The Frugal Fiduciary Small Business 401(k) Blog
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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.
One of my favorite Warren Buffet investing principles is “never invest in a business you cannot understand.” I think the rule of thumb is helpful in mitigating risk. If you’re a small business owner, I recommend you extend this principle to managing your 401(k) plan – never hire a 401(k) provider you cannot understand. What you don’t know about your provider can hurt plan participants and increase your fiduciary liability
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Mutual fund companies usually make their funds available to 401(k) plans in multiple share classes. While all classes hold the same underlying securities, they can charge very different fees. In general, employers have a fiduciary responsibility to choose the lowest-priced share class available to their 401(k) plan – so participant investment returns aren’t reduced unnecessarily by avoidable fees.
In multiple lawsuits, Fidelity Investments is being accused of charging excessive, undisclosed 401(k) fees. At issue is an “infrastructure fee” the company demands from some third-party mutual funds in return for access to Fidelity 401(k) clients. Fidelity claims the fee is not 401(k)-related. The lawsuits claim otherwise, saying the fee represents indirect compensation – a form of 401(k) fee that must disclosed in a 408b-2 fee disclosure to be legal under the Employee Retirement Income Security Act (ERISA).
Small business owners can have dramatically different goals for their 401(k) plan. While some want to maximize key employee contributions, others want to incentivize plan participation by all employees. Business owners have nearly endless options for meeting these goals – many with very different expenses. The process of matching 401(k) goals to available options is called 401(k) plan design.
One of my heroes – Jack Bogle, the founder of The Vanguard Group – died on January 16. I can’t think another person who has done more to help the average American save for retirement than Jack Bogle. Before he started an index fund revolution, it was difficult for investors with few assets to pay low fees for top mutual funds. Bogle democratized investing by making it easy for all investors – regardless of assets – to pay low fees for top funds. His guiding principle was simple: costs matter. Since fees reduce investment returns, they should be kept to a minimum.