As an employer, you may have opted to offer your employees a 401(k) plan as an added benefit for recruitment and retention purposes. Yet what many companies don’t realize is that you should be regularly reviewing your plan to ensure that it continues to be the right fit. I recently wrote an article about your responsibilities as a plan sponsor, and what you need to know, especially when it comes to fees and your provider.
A big part of that responsibility involves knowing when it may be time to change providers. Your plan providers service two roles: record keeping and third party administration. Often these two roles are served by one provider. Some of these companies you may be familiar with are Fidelity, Vanguard, and Empower amongst many others. How do you know if your 401(k) provider is still the right choice for your company? Here are the top five things to examine, which could lead you to determine that it’s time to change:
1. Your provider has not decreased expenses in over five years.
If your 401(k) plan is growing in asset size, your provider should be decreasing their costs. Let’s examine that a bit. Perhaps your overall 401(k) plan started small, with $500,000 assets in the plan. Over time, that $500,000 has grown as employees contribute to the plan, and as the money grows. Maybe today, the plan has $5 million in assets. Your provider should not be paid the same percentage on that $5 million as they were paid on the initial $500,000. In essence, they’re doing the same amount of work regardless of the total assets, so they should not be paid more. An annual review of your total plan expenses should be performed regardless of the size to examine whether what you’re paying in fees is fair and appropriate.
2. Your provider requires your plan to hold their proprietary funds.
Some providers require your plan to hold a certain number of their funds, and in some cases, only allow you to hold their funds. It is impossible for one fund company to have best-in-class funds for every asset class. Ideally, your plan participants should be able to pick from a number of fund families, not just one. As retirement plan advisors, we regularly see plans where all proprietary funds are included, or where only the least expensive options are available (regardless of performance). If your provider does require you to hold a certain number of their funds, or only their funds, be sure to review the list very carefully, and consider whether it’s the right path for your plan.
3. Your provider doesn’t review your plan design and plan document.
A 401(k) plan is an ever-changing benefit for you and your employees. Your plan document was likely created when your plan was established. When was the last time your provider suggested that you review it? As the plan sponsor, you have the ability to change many features of your plan, yet many employers don’t realize this. Your plan document should be reviewed annually to make sure the plan is accomplishing the needs of you and your employees. After all, many things in your company, your plan, and involving your employees’ need change over time. To that end, there are many changes you can make on an annual basis that benefit all involved, if you’re proactive.
4. Your provider has a surrender charge.
While we see this mainly in older plans and 403(b) plans, all we can say is that if you hear the words “surrender charge,” run away! A surrender charge refers to a percentage that you may be required to pay if you take your money out prior to a specified period of time as set forth in the plan. This isn’t necessarily tied to your retirement age or eligibility, but rather to the length of time your money has been in the plan, and that you’ve been investing in the plan. Most plans today don’t include a surrender charge, but we advise all plan sponsors to be aware and avoid them where possible.
5. Your provider doesn’t offer a broad list of index funds.
Some providers allow you to create your plan’s fund line-up from any fund in the entire fund universe. Yet some require that you select index funds from their approved list. If your choice of index funds is limited, be cautious. Not all index funds are created equal, and you want to ensure that you’re providing the most appropriate list of options for your plan participants.
Do any of the above apply to your plan? Not sure, or don’t even know where to look to answer that question? A retirement plan advisor can help. I help clients proactively work with their providers and address the issues I’ve outlined above to help ensure you’re meeting your responsibilities as a plan sponsor. It can seem overwhelming, but rest assured that you don’t have to do it alone.