Looking for a 401(k) plan can be overwhelming for small businesses. In fact, navigating the fee structure alone can be bewildering.
Many small business owners find looking for a 401(k) confusing because they don’t know what questions to ask. It doesn’t have to be that way.
Here are some simple questions for small businesses to ask potential providers to help them find the right plan:
Cost What is the total cost to my employees and me?
Sounds like an easy question, but it’s not as simple as it seems. Many providers offer pricing structures that confuse and deceive, because they are not required to disclose all of their fees.
Here are some of the pitfalls to watch out for:
Wrap Fees
These expenses are based on the amount of money in the plan and generally are expressed as percentages or basis points. These fees can quickly erode the value of a 401(k) and can range from .25% to 1.50%.
Annuity Fees
Insurance companies may charge fees such as administration and mortality expenses on unnecessary annuity products.
Back-end Surrender Charges
These are fees that are charged if one decides to leave. These can be part of an investment option or just a general fee for leaving the plan, and they are usually a percentage of the plan’s assets.
“Load” Fees
Simply put, these are sales charges that are incurred for entering a mutual fund. They can occur on the front-end (when entering a fund) or the back-end (when exiting the fund).
What a small business can do: Ask about all the fees upfront and pay close attention to the hidden fees outlined above. Don’t pay extra “load” fees or fees based on the amount of assets in the 401(k) plan. Although these fees are perfectly legal, they don’t serve any purpose, except for tacking on more expenses for the small business and its employees.
Investments
What investments do you offer in a plan? Do you sell your own investments, and if so, how can we get access to outside mutual funds?
The small business owner needs to make sure that he or she understands his or her employees and what level of investing they are comfortable with. This will help determine what’s appropriate: a selection of mutual funds, a brokerage account or a selection of lifestyle funds.
In any case, a small business should have a selection of investments that is varied and well-researched, representing an OBJECTIVE selection of mutual funds. Some 401(k) providers sell their own investments and give the small business access to ONLY the investments they sell.
What a small business can do: Make sure the owner is aware of what the employees want, and use that as a requirement for the 401(k) plan provider. Most importantly, the small business should provide a range of investment options that combine offerings from different fund companies.
Ease of Use/Day-to-Day Management How much time do I need to put into running this 401(k) plan?
Depending on the amount of work and time the person who will be managing the plan wants to put into the day-to-day management of the
401(k) plan, the small business owner may decide to opt for a bundled or an unbundled plan.
Bundled Plan In a bundled plan, a single provider takes care of all investment, recordkeeping, administration, compliance and education services. Bundled
401(k) providers are a “one-stop shop” — they provide all administrative services. The cost of a bundled plan tends to be lower.
Unbundled Plan In an unbundled plan, the business combines in-house staff and independent service providers to administer your 401(k) plan. This allows for maximum control and customization, as it gives the business the ability to pick individual service providers. However, this can be extremely expensive and time-consuming.
What a small business can do:The small business owner should assess his or her options and budget, and talk to the providers about the company’s particular needs.
Customer Support What type of customer support do I get?
Look for Web AND live customer support. Do-it-yourself 401(k) plans and other 401(k) plans that offer Web-only customer support just don’t cut it. Managing the company’s 401(k) plan shouldn’t be complicated, but a 401(k) provider should give the option of talking to a live human being, if needed.
That’s It? Really, it’s just that simple. No complicated jargon. No complex calculations. The 401(k) provider that a small business eventually chooses should make it easy for the employer and the employees to understand their offering. It should also make it easy for the small business owner to put a 401(k) plan into place and to enjoy the tax benefits and happy employees!