I'm a small business owner, this is what Paychex offered

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Topic Author
fusQuanto
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Joined: Sun Apr 20, 2014 11:16 pm

I'm a small business owner, this is what Paychex offered

Post by fusQuanto »

Hi all--

I'm a small business owner, 33 years old. The business is a law firm, I have one partner, and 4 additional employees (all paralegals/1 receptionist). 6 total employees. We have been in business 3 years and I'd like to offer 401(k) to my employees, and to myself/partner as well. I'm planning on offering a 3% ER match, and then 50% ER match up to 6%.

Paychex is our payroll processor and I greatly value the quickbooks ledger file they send each payroll, for the ease of bookkeeping tasks. I prefer Paychex to administer the 401(k) for this sole reason. This is what they offered:

$1500 one time enrollment fee
$150/mo fee
$5/employee/mo that uses it

The rep said they have over 8000 funds they offer. I would login to the Paychex site and it is all administered there. Using this forum's knowledge, I asked about the Vanguard index funds and their fees. The rep sent me a pdf file of Vanguard funds that he prepared for another client. The ERs are in the .2-.4 range (seems like a good ER with my limited knowledge).

Is this a good deal? Am I paying too much in the monthly fees for their management? Any and all thoughts are appreciated.
jlawrence01
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Location: Southern AZ

Re: I'm a small business owner, this is what Paychex offered

Post by jlawrence01 »

My initial thoughts was that the fees seemed bit high.

HOWEVER, it take as much effort to start up a 401(k) for 10 people as for 100. Therefore, it seems pretty reasonable.

One caution. While it is tempting to "make it all Vanguard" fund, realize that you should be picking the best options. My last 401(k) plan that I supervised was administered by Vanguard but included funds from several fund families. Ditto for the two 401(k)s that were administered by T. Rowe Price.

You deserve credit for the 401(k) as MOST small firms offer little.
Quickfoot
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Re: I'm a small business owner, this is what Paychex offered

Post by Quickfoot »

Is the $1500 and $150 fee fixed or per employee? You are a very small business, having access to that low ER funds is pretty good. Many companies with 30-40 employees can't get funds below 1% ER.

Have you considered matching more than 3% and setting a vesting schedule? 3% is standard to low end of matching. 4-6% would be a great employee benefit and would also discourage attrition, my employer vests 20% per year, everything matched after 5 years is immediately fully vested. This allows you to reward loyal employees and will save you money with ones that leave early. Recruiting and training employees is expensive, decreasing the frequency you have to do it will save a lot of time / money and lets you appear to care more about your employees (peception is everything).

My last employer contributed 5% per year with a 6 year vesting schedule (nothing vested until 2 years) AND matched 1/3 of the first 6% contributed to the 401K (this amount was immediately vested). It was a huge retention / recruitment tool.
lostinjersey
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Re: I'm a small business owner, this is what Paychex offered

Post by lostinjersey »

Those fees seem reasonable to me (a former retirement plan administrator). As was mentioned, setting up a 401(k) is complex and requires the same legal documents regardless of the number of employees. Also, the access to low ER Vanguard funds is a plus. And finally, having one website to access everything is worth a lot as well.

One caution, I would strongly consider a safe Harbor 401(k) plan design. It would defeat the purpose if you and your partner max out your contributions and then at the end of the year had to take most of them back because you failed the ADP test, which is a real likelihood in your scenario.
jnet2000
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Joined: Tue Mar 19, 2013 4:22 pm

Re: I'm a small business owner, this is what Paychex offered

Post by jnet2000 »

fusQuanto wrote:Hi all--

I'm a small business owner, 33 years old. The business is a law firm, I have one partner, and 4 additional employees (all paralegals/1 receptionist). 6 total employees. We have been in business 3 years and I'd like to offer 401(k) to my employees, and to myself/partner as well. I'm planning on offering a 3% ER match, and then 50% ER match up to 6%.

Paychex is our payroll processor and I greatly value the quickbooks ledger file they send each payroll, for the ease of bookkeeping tasks. I prefer Paychex to administer the 401(k) for this sole reason. This is what they offered:

$1500 one time enrollment fee
$150/mo fee
$5/employee/mo that uses it

The rep said they have over 8000 funds they offer. I would login to the Paychex site and it is all administered there. Using this forum's knowledge, I asked about the Vanguard index funds and their fees. The rep sent me a pdf file of Vanguard funds that he prepared for another client. The ERs are in the .2-.4 range (seems like a good ER with my limited knowledge).

Is this a good deal? Am I paying too much in the monthly fees for their management? Any and all thoughts are appreciated.
Yes, that is a good deal if those are the only fees you will have to pay besides fund expense ratios. But I bet they have a hidden "custodial" fee somewhere in there. It was a few years ago when I did my research but I went with the Online 401k. Here are the fees I paid or pay for a Safeharbor 401k Plan with Profit Sharing:

$ 1000 set up fee
$ 495 per quarter for Third party Administration.
$ 4 per active employee per month
.07 custodial fee plus Vanguard Signal Share funds
"You really don't need leverage in this world much. If you're smart, you're going to make a lot of money without borrowing" Warren Buffet
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HardKnocker
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Re: I'm a small business owner, this is what Paychex offered

Post by HardKnocker »

Poll your employees to see if they are really interested in having a 401k.

It may not be worth the expense on your part.
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett
snowx800
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Re: I'm a small business owner, this is what Paychex offered

Post by snowx800 »

I have about 20 employees, when I was trying to figure out what to do. the best thing I came up with was a simple IRA plan.
I do it through Vanguard very cheap you just can't put away as much money that's the biggest downfall.
Topic Author
fusQuanto
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Re: I'm a small business owner, this is what Paychex offered

Post by fusQuanto »

HardKnocker wrote:Poll your employees to see if they are really interested in having a 401k.

It may not be worth the expense on your part.
I'm pretty sure they are not interested. But I am, as well as my business partner!
Topic Author
fusQuanto
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Re: I'm a small business owner, this is what Paychex offered

Post by fusQuanto »

lostinjersey wrote:Those fees seem reasonable to me (a former retirement plan administrator). As was mentioned, setting up a 401(k) is complex and requires the same legal documents regardless of the number of employees. Also, the access to low ER Vanguard funds is a plus. And finally, having one website to access everything is worth a lot as well.

One caution, I would strongly consider a safe Harbor 401(k) plan design. It would defeat the purpose if you and your partner max out your contributions and then at the end of the year had to take most of them back because you failed the ADP test, which is a real likelihood in your scenario.
The Paychex rep also suggested a Safe Harbor plan. I'm to new to understand what that entails. After he explained, it, I was left wondering "what am I giving up to get into safe harbor"? And if the answer is nothing, then why isn't every plan a Safe Harbor?
bradshaw1965
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Re: I'm a small business owner, this is what Paychex offered

Post by bradshaw1965 »

You might take a look at Fidelity. They offered a pretty easy self serve small business setup with clear administration fees not based on a percentage of assets in the plan. That's where the small business I'm involved with ended up after realizing the crazy fees hidden in most plans geared towards small businesses. Not sure if Paychex is using the hidden custodial fees, although a quick Google search for "Paychex hidden fees" turns up quite a few results I'd want to dig into, but take a close look at the contract.
Spirit Rider
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Re: I'm a small business owner, this is what Paychex offered

Post by Spirit Rider »

fusQuanto wrote:
lostinjersey wrote:One caution, I would strongly consider a safe Harbor 401(k) plan design. It would defeat the purpose if you and your partner max out your contributions and then at the end of the year had to take most of them back because you failed the ADP test, which is a real likelihood in your scenario.
The Paychex rep also suggested a Safe Harbor plan. I'm to new to understand what that entails. After he explained, it, I was left wondering "what am I giving up to get into safe harbor"? And if the answer is nothing, then why isn't every plan a Safe Harbor?
A safe harbor plan requires the employer match to be 100% immediately vested and meet one of the following options:

A. Basic - Match 100% of the first 3% of compensation, plus 50% of the next 2% of compensation.
B. Enhanced - Match 100% on the first 4% of compensation
C. Non-Elective - Contribute 3% of compensation to all eligible employees.

So with the addition of immediate vesting, you would meet the basic qualifications for a safe harbor plan.

Without a safe harbor plan your 401k would be subject to non-discrimination testing:

A. Actual Deferral Percentage (ADP) test compares the deferral percentage of Highly Compensate Employee (HCE)s and Non-Highly Compensate Employee (NHCE)s. Generally, the HCE deferral amount cannot be more than two percentage points higher than the average for the NHCEs.
B. Actual Contribution Percentage (ACP) test compares employer matching contributions between the HCEs and NHCEs.
C. Top Heavy test determines if the account balances of key employees is greater than 60% of the total assets of the plan.

With two lawyers and 4 paralegals, there is a high likelihood you would fail this testing. You and your partner could very likely be limited to as little as 5% employee deferral. A safe harbor would allow you to contribute the max $17.5K employee deferral.
Buffetologist
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Re: I'm a small business owner, this is what Paychex offered

Post by Buffetologist »

I think that the Paychex plan sounds great for a small business.

My company uses fidelity and I dislike it. While they have some index funds, the ER is higher than Vanguard. Most of their other funds are too large and mediocre. They are really lacking in bond funds. For example, I was looking for a short-term investment grade bond fund with about a 2-3 year horizon. It wasn't part of the plan. I think you are better off with Paychex and Vanguard.
bsteiner
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Re: I'm a small business owner, this is what Paychex offered

Post by bsteiner »

There are various ways to set up the plan. Some of them allow you to contribute proportionately more for you and your partner.

You may want to consult with an actuary to determine how to set up the plan to best accomplish your objectives. The lawyer who handles your estate planning should be able to give you the names of some actuaries who deal with small company plans.
lawman3966
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Re: I'm a small business owner, this is what Paychex offered

Post by lawman3966 »

The fees seem reasonable, though I don't have a good frame of reference handy.

My best suggestion is to call Employee Fiduciary and to conduct a detailed comparison of the fees of both. After comparing EF with other small-firm plans, my employer went with EF. As I recall, the fees were close (though I don't recall the name of the other provider). In sum, the fees started off lower with other firm (through their having lower fixed fee services, but higher ERs), but EF would be lower once the plan expanded in size, because their ERs were the lowest of any firm we could find.

I selected the fund lineup for my employer's plan using suggestions that are on EF's site, which in turn arise from the Federal government Thrift Savings Plan offerings. If you have unsophisticated investors in your plan, you are better off avoiding any exotic investment options in your plan. We did that, and ended with one S&P 500 index fund, a money market fund, one bond fund, and a set of target date retirement funds that included different weightings of the previously listed underlying funds. My understanding is that you reduce your liability by avoiding having fund options in which a novice investor could him/her self into trouble (i.e. ETS with a triple short on the price of copper or the like).

We also opted to go without a financial advisor, and ran into no problems doing so.
jlawrence01
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Re: I'm a small business owner, this is what Paychex offered

Post by jlawrence01 »

lostinjersey wrote:One caution, I would strongly consider a safe Harbor 401(k) plan design. It would defeat the purpose if you and your partner max out your contributions and then at the end of the year had to take most of them back because you failed the ADP test, which is a real likelihood in your scenario.
This is a very critical point.

With the safe harbor, you will be able to contribute the MAXIMUM amount.

Without the safe harbor, the employer will need to do discriminatory testing and there is a good possibility that any HIGHLY COMPENSATED INDIVIDUALS will be limited in their annual contributions. Think about it. The OP does all the right things but might be limited to a 5-10% salary deferral.
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Wildebeest
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Re: I'm a small business owner, this is what Paychex offered

Post by Wildebeest »

Hi FusQuanto,

Paychex offering sounds like a great deal. My experience with Paychex has been checkered though.
The White Coat investor has a excellent Q and A on this: "Starting a 401K/Profit-Sharing Plan For A Small Practice – Friday Q&A Series", and you want to PM Frank Cirullo, who has had a thread on Bogleheads on this and the Wiki is a great resource as well.

Good luck
The Golden Rule: One should treat others as one would like others to treat oneself.
Topic Author
fusQuanto
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Joined: Sun Apr 20, 2014 11:16 pm

Re: I'm a small business owner, this is what Paychex offered

Post by fusQuanto »

Thank you everyone for helping me and giving me your feedback. I truly appreciate you and this site!

Sounds like I will be doing a safe harbor for sure. I hope to be able to offer more % matching as our new company continues to grow and expand.
Five Scoop
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Re: I'm a small business owner, this is what Paychex offered

Post by Five Scoop »

An important question that has not been addressed is what do you and your partner want to accomplish with this 401k plan?

If you big want to contribute $17,500 per year then the 3% match and vesting noted above is fine.

But, you can also have a profit sharing component that would potentially allow for an additional $33,500 to be contributed to each partner for a total tax deferred amount of $51,000. The additional money is an employer contribution but you would also have to make profit sharing contributions to the other employees. This can be done in an assymetric fashion where the majority of the profit sharing amount can be allocated to the owners and only a small percent to the other employees. There are non-discrimination rules for these types of profit sharing calculations that must be followed.

If you are thinking of having a profit sharing component then be aware that most 401k providers, including Employee Fiduciary, do very basic calculations of contribution amounts and can be quite costly in terms of how much profit sharing is allocated to employees other than the owners. If profit sharing is to be part of the plan you should look online for third party administrators that specialize in these calculations (they can often make allocations that heavily fave the owners of a business and minimize contributions to the employees, while making sure that the contributions pass non-discrimination testing).
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