It isn’t lost on small business 401k sponsors that these plans are not for the faint of heart. Endless changes in regulations and increased scrutiny leave some small business owners wondering why they even bother offering a plan at all. Keeping the plan in compliance and maintaining an investment platform can leave any seasoned business owner scratching their head at best and pulling their hair out at worst.
While the risks and burdens on the business owner and 401k sponsors have increased, so has competition for the 401k business. Recent regulatory changes related to fee and services disclosure have made reviewing and comparing plans easier. If you’re frustrated with your plan or haven’t take a good look at it in a while, invest the time in a review and get some competitive quotes. This likely won’t cost a thing and at the same time will help fulfill the fiduciary obligations owed to the plan.
Keeping things simple is a good way to start so limiting the review to investments and fees will keep the process manageable.
Investment Analysis: How do the plan’s investments measure up?
- Morningstar ratings: These ratings can form the basis for comparing mutual funds and help sort through the good and the bad. Three stars out of five should be the minimum requirement. If a fund is less than three stars, a replacement should be considered.
- Fund expenses: Becoming familiar with mutual fund operating costs (expressed as a percentage and known as the expense ratio) is critical to understanding true plan costs. If there are two funds with similar risk, investment objective, ratings and performance, the lower expense fund should be considered.
- Returns: Funds should be compared over three, five, and ten year periods. The shorter the time period, the less reliable the information. If there are two funds with similar risk, investment objective, ratings and performance, the fund with stronger five and ten year performance should be considered.
Fee Analysis: Who are you paying and how much?
- Broker or advisor fees: It is very important to know what compensation the advisor receives and how they’re paid. The fee disclosures from the broker or advisor will show whether they are paid from the funds owned by participants or if they are paid directly from the employer outside of the plan’s assets. Because broker and advisor compensation doesn’t always show up as a line item or an invoice, it can be easy to forget about this part.
- Record keeping and custodian fees: The company that maintains the accounts and platform for participants to direct their investments will also be charging some sort of fee or receiving some form of compensation either directly from the plan or indirectly from the investments within the plan.
- Plan administration and compliance: Utilizing a pension administrator or Third Party Administrator (TPA) is critical given the complexities involved with compliance and plan testing. However, they are not all equal and costs can vary for these services. This blog from Benefit Resources, Inc. has some great information for business owners.
Retirement plan sponsors have a fiduciary duty and should document the review of and decisions made with respect to investment options and fees being charged to the plan. Start with a basic review of the items above. Doing so can be done with little time and cost and will help with the review of quotes from other service providers.
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