You have a 401(k) plan for your business which is great. But how do you know you have a top plan? The differences can be big across components. This can include the ease in which you are able to run the program, investments, employee education, as well as how to minimize costs and risks for you and your company.
Top questions to answer:
• Are you keeping costs low – especially for employees?
• Do you have a great investment line-up?
• Do you have the right plan design and education program?
• Are you minimizing the risk to the company for running 401(k) benefits?
• Are you getting the service you expect?
To answer these questions and others you might have, there are two primary areas to understand and each of these break down into clear components:
Core Services & Costs
a. Investment Offering & Management
b. Recordkeeping & Administration
a. Plan Sponsor 401(k) Consultant (design and goal delivery)
b. Digital experience
c. Education program
d. Call Center and Service Levels
Comparing Core Services and Costs
Recordkeeping and administration ensure your employees accounts are record kept correctly, can be accessed and managed digitally (mobile or computer), and your plan is administered in a compliant manner with the regulations. Your provider should offer an employee 800# line for questions or service in case an employee has a unique need or is unable to access the site. In addition, the 401(k) monies must be held in safekeeping and that is the role of the Custodian which is often a subsidiary of the recordkeeper.
When you compare these recordkeeping and administrative costs, know that your business likely pays these directly, but sometimes a provider passes these on to employees. If your plan value is large enough, sometimes these costs can be absorbed elsehwere. As the business can deduct recordkeeping expenses from taxes, and these costs are typically low (e.g., a plan with 10 or less employees might pay ~$100 per month), it’s generally more cost efficient to have the business cover if they aren't aborbed elsewhere. An exception would be a plan that is just starting and has 500+ employees. This situation may require some of the admin to be covered by employees with a flat monthly charge (e.g $4 per month). But with growth of the plan monies, this can be removed.
Custodial costs may be included with recordkeeping or may be pretty small investment management charge. Check to see where these fall, but they should be minimal.
Then there are investment expenses where a lot of costs can be buried or not truly considered, yet these costs are likely the most important. These can dramatically impact how much you and your employees have come retirement. In most plans, fund expense ratios are the core investment expense. All fund expenses should be under 1% and many even under 0.2%. You’ll want to consider asset class coverage as well as long-term performance of funds but know that index funds historically have held a significant edge over actively managed funds and life insurance products. While there are no guarantees, we believe a fund line-up built with most, if not all, index funds put your employees in a better position over time. Paying less in expenses means more of your money stays invested in the markets.
It's important to know if you have a provider that is an ERISA 3(38) investment advisor, how the provider manages your fund line-up (or not), and how you are charged for investment services. We believe most businesses do benefit from ERISA 3(38) investment management services as it ensures a high level of investment oversight by experts with tools and models business owners may not have access, plus it protects the business owners and sponsors from employee concerns or litigation on fund selection. Good providers will lower your costs automatically including recordkeeping as your plan exceeds designated money milestones for the plan. Again, fund expenses and investment management services should not exceed 1% of assets and should lower as your plan monies grow to ensure you are always getting great value.
Plan Support and Costs
Last but definitely not least, there is the support you need to ensure your plan is run well from design to investment as well as employee education programs. Some providers will charge separately for some of these consulting and education services. Others include it as part of their normal pricing. In general, we believe it should be included in your normal pricing. When thinking about what is essential, a dedicated lead to ensure your plan is setup correctly and employees are provided education at launch is a must. And, as your plan grows, having a dedicated lead will make plan design and investment discussions meaningful and productive. You can work to establish goals the consultant can work to impact to improve saving rates, participation rates, and keep costs in check. As important, are the education approach and resources to help employees save smart. For example, ShareBuilder 401k has blogs, webinars, in-person employee education meetings, videos, and more to meet employees where and in which media they prefer to use.
Do consider the digital experience, potential for payroll integration or simple uploads, and other means that make your plan run smoother. Make sure your provider has a service level for answering calls (e.g., 80% of calls answered in 20 seconds or less) and will get back on emails in 24 hours or less.
Now is a great time to receive a 401(k) plan check-up. Not only will you learn what sorts of opportunities exist with your plan, but it’s also a great way to stay in line with the Department of Labor best practice of a regular plan cost review.
We’re always happy to run a cost analysis and business risk assessment of your plan and detail the pros and cons of your plan so you can make the best decision for your business.