So you’re shopping for an improved 401(k) plan, congrats! Whether you inherited a clunky plan from your predecessor or you’ve outgrown your current solution, there’s a lot to keep track of. The good news is with the Department of Labor cracking down on bad 401(k) providers, it’s easier now to identify the good 401(k) providers from the duds. Use this 401(k) shopping checklist to quickly identify winners and build a short list of your ideal providers. This guide will help you compare 401(k) plan providers and choose one that serves your needs.
Before I go on, if you take only one thing away from this post, I recommend this: be prepared — before you enter a vendor call — and ask simple and direct yes/no questions to get around fancy marketing speak. (For example, “help selecting and monitoring investments” does NOT necessarily mean that your 401(k) provider is taking on the fiduciary liability associated with your plan’s investments. Try asking specifically for the legal type of fiduciary that provides the most protection, a 3(38) fiduciary: “Responsible for selecting and monitoring investments, acts as the 3(38) fiduciary.”)
The work a 401(k) provider does can be divided into five categories:
- Employee Experience: Helps employees save for retirement and be more invested at work.
- **Routine Administrative Work: **Completes the day-to-day tasks that come with sponsoring a 401(k) plan.
- **Compliance: **Ensures your 401(k) plan meets Department of Labor and IRS requirements.
- Cost: Keeps fees in the 401(k) plan in check — from plan administration to individual investment fees.
- ****Investment Selection: Offers low-fee fund options that include index and target date funds.
Because the 401(k) shopping experience involves two phases at minimum, I’ve prioritized a list of the top fifteen questions you should ask all of the 401(k) providers that you’re interviewing. Use these questions to help you compare 401(k) companies, and download the guide to be even more prepared.
401(k) Provider Search Phase One: Discovery
Goal: Find out if the provider offers low fees, help for employees, and a tech-friendly platform to minimize manual work for you.
- Do you have payroll integration? Will I need to do any work related to changes employees make to their plan (savings rates, rebalancing, enrollment status, etc,)?
- Do you sign the Form 5500 and are you the Named Fiduciary on the plan? Are you a 3(16) fiduciary?
- Are you a 3(38) fiduciary? Or a 3(21) fiduciary?
- Do employees have access to investment advisors? What are their certification levels?
- How much do you charge employees including the average fund fee? (Rule of thumb: this should be < 0.75% including the fund fee.)
- Are you commission-free and do not receive 12b-1 fees or other compensation from any funds that are in the plan?
- Does the fund lineup include target date funds? What is the expense ratio? What is your default fund?
If any of these answers are “No,” cross them off your list and move on. This provider will leave the fiduciary responsibility and administrative work on your plate.
401(k) Provider Search Phase Two: Compare 401(k) Plans Under the Surface
Goal: Determine which of the 401(k) providers can scale as you grow, effectively engage employees to join and save, and will take on the lion’s share of compliance testing work.
- What are your average participation and savings rates in your book of business?
- Can employees easily view and make changes online on their mobile device?
- Do you support automatic enrollment?
- Can you support automatic annual increases to employee savings rates?
- Do you track employee eligibility? What work do I need to do when an employee is eligible for the plan?
- Do you review and approve hardship withdrawals? Loans? QDROs? What will my involvement be on that, if any?
- Do you provide guidance on non-discrimination testing including regular testing to determine whether the plan is heading toward failing the test?
- How often do you run non-discrimination test checks?
If any of these answers are “No,” they can still be a good provider but go into this knowing that you will be on the hook to run compliance test calculations on your own and without automatic enrollment support, your participation rates can take a big hit.
For a deeper dive and our full set of questions to help you thoroughly vet your next 401(k) provider, download our ebook: The 401(k) Shopping Checklist: What to Ask When Evaluating Retirement Plan Providers.