A week after filing their tax returns, many small business owners are window shopping 401(k) plans as a proactive way to lighten next year’s bill. And mid-size business employers are looking for ways to manage costs and provide a better plan for their employees. While a good 401(k) plan can have a positive impact on a business and its individual employees, there are also some significant landmines to watch out for when evaluating and choosing a provider.
Many of today’s 401(k) plans are fraught with conflicts of interest that can have a negative effect on their performance and ultimately undermine an employer’s ability to deliver a plan that’s in the best interest of his/her employees. Conversely, finding the right provider can help avert certain issues and even simplify and lower the costs of a 401(k) plan.
With that in mind, here are the top three things to look out for when choosing a provider (or reviewing your current one):
1. Investment Bias: Many providers offer their own funds or insurance annuity products within the 401(k) products they sell. This makes it difficult for them to take an unbiased approach in providing the best investment options for their customers. Using an independent investment advisor that can take an objective look at all the offerings on the market and select top funds by asset category may offer some solid upside compared to a biased fund line-up.
2. Employee Expenses: There are several line-item expenses associated with most 401(k)s including investment, recordkeeping, administration and trustee expenses; all are typically paid for, in varying degrees, by employees. The fund expenses are often paying the sales representative who sold the plans in the form of a 12b-1 fee and/or loads (that can be one percent or higher). It’s common for employees in smaller plans (e.g. a 401(k) plan with total balances of less the $1M) to pay two percent or more for these services. However, there are very good providers that charge less than a total of one percent to employees, regardless of the plan’s asset balance. This is in line with what much larger firms and plans pay, and it can mean a big difference in how much the employer and his/her employees ultimately save for retirement.
3. Plan Protection: While 401(k) providers often give employers a list of funds from which to select their company’s fund line-up, they won’t take on that responsibility for them. Therefore, if employees complain or the business owner is audited, the responsibility falls solely on the employer to correct any issues. To monitor funds and ensure the investments remain the right ones for a company’s plan, each company is supposed to assemble an Investment Committee of employees who can regularly review the plan. For businesses without those resources or in-house expertise, there is another option: selecting a provider that takes on the Investment Manager role for the company and maximizes the protection of each plan. A provider that takes on this role (called an ERISA 3(38) advisor) will select the investment line-up for each customer, monitor the line-up, and run it in line with an investment policy. At little to no cost, this can provide a lot of protection and service for each customer’s plan.
With new Department of Labor rules around Fee Disclosure becoming effective July 1st, 2012, now is a great time for small and midsize business owners to review their current provider’s plan and ensure it’s the most ideal fit for them – with all the necessary protections enabling them to have a highly performing 401(k) that best-serves the needs of their employees and business.
