How to Launch Your Company's 401(k) Plan

3. Pick a Fund Platform

Virtually every fund company, bank, or brokerage in the 401(k) business can offer the basic mutual funds any defined contribution plan should have. An independent investment adviser will compare fund performance, of course, but he or she will also give weight to other ways in which the fund will serve your business. One key factor should be fees, which vary widely and can be quite large. Among the other considerations: Can the vendor conduct educational seminars in multiple locations or provide materials in Spanish?

There are many types of investment vehicles for a 401(k), but mutual funds are by far the most popular. Insurance brokers often sell funds packaged within what's called a group variable annuity contract. As the market consolidates, the menu of offerings is looking ever more similar from company to company. A basic 401(k) plan ought to begin with a basket of funds, including:

• A large-cap value fund
• A large-cap blend fund
• A large-cap growth fund
• A mid-cap blend fund
• A small-cap blend fund
• At least one bond fund
• A fixed income fund, such as a money market
• An international fund
• Three to five asset-allocation funds targeted to employee retirement dates

What about individual stocks and bonds? Not a good idea. A plan must offer prudent investment choices, and educating participants about all those options is all but impossible given the complexities of the market. If you or your employees want to bet on individual companies, do it outside your retirement plan.

3 Questions to Ask An Investment Advisor

Will you take fiduciary responsibility for the plan?
A 401(k) plan is set up for the exclusive benefit of participants, who may seek redress if the plan isn't suited to their investment needs, doesn't provide the proper guidance, or performs poorly relative to the market. If your adviser doesn't assume responsibility, then the plan's sponsor -- namely your company and its officers -- is at greater risk of being held liable. In which case, find another adviser.

Do you take compensation from an investment company?
A sales commission from a plan provider may cloud your investment adviser's judgment; he or she might steer you toward a provider that may or may not be the best match for your company.

Are you certified by a professional organization?
It's no guarantee, but hiring an adviser who has been vetted by a standard-setting organization (see "Resources" in How to Launch Your Company's 401(k) Plan) increases the odds that he or she will follow best practices in maintaining your plan's integrity.

Figuring Out the Fees

Fees for 401(k)s are a hot issue right now -- participants are suing, regulators are tinkering with the rules, and Congress is considering a rewrite. It's a complex topic, but suffice it to say: Don't believe it if an adviser says his services cost nothing -- you're paying for it, one way or another. Here's a breakdown of the fees to watch for.

MUTUAL FUND FEES Hidden fees are especially common among fund companies competing in the small-business market. They embed administrative fees in the fund expense, for instance. When insurers wrap funds in annuities, they add features -- including a guaranteed income option and an easy annuity rollover -- but often layer extra fees on top of the usual expenses. And brokers collect commissions, which fund companies recover by selling a share class with higher expense ratios.

UP-FRONT VS. EMBEDDED FEES Retirement-plan consultant Shelton urges clients to avoid embedded costs and arrange up-front fees when possible. Company owners ultimately pay that expense, either as the plan's sponsors or as its leading participants; better to take it as a tax deduction than to have it eat away at investment returns.

ADVISER AND ADMINISTRATOR FEES Investment advisers generally charge fees as a percentage of plan assets; figure a quarter of a percent to 1 percent of assets, depending on the services offered, and more if they're taking on an administrative role. Third-party administrators typically charge a base fee of about $1,000 plus $25 to $35 per participant. Sometimes those fees are partially offset by commissions paid by the fund companies to the plan administrators.