How to Pick a Small Business 401(k) Provider
Siân Killingsworth / 9 Nov 2022 / 401(k) Resources
The retirement plan market has become more crowded in recent years, underscoring the difficulty of finding the right 401(k) provider for your small business. Exercise due diligence before you choose a small business 401k provider, taking into consideration:
- Employer involvement
- Plan features and benefits
- Fees and costs
Services and prices can vary widely, so it’s worth the time and effort to make a well-researched decision.
Much behind-the-scenes work goes into providing a stellar front-end experience for your employees. As the employer sponsoring the plan, you’ll need to answer a few questions about how you’d like the plan designed. For instance, you’ll need to decide whether you’d like to offer traditional (before-tax) and/or Roth (after-tax) contributions.
Ideally, you’ll find a 401(k) provider that handles day-to-day administration, IRS and DOL compliance, and investment management for one low fee. Your 401(k) provider will:
- Write up the plan documents
- Prepare participant disclosures and account statements
- Process all loans and distributions
- Ensure that the plan follows all federal rules
- Assist in audits and conduct discrimination testing
- Aid in employee enrollment
- Answer employee questions
- Prepare Form 5500 for annual filing with the DOL
Some third-party administrators act as investment advisors and managers, while others focus on administration and give you the freedom to work with a financial advisor of your choice. If you need a recommendation, a TPA can often point you in the right direction. Sometimes you can save money by unbundling these services.
Lastly, it’s worth considering that the best 401(k) provider offers fiduciary support — meaning they take on the personal, legal liability to make sound investment choices on behalf of employees. You may find 401(k) custodians that hold plan assets but do not assume any responsibility for helping you make management decisions.
401k Plan Features and Benefits
The best 401(k) providers offer flexibility. For starters, find an administrator that handles both traditional and Roth retirement plans for small businesses. Employees with traditional accounts have the opportunity to reduce their taxable income annually and grow returns tax-free until they withdraw the money years later in retirement — when their tax bracket is likely lower. On the other hand, young employees who plan to climb the ladder and get married in the future may prefer to pay their taxes now, while they’re in a lower tax bracket, and enjoy a tax-free retirement.
Beyond the traditional vs. Roth account decision, small business 401(k) providers may also offer Safe Harbor plan designs that can help you automatically pass nondiscrimination testing each year. While you will need to contribute to your employees’ accounts, employer matching and profit-sharing can also reduce your tax liabilities while making your benefits more enticing to top talent.
Plan providers should allow access to a broad selection of investment options, including a mix of large and small stocks, different types of bonds, emerging markets, and some international exposure. Some administrators may also offer creative solutions for boosting plan enrollment, such as employee auto-enrollment — which, as a bonus, also provides you with an added tax credit.
Fees and Costs
The best 401(k) providers offer their services with low-cost, transparent fees. True small business 401(k) providers charge a flat fee for administration services. Some providers may charge a percentage of the Assets Under Management — AUM fees — which increase as the popularity of your 401(k) plan increases. While a 1.68% AUM fee may seem trivial, it can become quite expensive over time. Other providers may charge per-person fees under the guise that it costs more to manage more accounts — yet, that’s just another way that you can be penalized for growing enrollment. Worse yet, many companies charge both AUM and per-person fees to nickel and dime you, so it’s worth looking around to find a provider who truly has your best interests at heart.
Investment fees must also be considered. Are you charged transaction fees? While the average transaction fee is around 1.44%, some are lower than 1% — which can save a considerable sum in the long run.
Looking at your total expense ratio can also help you figure out whether you’re overpaying on your investments. If your employees are charged a 1% expense ratio, that means they’re paying $1,000 for every $100,000 invested. With many of the larger and well-known providers, a small business can expect to pay a higher total expense ratio than a larger company; for instance, a business with 2,000 employees might pay 0.7%, while a small business with 50 employees might pay 1.68%. You can find a small business expense ratio below 0.7% with a 401(k) provider specializing in small businesses.
While built-in employee counseling services can be great, it’s worth taking pause before accepting higher fees in exchange for this service. Do you really need it? Ideally, your 401(k) provider will offer these services a-la-carte so employees who want this extra level of financial guidance can access it, but you’re not compelled to pay for a service no one ends up using. Most small business 401(k) providers offer employee portals with DIY tools and articles to help employees make informed financial decisions — and these resources are almost always free.
The Bottom Line
Many small business owners feel like they’re flying blind in selecting a 401(k) plan for their employees. The right small business financial advisors can change that. Making the right choice can result in employee engagement, low-cost benefits, and effortless administration. Create a spreadsheet to help compare apples to apples — measuring all the factors we’ve mentioned above — and get the right 401(k) your growing small business deserves. Contact Ubiquity to learn about the different types of 401k plans available to you.
Ubiquity is not a registered investment advisor and no portion of the material herein should be construed as legal or tax advice. Please consult with your financial planner, attorney and/or tax advisor for advice.