Used to be, giving your employees a 401(k) retirement investment plan was one of those good deeds that never went unpunished. While corporate giants have had decent 401(k) plans for years, small business 401(k)s always came larded with stiff fees and sales charges. Generally, it was your employees who paid, not you, although the fees were so well disguised that your employees were usually in the dark about how much they were being fleeced. Well, the lights are about to be switched on: As you may know, next year new 401(k) fee disclosure regulations go into effect, and your employees will see what they’re on the hook for. You don’t want to be the one blamed for the gouging.
That’s why I’m heartened that two of the financial industry’s most efficient providers, Employee Fiduciary Corporation and Vanguard, have entered the market for small business 401(k)s. Finally!
Why costs matter
Now, I have no reason to shill for either company. I’m a personal financial planner—I don’t sell 401(k)s or any other service to businesses. But I spent most of my professional life working in the CFO’s office of large corporations, where I helped put big 401(k)s in place. I made it a point for our plans to offer low-cost funds because I understood how the accumulation of fees over many years could erode the growth of employees’ savings.
When I left the corporate world to become the CFO for several venture-capital backed startups, I was distressed to find that small businesses didn’t have the same low-cost options. Plenty of 401(k) providers offered plans that cost owners virtually nothing, but they imposed fees upwards of two percent a year on the employees. (Consider what a 2.5% annual fee does to a fund’s return; at a time, like now, when the 10-year Treasury bond yields just 2.3%, your employees are guaranteed to lose money on their safe investments.) To help my clients do right by their workers, all I could do was search for the least bad option.
Now, as an independent financial planner, I deal directly with individuals who have their life savings in expensive small business 401(k)s like the ones I helped set up. I tell them to roll the 401(k) over to an IRA as soon as they leave their employer.
Finally – two solutions
Then, several months ago, I discovered Employee Fiduciary Corp. This 401(k) administrator offers only Vanguard funds (which invariably have among the lowest operating costs in their category), and its administrative fees are rock bottom. Record keeping and administrative fees were only $1,500 annually for plans with under $1 million and 0.06% of assets for plans with more. There is also a one-time startup fee of $500 for a new plan and $1,000 to modify an existing plan. In my personal blog, I called this the best small biz 401(k) provider.
Just a few weeks ago, Vanguard launched its own new 401(k) plan for small businesses. Vanguard, which is mainly a money management and mutual fund firm, is partnering with Ascensus as record keeper and administrator. Vanguard spokesperson Linda Wolohan estimated that fees would be about 0.32 percent annually for a $5 million plan. While more expensive than the Employee Fiduciary Corp option, it’s likely that this includes more services.
Times have changed
As a business owner, you don’t have the cash to play retirement Santa Claus. For years that meant you had two unpleasant choices: either pay high costs out of your own pocket; or opt for a 401(k) that cost you almost nothing but took its fees out of the hides of your employees.
Now you don’t have to settle. These new low-cost options arrive just as the Labor Department’s 401(k) fee disclosure regs kick in and pull the veil back on the real cost of small business 401(k)s. They couldn’t come at a better time.