Tips on Choosing A 401(K) Provider
It is good to note that whereas large firms that have dedicated benefits departments and large balance sheets can afford to pay external consultants to help them select a good 401(k) provider financial managers at smaller companies can find it hard to choose a good 401(k) service provider. It is good to note that the guide discussed below can help any financial manager regardless of the size of the firm choose the best 401(k) provider using some industry best practices, and without the need of a financial advisor, the executive can create a request for proposal and send it out to prospective vendors.
The financial executive needs to consider things like the fees that will be involved because fees for plan administration, brokerage services, investment management, loan transaction processing and other figures can quickly reach several hundred basis points. An incredible fact to state is that the law obligates that the 401 (k) provider discloses all the fees and expenses to the client and thus the financial manager can use this information to select 401(k) providers. Many 401(k) providers pass these fees to the plan participants but reining them in is not good for the sponsor’s fiduciary duties, but it also achieves the goal of enabling employees the ability to afford to retire instead of just remaining in the company and being a drag. One way to keep the fees in line is by having a consultant frequently benchmark the existing fees after every two or three years so that when the financial manager does a provider search, they will get some perspective on the fee quotes.
A vast majority of the costs in a plan go to investment management and not plan administration thus if the person has a broad agenda to focus on high caliber investments at a low cost then the financial executive needs to search for a 401 (k) service provider that supports that. It is worth noting that this partially means including in the fund line-up a selection of passively managed index funds and target-date funds that carry management fees of between 5 to ten basis points and choosing simple investments like an S & P index fund which will not need the person to be actively involved in money management. Costs can be reduced on actively managed funds because their fee model (which is called share classes) can vary widely and some may have front-end (front-load) sales charges. Other actively managed funds charge on the back-end after fund shares are sold, and some are no-load funds, but they can carry 12b-1 distribution fees that can reach up to 50 basis points. It is good to note that depending on the size of the plan’s aggregate investment in a particular fund the investor can qualify to invest in low-cost institutional share class funds.