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The 401(k) Cart

Greg Carpenter

December 29, 2022


It’s commonly accepted that the beginning of a new year presents the opportunity to resolve to do things differently. For some folks that means fewer cupcakes, more frequent trips to the gym, or the classic resolution to save more and spend less - Federal government excepted. As Employee Fiduciary is in the 401(k) biz, allow me to suggest this resolution: Stop putting the 401(k) cart before the horse!

Allow me to explain. Financial services companies pour enormous resources into building up credible and attractive brands because buyers often skip doing a thoughtful analysis and instead go with a brand that most resonates with them. Example: Buyers choose Allstate - “You’re In Good Hands” - it’s a visceral impression, not a conscious cost comparison and analysis. I’ve found that small business owners choose 401(k) providers the same way.

Here’s how to put the horse in front of the cart - start by picking the type of investments you and your employees want. In our experience, the savviest investors gravitate towards low-cost index funds and target retirement date funds. Do some research - this is a potentially million dollar decision! Here is an article from fee-only financial adviser Roger Wohlner that explains why low-cost funds make the most sense:

Only after you have the investment choice made should you begin to consider specific providers. You will have some very specific questions to ask. The first is: Do you offer the investment I want. If yes, the second is: What does it cost? Some providers charge based on total assets in the plan; we charge a flat fee based on services rendered. Guess which method makes the most sense for small businesses?

To recap:

  1. Choose your investment first. This is the most important decision and will provide the quickest and most straightforward way to narrow the list of potential providers. If they don’t offer your chosen investment, move on.
  1. Check provider costs. Fees for services performed (best for many small businesses) or a percentage of assets. Make sure you understand what services they provide, and what they charge for each service.

Now that you have your investment options and a few low-cost providers under consideration, it’s finally time to consider the trade-off between fees and services. Check back for more on this in my next post.

Until then, stay frugal!

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