Many small business owners start a retirement plan—such as a 401(k)—for their business in the first few years of operation, but fail to regularly evaluate if the plan, plan provisions, or service providers still fit the needs of the business. This can lead to an excess in plan fees, low participant satisfaction, inefficient plan design, or obsolete investment choices. Additionally, the plan sponsor, as a fiduciary of the plan, has a duty to regularly review plan costs. According to a survey in 2021, “64% of plan sponsors think they aren’t paying any administrative or investment fees in their 401(k) plans or didn’t know if they were”.[1]
A typical plan usually has costs from 3-4 sources: the recordkeeper, the TPA, investment fees, and the advisor.
The Recordkeeper
The record keeper will primarily provide the participant interface/website, sponsor interface/website, process distributions or incoming rollovers, track beneficiaries, and provide statements. Recordkeeping cost can be either a flat base charge with additional cost for each participant, or charged as a percentage of plan assets. There are multiple companies that provide recordkeeping services with varying degrees of ease of use, investment options, and cost. Investment accessibility will vary depending on the record keeper.
The Third-Party Administrator (TPA)
The TPA primarily designs the 401(k) plan, confirms individual plan provisions, drafts the plan amendments, calculates the employer contributions, prepares projections of funding, and completes the annual compliance testing. The TPA ensures the plan adheres to IRS and DOL regulations. Some 401(k) plans use the same company for recordkeeping and administration, often referred to as a plan being “fully bundled”.
The Investments
401(k) plans have costs associated with the investments offered in the plan, referred to as expense ratios. Many recordkeepers make hundreds of different mutual funds available on their platforms, and expense ratios can range from almost nonexistent at 0.04%, to very significant at close to 2%. High expense ratios can have a direct negative impact on investment performance. Plan sponsors have a fiduciary responsibility to monitor investment costs and should have a documented process of monitoring investment costs at the plan level.
The Advisor and Outsourcing Plan Duties
A plan sponsor could choose to outsource some of their fiduciary duties by hiring an investment advisor. Plan investment advisors can be in the capacity of a 3(21) or a 3(38) fiduciary. A 3(21) fiduciary gives advice or recommendations while a 3(38) fiduciary has authority to make decisions independently. Only 3 entities can be a 3(38) fiduciary: banks, insurance companies, or registered investment advisors.
A good advisor will meet with participants on a regular basis (annually or semiannually), provide retirement readiness education, and make themselves available to answer participant questions. Additionally, as part of our service model to our clients, we regularly evaluate 401(k) costs and review the findings with the plan sponsor. Many plan sponsors find that they can drastically reduce costs, improve plan efficiency, or create a better participant experience by making changes to the parties involved. In addition, a plan sponsor can hire an outside party to handle the day-to-day responsibilities of the plan like providing proper disclosures and soliciting participants for enrollment. Outsourcing these duties can drastically cut down on the administrative burden a 401(k) plan can put on a small business owner.
Is it time to reevaluate your 401(k) plan?
It important to choose a plan structure that fits your business. The costs associated with the parties listed above can vary drastically based on the size of the plan in terms of balances and participants. Furthermore, a plan sponsor can typically choose to pay plan costs directly as the employer, pass the cost to the participants, or some combination. The 401(k) provider the business next door uses might not be the best fit for you. So how do you know if it’s time to make changes? Ask yourself these questions:
- Has it been more than a year since your plan fees were benchmarked?
- Are you bogged down by plan administrative tasks?
- Are you looking for ways to get extra funds into your retirement plan efficiently?
If you answered yes to any of the questions above, please reach out to my office to schedule a free consultation. Act Two Advisors works with over 70 employers across Michigan to implement retirement plans such as 401(k)s, SIMPLE-IRAs, or Cash Balance Pension Plans. Our years of service and experience in the industry help us guide clients to have a better experience with their retirement plans and save on plan costs! Contact us today to review your plan: 989-402-1423 opt. 1 or info@acttwoadvisors.com
[1] Carmen Reinicke. “Roughly 40% of Americans don’t understand 401(k) fees, government watchdog finds.” CNBC. August 26, 2021.