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

January 27th, 2016

Provider Shopping

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.

To help 401(k) fiduciaries select the best service provider(s) for their plan, I recommend a 3 step process:

1. Understand the services that compose a 401(k) plan
2. Determine which of these services require professional assistance to deliver
3. Compare 3 or more 401(k) service providers

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
Business Statistics	Year Founded	2004
	Total Plans	5,000
	Total Participants	145,000
	Total Assets	$5+ Billion
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
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
Plan Assets	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
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
Plan Establishment Fees	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.