These 401(k) basics give employees a first-rate retirement portfolio


A recent study by Brightscope and the Investment Company Institute reported that 401(k) plans with assets of more than $1 billion paid an average of 0.33% in fees. By contrast, plans with less than $1 million in assets paid an average of 1.60% in fees. That’s a staggering discrepancy.

The complexity of 401(k) plans breeds high-priced helpers, advisers, and consultants who capitalize on small business owners’ lack of understanding. But a small business owner can learn a few basics that will help create a good retirement savings plan for a company, and help attract and keep better employees.

1. Hiring a broker

The first thing to consider is the broker or adviser. Everything usually starts with the adviser, who will coordinate with something called the “third-party administrator” and the asset manager or brokerage. The adviser will also provide ongoing investment education to the company.

It’s understandable that small business owners seek help from advisers. If you’re a small business owner, you want to run your business, not a retirement plan. You’re also used to paying to make problems go away. The problem is that advisers know these instincts, and exploit them.

But as a small business owner, you have a fiduciary duty to your employees to make the adviser selection an arm’s length negotiation, and to keep fees low. So bear in mind that, say, a 1% fee from the assets in the plan for the adviser will make the expense ratios on the funds astronomically high and destroy returns for everyone in the plan. You should keep the adviser’s fees to 0.25% of the assets in the plan.

The different fees, including the adviser’s, are often embedded in the funds’ expense ratios. As a rough rule of thumb, stock funds shouldn’t have expense ratios of more than 1.2% and bond funds shouldn’t have expense ratios more than 0.60%, including the adviser’s fee. If your broker presents an initial proposal with a fee structure more expensive than that, or doesn’t give you a clear itemization of fees including what’s going into his pocket, cut him or her loose immediately.

2. The asset manager

The next consideration is the institution that holds the plan’s assets. It’s important for plan sponsors/employers to choose a brokerage or asset management company that has access to, or provides, reputable fund choices, including some index options, with low fees.

It’s also important to choose an asset management firm that can offer “target-date” funds. Among the target-date funds that investment research firm Morningstar rates highly are those from T.Rowe Price Group TROW, -0.60%  , American Funds, TIAA CREF, and Charles Schwab SCHW, -0.34%  .

Target-date funds have their flaws, but they are crucial in 401(k) plans. They are a one-stop fund package that gives an investor access to underlying stock and bond funds, with a manager changing the allocation to those funds systematically as the employee moves through their career and nears retirement.

Smart financial plans keep workers satisfied and productive

<:article id=article itemscope itemtype="" itemref="article-headline article-subhead">



Shake Shack leaves some Wall Street analysts cold

Shake Shack had investors salivating when it launched its initial public offering last month. But some Wall Street analysts argue that the stock has gotten too hot too fast. Erik Holm joins MoneyBeat. Photo: Getty

Finally, the broker or asset manager is generally responsible for the record keeping of the plan, and takes an extra fee for that.

3. Consider ditching the broker entirely

In truth, if you use one of these firms (except for American Funds), you can pretty much avoid the adviser entirely. That means dealing with the firms directly on the telephone.

The big asset managers have the 401(k) business down to a science. In many ways it’s easier dealing directly than going through a high-cost broker. Telephone reps end to pick up on your circumstances fast, and are knowledgeable.

4. The third-party administrator

The last point to consider is the third-party administrator of the plan. The TPA is an institution or entity that draws up the legal paperwork for the plan and customizes it for the employer.

There are many features employers can consider, such as whether to allow participants/employees to borrow from their investments in the plan. Third-party administrators charge fees to set the plan up and tailor it to a company’s wishes initially, and then charge ongoing annual fees to monitor it.

An adviser or an asset managers will recommend a TPA, typically one they have experience working with.

Remember, multiple layers of fees for advisory services, asset management and administration often torpedo small business 401(k)s.

But a little bit of learning about these plans means you don’t have to be another small business victim. And becoming savvy in this area will go a long way to keeping employees happier and wealthier.

John Coumarianos runs the website, Institutional Imperative, and focuses on value investing and behavioral finance. He formerly was a financial writer at mutual-fund company Capital Group and a mutual-fund and equity analyst at investment researcher Morningstar Inc.