A 401(k) plan is a great way for employees to save for retirement and a great benefit for you to offer, but how much should it cost your company to offer a program to your employees? In August, 2012, new federal fee disclosure regulations or what I refer to now as the “no excuses for not knowing” rules have highlighted the importance for employers to know the answer to this question. If you have a 401(k) plan and you don't know the answer, or worse, you believe it's free, I offer the following tips to help you learn what a 401(k) plan costs:
1. Work with a Financial Professional.
Unless you a very familiar with the inner workings of how retirement plans are priced, you should consider hiring a professional. An experienced retirement plan professional can help you find the most appropriate service providers for your size company, help you decipher fees, choose a diversified investment line-up and oversee plan implementation. Make sure that the adviser you work with has retirement plan service experience. Not all financial advisors do. If you engage a fee-only adviser, ask them if they will share fiduciary responsibility with you. Most do. If you work with a broker, he or she will be paid commissions from the investments and generally cannot act as a fiduciary. In either case, you should ask them the fee they will charge or the amount of commission they anticipate receiving for their services.
2. Review Three Proposals.
Get proposals from at least three 401(k) providers. I suggest that you look at providers from different types of businesses (i.e. banks, insurance companies, payroll services, or independent-third-party administrators/record keepers). Each type of entity has its own value proposition, which might be particularly important to you. Further, reviewing a broad range of options creates a great fiduciary record of your vendor selection process.
3. Do an Apples-to-Apples Comparison.
Each provider is required to provide you with a point of sale fee disclosure that outlines all of the fees that the provider can charge for its services. Unfortunately, these disclosures can be complicated and time consuming to review (another reason to engage a professional). You or your adviser should compare services offered and fees in a single view. This will help you understand the value each provider places on each type of service and help you weigh what's most important to you. It will also put you in a better position to ask informed questions and negotiate price.
4. Meet Prospective Providers In-Person.
Interview at least two providers. Maybe it's just me, but I like to meet with people face-to-face when I do business. Learn how each prospective firm will support you and your employees. Ask to see a demonstration of their online tools and reports. Ask to meet the people you will work with on a day-to-day basis. (Not always possible, but ask.) In the end, you are buying a complex financial service and not a commodity. Ultimately, it will be their people, their culture, their processes and technologies that will make or break your service experience.
5. Be Consistent When It Comes to Cost Sharing.
Once you've selected a provider, you should consider the issue of cost sharing. How much of the total fee should the employees pay and how much should the company pay? Often, retirement plans are mistakenly considered “free” because an employer has no billable costs. As we all know, nothing worth anything is free. Typically, a “free” plan means that the employees are shouldering 100% of the cost. You may want to consider cost sharing the retirement plan in the same manner as your health care program. Better to be consistent with your employees when it comes to benefit matters.
The government does not require you to hire the lowest-cost service provider. Some salespeople may tell you that, but don't believe it. The best practice is to follow a prudent and diligent process that reviews available services and associated fees and then determine which provider can best serve the needs of your employees at a reasonable cost.
John Carnevale is a founder and president of Sentinel Benefits & Financial Group, an independent employee benefit firm.