My grandfather used to say, “All my life, I thought air was free… until I bought a bag of chips.” We all love certain products and have visions of grandeur when we see the newest (insert guilty pleasure here) on the market, but it always comes back to one thing: cost.
Small business 401(k)s are the new kids on the block (without the fancy dance moves) which means there’s not yet a level playing field. There are multiple providers offering varying levels of service for medium sized businesses stuck with the same provider or new startup 401(k) plans, but with inconsistent fees.
Back it up, you say? Gladly. 401(k) Averages (14 th ed.) conducted an annual survey of various plan providers and discovered that a company with 10 employees (is this you?) could pay from $1,692 annually on the low end to $6,200 on the high end. You should be outraged! I’m no brain surgeon but that is nearly quadruple the cost between the two competitors. Kinda like paying $3.24 for gas at one station, while the one across the street is charging $12.96/gallon. And with that, let’s talk service.
Bang for the buck
Would anyone pay more to get less?
The reason we tolerate second rate service is sometimes to save a buck or two. But when we pay a premium, we naturally expect a superior product. Sadly, due to misinformation and a fairly new product, consumers are often unknowingly paying too much. For example, according to a recent GAO survey, sponsors of about 50% of plans (primarily small plans) surveyed either did not know if they or their employees paid investment management fees or believed these fees were waived. This is alarming considering investment management fees account for the lion’s share of 401(k) plan fees. One industry standard you can hang your hat on: providers will perform the basic recordkeeping functions. But don’t get the confetti out just yet.
Most 401(k) providers offer Do It Yourself 401(k)s that leave the heavy lifting and fiduciary responsibilities to the business owners, including day-to-day plan administration and investment oversight. Food for thought: an estimated 75% of 401(k) plans fail their DOL/IRS audits, and of those, 70% face fines (as of September 2012). Ouch.
And if you think maybe you can bring on Auntie Blanch to handle this mess so she can quit pipe-dreamin’, think again. Some examples of the “day-to-day” that are often glossed over while plan providers are trying to win your business: verifying and documenting that hardship withdrawals are consistent with IRS regs, processing Qualified Domestic Release Orders (QDROs), and verifying that the Form 5500 is correct. Are you scared yet? Hold tight, there’s more. You will be personally liable that the 401(k) is run properly. The learning curve here is steep, as are the penalties, even for minor mess-ups.
On the bright side – payroll (including Gusto) 401(k) integration
Select providers deliver 401(k) plans that tackle all of that work for you. This includes payroll integration with the top payroll providers including Paychex, Intuit, and ADP. And scores of plan sponsors are using the Gusto 401(k) integration through ForUsAll. Are you in love yet? An added bonus: they’ll take on legal liability that your plan is in compliance, significantly reducing your work (the technical term is that they act as a 3(16) plan fiduciary).
Gimme their names
A lot of traditional 401(k) providers today charge a premium for their services. Adding salt to a wound, many of these companies do not act as a 3(16) Plan Fiduciary so you’ll either have to do all the day-to-day work (and take on the legal liability) yourself, or pay someone extra to do it for you. Want it to integrate with your payroll? You’d have more luck finding a pink unicorn who delivers iced mochas and handles your marketing (with a smile). And speaking of unicorns…
Who are the good guys
There are a couple of 401(k) innovators on the scene who specialize in establishing and managing 401(k)s for small businesses. The NY Times likes them, and so do we: Ubiquity and ForUsAll (my employer, also reviewed by InvestorJunkie). The lowdown on these favorites:
- Great low-cost provider
- Can plug into a few select payroll providers
- Does not offer a 3(16) plan fiduciary, so the liability and day-to-day is on you (or your appointed person), but you might save a few bucks (assuming your appointee is a rock star)
- Provides low-cost recordkeeping
- Offers an impressive Vanguard fund line-up
- Works seamlessly with a dozen cloud-based payroll providers including Gusto, ADP, Paychex, Intuit
- Charges a small fiduciary fee to cover valuable services including:
- 3(16) plan fiduciary to handle the day-to-day plan administration
- 3(38) investment fiduciary to monitor and review your 401(k)investment options
- Online fiduciary vault so your 401(k) will be audit-ready (crucial for startups who see a cap raise in their future)
- Human and virtual advisors (see, some of us do have a pulse)
Any honorable mentions?
TriNet is also active in the startup 401(k) space, and while they will gladly hand-hold, their warm and fuzzies don’t come cheap. Their 401(k) is administered by TransAmerica and their fees hover around 1% which becomes increasingly painful as your business takes off. We’d rate this one as a lukewarm.
While there are many providers who would love to earn your business, administering a 401(k) plan is no small task.
You have options available, so we urge you to proceed with caution in this space. We can’t say enough about the value of protection. You became an entrepreneur to change things, but let’s face it: You being a fearless trailblazer doesn’t mean you (or your dedicated employees) should take on every task in your path. There are times when passing the buck makes most sense even if it costs a smidgen more. So please, do your homework, weigh your options and make a solid choice. Then go build your empire.