The Frugal Fiduciary Small Business 401(k) Blog
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401(k) plans are popular today because they offer generous tax benefits to employers and employees. However, to qualify for these benefits, 401(k) plans must complete a myriad of plan administration tasks each year. It’s ultimately up to employers to ensure each task is completed timely. Meeting this important fiduciary responsibility can seem overwhelming, but it doesn’t need to be. The key is hiring a 401(k) provider willing and able to do three things - 1) summarize all required tasks, 2) complete the more difficult and time-consuming ones, and 3) provide simple direction for the rest.
According to AARP, Americans are 15 times more likely to save for retirement when they are covered by a workplace retirement plan. However, while most large businesses – companies with more than 100 employees – sponsor a retirement plan, 51 to 71 percent of small businesses don’t. Causing many small business owners to steer clear of 401(k) plans, in my view, is a perception that plan sponsorship is too expensive, time-consuming, and/or fraught with liability – in short, not worth the trouble. To help overcome this perception – and close the small business coverage gap – I think we need more straightforward and transparent 401(k) plans.
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Would you buy a product if you didn’t know its cost? I doubt it. What if overpaying for that product could lead to serious consequences like being sued or postponing retirement? I know you’re not buying then. And yet, I see business owners do something similar all the time. They’ll hire a 401(k) provider without fully understanding their fees. Even when they know that paying excessive 401(k) fees could get them sued or force plan participants - including themselves - to work longer than necessary to afford retirement.
When an employer is looking to hire a financial advisor for their 401(k) plan, my advice to them is always the same – only consider financial advisors subject to a fiduciary standard of care. My reason is simple - only fiduciary-grade advisors are obligated by law to give impartial advice. In contrast, non-fiduciary advisors can give conflicted advice that favors investments with high commissions – making it harder for employers to keep their 401(k) fees in check. Generally, investment advisers are subject to a fiduciary standard of care, while brokers and insurance agents are not.
All 401(k) plans require three basic administration services – asset custody, participant recordkeeping and Third-Party Administration (TPA). A 401(k) provider can be paid “direct” or “indirect” fees from plan assets to deliver these services. Direct fees are deducted from participant accounts, while indirect fees are paid by plan investments. The most common form of indirect fee is revenue sharing. Below are five reasons why employers should pay direct fees for 401(k) administration services instead.
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.