Plan Administration Services Offered

Before you start comparing 401(k) providers, you should first confirm each provider offers all three of the basic administration services every 401(k) plan needs – asset custody, participant recordkeeping and third-party administration (TPA).

Many providers do not offer all three services. Instead, they partner with one (or even two) other companies to deliver all three services. When this is the case, evaluate the different companies as one provider when comparing services.

Service Employee Fiduciary Provider #2 Provider #3
Custody [Company Name] [Company Name]
Recordkeeping [Company Name] [Company Name]
TPA [Company Name] [Company Name]

A. Competence

According to the Department of Labor (DOL), “selecting competent service providers is one of the most important responsibilities of a plan sponsor.” To evaluate provider competence, I recommend the comparison of 4 objective criteria – experience, growth, risk mitigation and service standards. Client referrals from each provider should also be requested.

    Employee Fiduciary, LLC Provider #2 Provider #3
Business Statistics



Year Founded 2004    
Total Plans 2,800    
Total Participants 75,000    
Total Assets $2.5B    
2015 Growth 21%    
Risk Mitigation


Does the provider have a current SOC 1 Report (Service Organization Controls Report)? Yes    
Does the provider have errors and omissions (E&O) insurance? Yes    
Does the provider have a fidelity bond? Yes    
Does the provider have an information security policy? Yes    
Is there any current or pending litigation or administrative actions against the provider? No    
Service Standards E-mail or phone response time Less than 24 hours    
Contributions Invested within 2 business days    
Distributions 7-10 business days    
Quarterly Benefit Statements 15 business days after quarter-end    
Annual nondiscrimination testing If employee census and employer survey are received in good order by 1/31, testing guaranteed by 3/15    

B. Value-added services

When comparing service providers, it’s important for 401(k) fiduciaries to separate commodity from “value-added” services. 401(k) fiduciaries should pay as little as possible for commodity services, but may pay extra for value-added services. Examples of value-added services include:

    Employee Fiduciary, LLC Provider #2 Provider #3
Does the provider assign a dedicated relationship manager to each 401k plan? Yes    
Do participants have access to a dedicated call center for questions? Yes    
Plan Assets Are plan assets held by a custodian or directed trustee? Directed trustee    
Does the provider limit investment options to funds that make revenue sharing payments? No    
TPA Services


Does the provider offer plan design consulting to the employer? Yes    
Is a volume-submitter plan document included in the provider’s base fee? Many providers include a less flexible prototype doc that limits design options Yes    
Does the provider identify highly-compensated and key employees during year-end nondiscrimination testing? Many providers require the employer to identify these employees Yes    
Does the provider monitor plans for RMD-eligible participants? Yes    

C. Fees

One of the most important 401(k) fiduciary responsibilities is paying only reasonable expenses from plan assets. One way to prove 401(k) fee reasonableness is to compare provider fees. Unfortunately, these comparisons can be difficult given the numerous ways 401(k) providers can be paid today – some are paid directly by employer invoice or participant deduction while others are paid indirectly from plan investments. To normalize these differences, I recommend 401(k) fiduciaries sum all administration fees, regardless of their source, into a single all-in fee and then compare that fee between providers.

401(k) fees are extremely important, but they shouldn’t be the only consideration when selecting between service providers – the value of any service differences should be weighed.

    Employee Fiduciary, LLC Provider #2 Provider #3
Annual Plan Administration Fees




Base Fee $1,500 (Includes up to 30 eligible employees)    
Per Head Fee $30 for each eligible employee in excess of 30    
Asset-Based Fee

0.08% of plan assets

   
If the provider receives revenue sharing, do these payments offset base, per head and asset-based fees? Yes    
Does the provider add a “wrap” fee to plan investment options? No    
Total all-in annual administration fee [$X,XXX]    
Plan Establishment Fees Startup (New) Plan $500    
Conversion (Existing) Plan $1,000    
Initial Commitment Period None    
Service Termination Fee $300    
Participant Distribution Fee $50    
Loan Establishment Fee $50    
Loan Maintenance Fee (annual) $50    
Plan Document Amendment Fee $150    

Feel good about your choice!

Too many 401(k) fiduciaries shop for service providers backwards – they start shopping before they understand their options. When fiduciaries don’t know their options, it can be easy for 401(k) providers to sell overpriced or unnecessary services to them due to an asymmetrical information advantage. When this happens, personal liability for 401(k) fiduciaries can result. 401k fiduciaries should know their options before they start shopping.

Selecting competent 401(k) service providers does not need to be overwhelming – a prudent selection process can be completed in just 3 steps.

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