My experiences starting a 401k plan from scratch

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
Posts: 148
Joined: Sat Jan 30, 2016 3:19 am

My experiences starting a 401k plan from scratch

Post by boglechu »

I'm currently in process of setting up a 401k and I wanted to share my experiences with other posters. It's an ongoing process and I will update from time to time.

For many people, setting up a 401k will mean they will go to a pension/retirement specialists who will serve as their third party administrator to set up the 401k. This person will be knowledgeable of the rules of the game, and will make some recommendations of what fund to set up, how much to allocate, etc. When I asked around, setup fee was $750-1500. Annual fee was $1200-2000. The TPA will make some recommendations of what funds to get. The TPA's I spoke to all recommended American Funds, which have high expense ratio's of 1.5% or so for the no-load funds or 5% load and 0.7% expense ratio's for funds with a load of about 5%. I check performance of American funds and very similar to total stock market funds from Vanguard.

For those who want to use expertise of the TPA, but want freedom of using low expense ratio funds, I recommend that you suggest to them that you want to use a self-directed type of brokerage account like Schwab Company Retirement Account or Fidelity Invest-Only Retirement Account/Non-Prototype account. These funds let the fund sponsor (owner) open up a master account with the brokerage, which can oversee the individual employee accounts. Trades are paid by the participants of the funds and standard brokerage fees. There is access to no-load, no fee funds and ETF's. When doing this, some companies may say that you need a financial planner or 3(21) fiduciary to help pick out some recommended funds/provide advice. The financial planner may charge 0.5% fee to be a 3(21) fiduciary. For someone who is fearful of liability, your best bet would be to use a 3(21) fiduciary so they can share in some of the responsibility. Otherwise, you can do it with yourself save the extra management fee.

Private TPA + recommended funds with high expense ratio’s
Private TPA + Schwab or Fidelity +/- Financial Planner to be 3(21) fiduciary
Using a private TPA will give you best option for having someone to answer your questions and offer personalized service. It comes at the price of 1-1.5% more expensive actively managed funds. Some business owners may not want responsibility of using Schwab or Fidelity without a financial planner.

There are several pre-packaged options where a big company serves as a third party administrator and will run your 401k. Choose this option if you know you want a 401k and know that you don't want something else like a defined benefit plan.

1. Employee Fiduciary
Employee fiduciary is a small company around for over 10 years that gives access to Vanguard funds for 401k. Setup fee is $500 and annual fee is $1500/yr flat for your company plan. Each employee (participant) has option of paying $100/person for access to self-directed brokerage to access any funds. Otherwise, the participant has to select a fund from the list of Vanguard funds selected by the fund company. They charge 0.08% management fee. This offers the most freedom in selecting quality funds with low expense ratio’s.

There is no 3(21) fiduciary offered for this plan, so you need your own financial planner to build the list of funds. Otherwise, you will have to accept responsibility for building the list.

2. Sharebuilder401k / Spark401k
Both these 401k companies are run by CapitalOne. Sharebuilder has been around longer. Plans start at $495 setup, $960 annual fee for up to 10 participants. Account management fee is 0.75%. Look for discounts to waive setup fee, or $200 off.
The have a good selection of 21 funds, many with low expense ratio’s including Vanguard S&P 500 index VOO 0.05% and vanguard total bond BND 0.06%. They also have a few others like IAU (gold) ETF and REIT ETF. They serve as 3(38) fiduciary for the fund selection. PAI is the third party administrator.

Good plan to start off the business.

3. Merill-Edge 401k by Bank of America
Through the Merill-Edge program, BOFA offers a introductory 401k program for $390 setup and $840 annually. Each additional participant is $36/yr. Account management is 0.52%.

They have 16 funds including BlackRock S&P BSPIX 0.11% and Voya intermediate bond IICIX 0.33%. Funds range from 0.11-1.3%.

TPA is PAI and 3(38) is Morningstar.

I would choose Sharebuilder over BOFA because of better fund selection.

3. PAI Co-Pilot Program
The PAI Co-Plot program is similar to Sharebuilder and Merill-Edge in that for $390 setup and $1200/yr, it gives participants access to pre-selected funds. Additional participants is $48/yr. Custodial fee is 0.07% and management fee is 0.25%.

The plan offers 16 low expense ratio funds including iShares S&P Growth 0.18% and S&P Value 0.18%, but no total S&P index. Vanguard total bond BND 0.07% is also good. There are also 50 moderate to high expense ratio funds, including American funds, that are up to 2.14%.

4. PAI Open Architecture
PAI open architecture is $390 setup and $1800 a year. Additional participants are $60/yr. Custodial fee is 0.07%. There is no account management fee because there is no financial planner included or pre-selected fund. You can select any fund you like.
This is a reasonable option for someone who has a financial planner that they want to use as 3(21) fiduciary.

5. Paychex

Paychex has a basic 401k package available for $1500 setup and $160/mo. There is also a small price for each additional participants. The setup fee, price per month, and price per participant all negotiable.

The 16 funds available will be from GuidedChoice. If you choose their financial planning option, its 0.4%. You can opt-out. Low expense ratio funds including Schwab SWPPX S&P 500 for 0.09% and Metrop West MWITX total bond 0.44%. You can add self-directed brokerage option for all participants for $135/year which gives you access to Fidelity funds. Paychex charges 0.46% annual fee.

This can potentially be a good option to integrate with payroll. Most expensive than other companies, but can be a good deal if you negotiate to wave per participant fee, lower setup fee, and lower monthly fee. The 401k product reps don't see as knowledgeable as other companies and less personalized service compared to getting a local TPA.

6. ADP
ADP is a large payroll company that offers integrated 401k solution.

ADP’s basic package starts at $1500 setup, $220/mo, $48/yr for each participant and total of $96/yr for Mesirow Co-Fiduciary. Price is negotiable. You have access to over 100 funds with expense ratio of 0.7-1.5%.

ADP’s Full Mesirow package has $1500 setup, $390/mo. $96/yr for each participant and a total of $96/yr for Mesirow Co-Fiduciary. Price negotiable. You have access to over 100 funds with a vairaty of low ER funds like Vanguard total stock market VTSAX for 0.05% and Vanguard target date funds. Some actively managed funds 1.85%.

The product salesmans is in another state so no personalized touch.

7. Vanguard

Vanguard charges $1000 setup fee and $3,475/year for rerecording for up to 15 participants. Each additional participant is $75.

While Vanguard is a trusted name, the price is much higher for a small company of less than 10 than its competitors.
Post Reply