small business 401(k) need advice

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Topic Author
anneatheart
Posts: 4
Joined: Mon Jul 20, 2015 2:42 pm

small business 401(k) need advice

Post by anneatheart » Thu Oct 29, 2015 3:52 pm

I have a small business and a financial planner suggested a safe harbor 401(k) because I can contribute up to $17,000 a year plus extra monies. None of my employees are participating and I am paying a TPA $1200 annually plus $75 quarterly to Principal for administrative fees. Principal also charges me 1.5% as a participant plus I pay the expense ratio of the funds that I choose to invest in. I asked the financial planner about other retirement planning options and he mentioned a SIMPLE IRA then backtracked. He said that I will pay 3% upfront for funds offered in a SIMPLE IRA.

I am not a financial person but it appears that whatever I have made on the 401(k) is gone after Principal takes their 1.5% and the expense ratio. I know that my account balance is equal to what I have deferred through payroll. All of the funds the financial planner has chosen have expense ratios of .86 and above, with most being over 1%.

Please help.

renue74
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Re: small business 401(k) need advice

Post by renue74 » Thu Oct 29, 2015 7:14 pm

I have a small business and about 10 years ago we started a SIMPLE IRA. It's self directed and we simply match employee's contribution up to 3%.

The max contribution is $12,500, plus the 3% company match.

I've recently considered a 401(K), but had issues with the fees as well. I only have 2 other employees.

With the SIMPLE, I pay no admin fees at all.

It sounds like your 401(K) is in line with the fees, etc. If you find a 401(K) that offers great funds and a decent administrative fee, I would LOVE to hear about it.


physiorol
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Joined: Sun Mar 09, 2014 1:52 am

Re: small business 401(k) need advice

Post by physiorol » Thu Oct 29, 2015 9:28 pm

As you already have a 401K I suggest you look into switching to lower cost provider with and securing a better fund line-up.

401K third party administrator with low admin fees make up for it by including only funds that offer them a kickback (not sure the technical term but they can be upto .5% of fund assets). This may make sense from a numbers point of view if your total 401K balance is low, but most people prefer to pay a little more on the admin fees to get access to low cost mutual funds that do not offer kickbacks to the TPA.

I would suggest looking into ubiquity and employee fiduciary. A summary of my research is here

viewtopic.php?f=1&t=157858

It is very easy to switch 401K providers. Just make sure that your current plan does not have lots of surrender fees.

There are other benefits to keeping the 401K. I believe funds in a 401K are protected in a law suit but not IRA account. But this may vary by state.

Also, I believe, if you close the 401K you cannot contribute to the IRA until the next calendar year.

RipkenFan08
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Joined: Fri Oct 30, 2015 8:37 am
Location: Delaware

Re: small business 401(k) need advice

Post by RipkenFan08 » Fri Oct 30, 2015 9:21 am

Those fees seem pretty high. See if you can get ahold of your 408-B2 form from Principal. That will highlight exactly what you are paying in fees. The 1.5% fee sounds fishy. Is that a management fee or a commission paid to the advisor? Typically all fees are imbedded in the fund expense ratio. For example if the expense ratio in the fund is 1%, maybe .25% goes to the advisor (12-b1 fee), .5% goes to principal for recordkeeping and .25% goes to the actual fund company for management. This will be broken down in your 408-B2 form. The Record Keeper can also pay the TPA as well through the fund expense and if the plan has enough assets, the record keeper will pay the TPA from their cut (.5% in the above example) so you don't have to pay the $1200.

Also, the Safe Harbor sounds like the best option for you. There are discriminating tests done at the end of the year where owners and highly compensated employees cant be the only people using the 401K benefit. So, Safe Harbor forces you to make a match or automatically contribute money into employees' accounts. So your employees should have some balance. I'm guessing you just started this

One last thing, I'd talk with your accountant to see if it is advantageous for the business to be paying the administrative fees rather than the participants.

SteveKL
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Re: small business 401(k) need advice

Post by SteveKL » Fri Oct 30, 2015 1:38 pm

To the OP: I own a small business with employees. My company has maintained a SIMPLE-IRA with Fidelity for many years. We match employees' elective contributions up to 3% of their pay. If an eligible employee declines to participate, the company does not have to fund a contribution on their behalf. Our participation level is roughly 50% of eligible employees, but it has been as low as 10%. Because there is no top-heavy testing with SIMPLE-IRAs, we two owners have always been able to contribute our maximum even when employee participation has ebbed significantly.

I have previously considered switching to a safe harbor 401(k) to increase the allowable contributions for me and my spouse, who is the co-owner. The downside for us would be the requirement that we contribute 2% of pay for all eligible employees, even those who chose not to defer a portion of their earnings. The extra cost for us to fund those employee contributions would not be offset by the tax savings on our increased contributions, so we have stayed with the SIMPLE-IRA, which has a $75 annual fee per account and permits access to all of Fidelity's low-ER funds, as well as brokerage products.

Switching your 401(k) to a lower-cost provider would save you "something" on the annual admin fees, and hopefully give you access to cheaper-ER fund choices, but the cost to your company of funding non-elective employee matches will always be there.

livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: small business 401(k) need advice

Post by livesoft » Fri Oct 30, 2015 1:42 pm

You should read this NPR article about small company 401(k) plans and the kind of help advisors give (It's a good horror story for Halloween):
http://www.npr.org/2015/10/19/445322138 ... k-nest-egg

Then consult the Bogleheads wiki on how to create a better 401(k) plan:
https://www.bogleheads.org/wiki/Setting ... 01(k)_plan
as well as
https://www.bogleheads.org/wiki/How_to_ ... 01(k)_plan
Wiki This signature message sponsored by sscritic: Learn to fish.

Topic Author
anneatheart
Posts: 4
Joined: Mon Jul 20, 2015 2:42 pm

Re: small business 401(k) need advice

Post by anneatheart » Fri Oct 30, 2015 3:48 pm

physiorol wrote:As you already have a 401K I suggest you look into switching to lower cost provider with and securing a better fund line-up.

401K third party administrator with low admin fees make up for it by including only funds that offer them a kickback (not sure the technical term but they can be upto .5% of fund assets). This may make sense from a numbers point of view if your total 401K balance is low, but most people prefer to pay a little more on the admin fees to get access to low cost mutual funds that do not offer kickbacks to the TPA.

I would suggest looking into ubiquity and employee fiduciary. A summary of my research is here

viewtopic.php?f=1&t=157858

It is very easy to switch 401K providers. Just make sure that your current plan does not have lots of surrender fees.

There are other benefits to keeping the 401K. I believe funds in a 401K are protected in a law suit but not IRA account. But this may vary by state.

Also, I believe, if you close the 401K you cannot contribute to the IRA until the next calendar year.
The TPA does receive 0.05% revenue sharing from Principal.

OP

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: small business 401(k) need advice

Post by retiredjg » Fri Oct 30, 2015 4:15 pm

Your problem is using the advisor and/or using Principle. It is hard to tell if the advisor got you into Principle or if Principle has supplied the advisor, but these high costs are a problem with your plan, not small business plans in general. Part of this issue, however, may be that the plans available to small businesses with only one user might be limited. That might be how you ended up where you are.

Here's an example.
He said that I will pay 3% upfront for funds offered in a SIMPLE IRA.
That may be true of the plan you are using, but it is not true of SIMLE IRAs in general.

I don't know if you need a SIMPLE or a 401k, but if you will google "Fidelity Small Business Plan" and "Vanguard Small Business Plan" and see what they have to offer, you will find a lot of information. People have also been very happy with a company called Employee Fiduciary and I believe a company called Ubiquity has gotten some good reviews.

physiorol
Posts: 219
Joined: Sun Mar 09, 2014 1:52 am

Re: small business 401(k) need advice

Post by physiorol » Fri Oct 30, 2015 4:24 pm

anneatheart wrote: The TPA does receive 0.05% revenue sharing from Principal.
0.05% does not sound too bad as an asset management fee, especially if they are acting as fiduciary. Requesting the 408-B2 (as mentioned below) should tell you if there are expenses added to the available funds that are paid back to the TPA in addition to the asset management fee.
RipkenFan08 wrote:Those fees seem pretty high. See if you can get ahold of your 408-B2 form from Principal. That will highlight exactly what you are paying in fees. The 1.5% fee sounds fishy. Is that a management fee or a commission paid to the advisor?
SteveKL wrote:I have previously considered switching to a safe harbor 401(k) to increase the allowable contributions for me and my spouse, who is the co-owner. The downside for us would be the requirement that we contribute 2% of pay for all eligible employees, even those who chose not to defer a portion of their earnings.
I think with safe harbor you can do an automatic 3% that does not require employee matching, or 4-6% of salary that the employer only contributes if the does require matching. Either options could add up if you have many employees. But, I believe I get a kickback in good karma.

Topic Author
anneatheart
Posts: 4
Joined: Mon Jul 20, 2015 2:42 pm

Re: small business 401(k) need advice

Post by anneatheart » Fri Oct 30, 2015 4:33 pm

RipkenFan08 wrote:Those fees seem pretty high. See if you can get ahold of your 408-B2 form from Principal. That will highlight exactly what you are paying in fees. The 1.5% fee sounds fishy. Is that a management fee or a commission paid to the advisor? Typically all fees are imbedded in the fund expense ratio. For example if the expense ratio in the fund is 1%, maybe .25% goes to the advisor (12-b1 fee), .5% goes to principal for recordkeeping and .25% goes to the actual fund company for management. This will be broken down in your 408-B2 form. The Record Keeper can also pay the TPA as well through the fund expense and if the plan has enough assets, the record keeper will pay the TPA from their cut (.5% in the above example) so you don't have to pay the $1200.

Also, the Safe Harbor sounds like the best option for you. There are discriminating tests done at the end of the year where owners and highly compensated employees cant be the only people using the 401K benefit. So, Safe Harbor forces you to make a match or automatically contribute money into employees' accounts. So your employees should have some balance. I'm guessing you just started this

One last thing, I'd talk with your accountant to see if it is advantageous for the business to be paying the administrative fees rather than the participants.
Thank you for your reply. I reviewed my documents with Principal and placed a call to them for a refresher on the fees. They charge 1.5% to the participants for record keeping and the plan sponsor pays Principal $300 annually.

There is a Total Investment Expense for each fund. The expense ratio range starts at .72% and the highest is over 1.6%. Our financial advisor strongly recommends being in a target date fund. The Principal LifeTime 2045 fund has an expense ratio of 1.36%; 0.51% is retained by the investment provider and 0.85% revenue sharing to the record keeper (Principal).

The TPA is paid .05% from Principal on top of the $1200 that the TPA bills my business for recordkeeping.

OP

physiorol
Posts: 219
Joined: Sun Mar 09, 2014 1:52 am

Re: small business 401(k) need advice

Post by physiorol » Fri Oct 30, 2015 10:31 pm

If I have your numbers right (I hope I do not) you and your company are paying

Admin Fee $1500
1.5% * Balance
1.36% * Balance if in target date fund 2045

This would be ~ $4300 on a balance of 100K and ~ $16000 on a balance of 500K. I put your numbers into the crude comparison calculator I used and ubiquity/Employee Fiduciary would have total costs of ~ $2100 for 100K and $3200 for 500K. Assuming you used Vanguard Target Date 2045 with expense ratio of 0.18. Employee Fiduciary is slightly lower than Ubiquity unless your balance is over 1 mil.

RipkenFan08
Posts: 36
Joined: Fri Oct 30, 2015 8:37 am
Location: Delaware

Re: small business 401(k) need advice

Post by RipkenFan08 » Mon Nov 02, 2015 9:42 am

Sounds to me like a change is needed. If you are paying 1.5% to principal for recordkeeping that's a lot. There are start up plans that don't pay nearly that much (they typically pay the highest fees).

To give you some hard numbers, I know a small business start up plan using American Funds as record-keeper. They were priced at one of the highest fees. They were charged .50% to advisor, $12 + .10% to Record-keeper (American Funds). Their administration cost all in was around .60% plus the $12 participant fee. They will still need to pay American Funds for management of the funds which is roughly .40% average between all the funds. So, all in, they are paying around 1% for a start up plan. American Funds also pays the TPA .10% and that cuts into the TPA's $1200 yearly fee, but as a start-up plan, it's not much.

Plans are priced based on: balance (the more the better), # of participants (the less the better), and contributions (the more the better).

Enjoying the Ride
Posts: 45
Joined: Wed Jun 03, 2015 9:40 am

Re: small business 401(k) need advice

Post by Enjoying the Ride » Mon Nov 02, 2015 3:34 pm

My wife's dental practice had a similar plan, with Voya.

We were paying a TPA approx. $2k/yr for admin fees. In addition, the Voya "daily asset charge" combined with fund expense ratios exceeded 2%. It took a lot of time and effort just to get to the point of understanding all of the costs. Once that happened, we were horrified, and properly motivated to take action. I think I went through all of the stages of the grieving process (denial, anger, bargaining, depression, acceptance).

We are preparing to convert to an Employee Fiduciary-like plan with a Vanguard fund lineup and expense ratios below 0.10%. We notified Voya and our TPA last Friday and are planning to convert on 2/1/2016.

I enthusiastically recommend looking into alternatives.

jgdsss
Posts: 86
Joined: Mon May 16, 2016 11:31 pm

Re: small business 401(k) need advice

Post by jgdsss » Sun May 22, 2016 11:06 pm

SteveKL wrote:To the OP: I own a small business with employees. My company has maintained a SIMPLE-IRA with Fidelity for many years. We match employees' elective contributions up to 3% of their pay. If an eligible employee declines to participate, the company does not have to fund a contribution on their behalf. Our participation level is roughly 50% of eligible employees, but it has been as low as 10%. Because there is no top-heavy testing with SIMPLE-IRAs, we two owners have always been able to contribute our maximum even when employee participation has ebbed significantly.

So you have employees that sometimes participate then sometimes elect to not participate? Are all your employees eligible regardless of hours worked? Or only full-time? I have 19 employees, most of whom are around 30 hours/week. I supposed i'd have to see what the guidelines were. But any additional info you can share on the front end would be helpful.

I have previously considered switching to a safe harbor 401(k) to increase the allowable contributions for me and my spouse, who is the co-owner. The downside for us would be the requirement that we contribute 2% of pay for all eligible employees, even those who chose not to defer a portion of their earnings. The extra cost for us to fund those employee contributions would not be offset by the tax savings on our increased contributions, so we have stayed with the SIMPLE-IRA, which has a $75 annual fee per account and permits access to all of Fidelity's low-ER funds, as well as brokerage products.

Switching your 401(k) to a lower-cost provider would save you "something" on the annual admin fees, and hopefully give you access to cheaper-ER fund choices, but the cost to your company of funding non-elective employee matches will always be there.

jgdsss
Posts: 86
Joined: Mon May 16, 2016 11:31 pm

Re: small business 401(k) need advice

Post by jgdsss » Sun May 22, 2016 11:07 pm

Enjoying the Ride wrote:My wife's dental practice had a similar plan, with Voya.

We were paying a TPA approx. $2k/yr for admin fees. In addition, the Voya "daily asset charge" combined with fund expense ratios exceeded 2%. It took a lot of time and effort just to get to the point of understanding all of the costs. Once that happened, we were horrified, and properly motivated to take action. I think I went through all of the stages of the grieving process (denial, anger, bargaining, depression, acceptance).

We are preparing to convert to an Employee Fiduciary-like plan with a Vanguard fund lineup and expense ratios below 0.10%. We notified Voya and our TPA last Friday and are planning to convert on 2/1/2016.


May I ask if you ever set up a plan with Vanguard? What type of plan? I'd really like to begin offering some sort of retirement benefits to my employees but i have NO idea where to start.

I enthusiastically recommend looking into alternatives.

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