A recent (8/1/2016) Wall Street Journal article notes that startups are going after the “forgotten” small 401(k) market. No worries here; in fact, it’s probably good for our business because we do a lot of takeovers of plans started by other companies. In a typical scenario, a payroll company sets up a plan for a small business, and after a year or two, the business owner realizes he/she is getting little or nothing out of it, or contribution costs for employees are so high that it just makes no sense to maintain the plan, or it is such a hassle that they can’t stand it. Their accountant refers us in and we fix things up…it winds up costing more than if we just handled it from the beginning, but at least things are working going forward.
Here are some thoughts on issues noted in the article:
- Fees – a low-cost alternative cited in the article charges $1,428 per year for a 15-life plan. That’s a little less than our fees, but barely. (Of course everyone asks about low-cost Vanguard – their “recordkeeping”* fees for the same plan are…$3,475. WOW.)
- Plan design – this is the elephant that no one in the press talks about, because they don’t understand it. Typical turnkey operators set you up with a, well, turnkey plan. One size does not fit all in the small plan market. Inevitably, they’ll ask “do you want fries, er, a match with that?” and of course, the employer says yes…but the reality is, matching contributions generally stink for all parties (matches are for…starting fires). The explanation for that is beyond the scope of this discussion but trust me (or call me).
- Service – ha! These are “no-service” models where everything is automated. If you ask “what is my optimal contribution?” you’ll be lucky to get a human to start with, and luckier still to get one who was born before I started doing this. Service is what it’s all about. We set you up with a plan that works for you, not one that you work for. And we help you determine the right contribution each year.
*Another misunderstood aspect; technically, there are usually “recordkeeping” fees (keeping track of money including providing a participant website), “administration” fees (documents and compliance, including preparing the annual filing), and “investment” costs. We’ll help you analyze each of those costs and come up with a package that makes sense. Paying $3,500 directly and saving $500 indirectly does not make sense…but paying $500 directly and saving $3,500 indirectly probably does!