Once you've decided what type of 401(k) plan makes sense for your business, you'll have a wide variety of plans to choose from. When choosing the right plan for your business, there are three important questions to ask:
What are the administrative costs?
There are several different ways in which plan administrators charge for their services. They include set-up fees, annual fees, monthly fees, per-employee fees, percentage-of-assets fees, reporting fees, trustee fees-plus transactions charges for distributions, loans, and moving assets between funds. The checklist below will help you make sure you've asked about all the possible fees, and ensure that there are no other hidden costs.
What is the annual rate of return?
Qualified retirement accounts are required to report their annual rates of return for each type of fund, as well as administrative costs. When comparing funds, be sure to look at the average annual return after fees. You can't compare true rates of return unless you also know the total annual costs of the plan, not just their nominal rate of return. Most funds will list rates of return going back several years so that you can see how their funds perform over the long term, not just last year.
What variety of funds does the custodian offer?
Most 401(k) providers offer a family of plans that employees may choose from, depending on their risk/return preferences. For example, high-growth funds usually invest in equities that pay little or no dividends, whereas income funds have a lower risk, but also lower rates of return from assets that don't tend to fluctuate in value. The variety of funds offered is a major factor in choosing between providers.
Other Factors Involved in Choosing a Provider
Beyond the big three issues of administrative costs, rate of return, and variety of investment vehicles offered, there are a number of other factors that might influence your choice of provider. Here are some other issues you might want to consider:
- Enrollment Procedures. How is the plan set up? How do employees get started? What options are available? With some plans, all employees are enrolled automatically. Others require employees to opt-out if they don't wish to participate. Most plans have restricted enrollment periods-specific times when employees can enter the plan.
- Employee Training Programs. Many plans include instruction for employees on how the retirement plan works; what choices they have; and what dates they need to be aware of with respect to contributions, distributions, and other transactions. Find out whether there are extra charges for employee training, or if a certain level of training is included in the plan price.
- Customer Service. One reason for creating a SIMPLE 401(k) plan is that it eliminates a lot of the customer-service issues inherent in traditional 401(k) plans. How good is the provider at answering employee questions about the plan, allowing for movement of money between funds (rebalancing), assisting with enrollment, and processing distributions? Once you've narrowed down your choice of providers, you should do an online reputation check on your finalists to see whether people are praising or slamming them.
- Investment Advising Capabilities. Some providers have great tools to help employees understand and manage their 401(k) investments. Look for quizzes that help establish risk tolerance, and simulators that show the effects of shifting a portfolio more toward income versus growth. You might find that paying a little more in administrative costs for a provider with a lot of tools saves money in staff time devoted to assisting employees with their investment choices.