Look for hidden fees when choosing a 401(k) plan provider

San Francisco Business Times
May 12-18, 2006

By Susan Smith Hendrickson

Most days, you are so busy running your business that it’s hard to imagine retiring.  But one day you will.

Small businesses have numerous retirement-savings options.  Chad Parks, founder of San Francisco-based Decimal, Inc., an online provider of 401(k) plans to small businesses, said you should be signing your company up for a 401(k) plan for one of four reasons: to maximize your savings, provide a benefit to employees, generously reward employees and increase retirement benefits for highly compensated employees.

Plans range from solo 401(k) plans for sole proprietors to profit-sharing plans for businesses that want to provide bonuses to employees.

Mutual fund companies, insurance companies and third-party administrators- such as accountants who keep the plans in compliance with IRS rules- can assist you in setting up a 401(k) plan for your company.

To find the best provider for your company, keep the following questions in mind:

* What types of plans does the provider offer?  “You need to make sure the provider can accomplish what you want them to do,” says Parks.  “You need a lot of flexibility in terms of plan design.”

The IRS has many requirements for 401(k) plans- ranging from how much employees can contribute to catch-up contributions for those over 50.  You’ll want to choose a provider to help you deal with IRS testing requirements and provide tools to reach your retirement goals.

* How many funds are available to invest in?  “Insurance companies usually offer many different mutual funds from many different companies,” said Mark Neumann of San Bruno-based Golden Gate Retirement Consultants Inc.

One option is lifestyle funds, a mix of stocks, bonds and cash investments based on what type of investor you are- either conservative, moderate or high risk.  You can use a survey to assess an employee’s tolerance for risk.

With most lifestyle funds, you can log on to a web site and change your investments daily.

Ask your employees what types of investments they want and whether they want a brokerage account tied to their retirement savings plan.

* What services does the provider offer?  Ask plan providers about record keeping, training, investment advice and web-based help.  Also ask whether the plan becomes part of your payroll process and how new hires and terminations will be handled.  It’s important to understand how much effort is required on by your company to maintain the 401(k) plan.

* How is the 401(k) priced?  There are hard-dollar costs that your company has to pay for the service and soft costs typically tied to assets that your employees will pay.  While a fee equal to one percent of assets is pretty standard, fees are often higher when assets in the 401(k) plan are low.

“For startup companies, you have the fewest choices for plans and fees because you have the least number of people providing the assets,” said Neumann.  “A million dollars in assets in a plan is the breaking point, give or take.”