Questions 401(k) Providers Don't Want You to Ask
Small business owners often struggle to provide competitive benefits for their employees. Behind comprehensive insurance plans, one of the most requested benefit is a retirement plan. Many investment institutions offer 401(k) plans for small businesses.
1. How much are the participation fees? Most investors understand the fees associated with mutual funds, but are not fully aware of the additional fees tacked onto 401(k) plans for small businesses. These fees can often amount to 2-4% of the plan balance. While it's not unusual for management fees to be assessed, there is no reason for these fees to be in excess of 1% of the plan balance.
2. Are actively managed funds worth the premium? Everybody wants to get their money's worth. Most of the mutual funds offered in 401(k)s purport to match or beat the major indexes. If your fund is not beating the index, you and your employees are not getting the best bang for your buck. While every fund can't be expected to outperform every index, especially in challenging economic times, it should perform better than average under normal conditions. Understand that many of the managers of plans work on commission which is conditional on the investments your company makes. If the funds available are not meeting the minimum expectations, contact your plan manager to see if there are investment alternatives.
3. Do you share the fiduciary duty? When you administer a 401(k) for your company you are obligated to provide a fiduciary duty to manage that plan responsibly. In the event that the fund is mismanaged, reports are not filed in a timely manner, or if the investment guidance material is not thorough, the responsibility rests fully on your shoulders. Depending on the severity of the infraction, the business owner could face a lawsuit or in extreme cases, criminal repercussions.
4. What does the plan administrator provide with a contract? All too often, small businesses become locked in to long-term commitments which can be costly and time consuming to terminate. Unfortunately, these contracts offer little benefit to the small businesses. Plan providers are under no additional contractual obligation to provide better service or support. In essence, the relationship becomes extremely one sided and unbalanced.
5. Are employee benefits meetings a true benefit? Few people fell comfortable discussing personal financial information in a crowded arena. If your plan administrator offers to have a rollout meeting with all employees, insist upon additional individual meeting with each employee. Individual meetings give your employees the opportunity to truly discuss their investment concerns in a one on one atmosphere.
6. How much does offer annuities cost? In addition to the typical fees associated with a 401(k), annuities carry a whopping 2.25% to 2.6% on all annuity products. These products often offer little or no additional value over the money market or cash funds available in the plan.
Prior to deciding on a 401(k) plan for your small business, you need to do an extensive amount of research to ensure the plan offered is the best match for your company and your employees. Make sure you understand the fees involved, both the fees you'll have to pay as a company and the fees your employees will be responsible for during the life of the plan. Additionally, it is vital to fully understand the legal obligations you have as the company owner.