Crappy 401ks – Do Small Businesses Really Have An Excuse Anymore?
A few years ago, I wrote about how crappy my 401k plan was (I’ve since changed jobs and my new 401k is better, though not great). Now I’m no fan of 401ks in general, but they’re here to stay and most of us have to do the best we can with the hand we’ve been dealt.
Why Do Small Businesses Usually Have Such Crappy Plans?
401ks wouldn’t be so bad if they weren’t so horrible. Sure, some larger employers have great 401k plans full of low-cost active funds and even some choice index funds, but most don’t. Most 401ks are full of expensive, crappy actively-managed funds and numerous fees meant to pass on the cost of operating the plan to participants. This works because while most companies need to at least offer a 401k plan to attract qualified candidates, most candidates don’t know nearly enough about investing to know the 401k is crap. Thus, merely having a 401k is usually enough. The sad reality is that it just doesn’t pay for companies to spend money to offer a good 401k in most cases.
Unfortunately for small businesses, that logic no longer works. In the past, it’s true there were relatively few low-cost ways for small businesses to offer quality low-cost 401k plans to their employees, but not anymore.
Employee Fiduciary
A company that has been getting a lot of attention lately (at least in the circles I run in) is Employee Fiduciary. Employee Fiduciary seems to be a one-stop shop, handling everything from set-up to record keeping to on-going administration for a low fee. The numbers I’ve heard from people who’ve supervised a switch say it only costs a few thousand dollars to set up and they actually advertise the fact that they offer access to every single Vanguard fund (as well as DFA funds if your plan works with a registered DFA investment advisor). Best of all, there are no wrap fees and all charges are 100% transparent to plan participants. What you see is truly what you get, which is so rare in the 401k world these days.
Vanguard Is Re-entering The Small Business 401k Market
When Vanguard got out of the small business 401k market a few years ago, people were understandably disappointed. It seems they are back, however, as Vanguard recently announced the reintroduction of retirement plan services for small businesses. Again, this appears to be an all-inclusive service with record-keeping, access to a wide range of mutual funds (not just Vanguard funds, although those are all offered as well), investment research through Morningstar (of dubious value since you can get the same info with a simple free Morningstar account), and even quarterly statements. The costs of this plan is not completely clear from just reading the website, however, knowing Vanguard you can bet that the fees and charges will all be completely transparent to the plan sponsor and plan participants. After all, an account maintenance fee isn’t nearly as egregious if you’re aware you’re paying it.
Do you have a crappy 401k plan? Why not point your plan’s administrator towards one of the two lower-cost options above? Who knows, maybe you’ll end up saving both yourself and your company a lot of money in the long run.
And if you are a plan fiduciary, are you really giving your employees the best deal possible or are you just cruising out of inertia? It always pays to shop around, especially when doing so could mean tens of thousands of dollars to your employees in retirement.
RSS Feed
Email
Small businesses have the same excuse that most individuals do: they don’t understand any of this stuff. So, they make the same mistakes that most individuals do, which is only talking to the players that heavily market to them. None of those are the good guys, so they’re screwed. It’s easy to say that businesses have a responsibility to figure it out, but, if individuals regularly try and fail to “figure out” retirement investing, how can we expect small businesses to succeed? They really have no edge at all over the individual.
Fee disclosure is coming. Starting in 2012, the statements employees receive will have to show how much, in dollars, was deducted from their account and where it went. The ensuing outrage and storming of Human Resources offices should result in an eventual migration toward the lower-cost providers. As Ethan pointed out, the reality is that most HR managers, CFOs, and owners of small businesses do not understand it. That said, as fiduciaries, they have the duty to hire experts and to make sure that the costs are reasonable.
I agree that, ceteris paribus, cheaper is better. IMO, lowest cost is not always the best, though, since cost is usually not the only component of returns. I would much rather pay 0.92% to Fidelity to have Will Danoff manage my money in Contrafund (which is available in a lot of 401k plans, BTW) than to get the Vanguard 500 Index Fund (Signal shares) at 0.06%. The 2.92% of annual outperformance would have meant 50% more real money in Contrafund over the past 15 years, even after expenses.
And, of course, none of this address the issues of investor behavior. I would argue that employees who are given the option of consulting an unbiased professional (who should legally be a fiduciary on the plan and be paid a fee that is unrelated to the investments offered), even if there is a reasonable costs associated with it, have a higher chance of achieving their goals. Most people are on the wrong side of the “fear and greed” trades.
@Ethan, I agree that small business owners don’t know any more about investing than most individuals, but that’s not an excuse. They are fiduciaries. Ignorance is never an excuse to shirk your responsibilities to those who depend on you to make smart decisions on their behalf.
@Chet, I’d love to think you’re right, but I really don’t think there will be any outrage once fee disclosure starts next year if only because few people understand how important costs actually are. One can hope.
Actually, I think 401ks should be abolished altogether, but that’s a rant for another day.