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Thayer Partners Blog

The Do's and Don'ts of Shopping for a New 401k Plan

[fa icon="calendar"] Oct 3, 2016 9:00:00 AM / by Chris Wilmerding

Chris Wilmerding

The_Dos_and_Donts_of_Shopping_for_a_New_401k_Plan.jpgIf you are unhappy with your current retirement plan, it’s probably a good idea to lay out your priorities before shopping around for a high-quality, low-cost 401k plan that actually meets your needs and those of your employees.

Beware, though, not all 401k plans are alike. In fact, they all vary in one way or another—sometimes significantly.

To get the most value out of your new 401k plan at a reasonable cost, take note of these do’s and don’ts.

DO: Check for Fiduciary Status

When shopping around for a new 401k plan, one of the most important things you can do is to choose an advisor who will serve as a fiduciary to the plan. Financial advisors get paid in many ways, but you should insist that the person you hire to run your retirement plan is legally bound to serve the best interests of the plan participants.

A fee-only financial advisor is an example of a fiduciarywhowill serve the plan participants’ best interests above all. They do not sell products or get paid for recommending particular products. This reduces potential conflicts of interests and helps ensure that only the plan participants’ needs are considered. Fiduciary status is the highest standard of conduct in the industry—a status you can trust.

You should also consider hiring the financial advisor for the plan first, before choosing a new 401K plan vendor.A well-trained advisor will assess your employees’ needs and recommend a short list of 401k platforms that closely meet your stated needs.This will save you a great deal of time since you will be able to leverage the advisor’s knowledge and experience.You should also know that the financial advisor’s job is to recommend and manage the other vendors (the record keeper and the third party administrator, if one is used).You pay him or her for that service—why not use it?

DO: Look for Employee Education AND Advice

The financial advisor and recordkeeping firm that you choose to work with for your new 401k plan should focus heavily on your employees’ retirement success. You want partners by your side who will help your employees save properly, who will help them understand the investments offered by the plan, and who will help them understand the fundamental importance of saving for retirement, so that all of your employees are given the best opportunity for a successful, secure, and comfortable retirement.This may require regular (and not canned) group education meetings offered by the recordkeeper or the advisor, but the gold standard of employee retirement planning is actually one-on-one retirement planning meetings with the plan’s financial advisor.These annual meetings usually last about 20 minutes and can cover retirement topicsas well as a wide range of financial topics. These topics include debt management and divorce, and can be an enormously valuablebenefit to your employees—literally life-changing in many cases.We say life-changing because minor adjustments in saving patterns, for example, over a decade or two, will be game changers in an employee’s life—the difference, say, between $200,000 in retirement funds and $500,000.Not many advisors offer one-on-one retirement planning because it is highly time-intensive, but it is a powerful message to say to prospective employees that you have retained a retirement planning expert to help employees prepare for retirement.

DO: Focus on Reducing Fund and Administrative Fees

Reducing your administrative costs is one of two ways to slash 401k fees. The less money you have to spend on mutual funds and plan administrative fees, the lower the fees your employees will have to pay. The management fee, custodial fees, participant record-keeping fees, and other fees can all add up, which means your employees will have less money when they retire.

One other way to reduce plan costs—soft costs in this case—is to hire a 3(16) fiduciary.A 3(16) planthird party administrator will literally do ALL of the plan administration and even run your annual 401K audit while taking on the administrative liability. This will relieve many of the day-to-day administrative burdens, save you time, reduce liability, and increase HR capability, while reducing audit risk and cutting costs.

DON’T: Choose a Plan Design that Won’t Meet Your Needs of Tomorrow

When shopping for a new 401k plan, don’t just think about your needs today. Think of your needs of tomorrow. You want to ensure that you choose a provider that has the options and services to grow as your business evolves.   You’ll want to be sure the recordkeeper can grow as your company grows and is committed to lowering its fees as your retirement plan assets grow.  You will also want a financial advisor and recordkeeper with plan design expertise so that your retirement plan design will meet your business’ objectives today and in the future.

DON’T: Use Actively Managed Mutual Funds

Another way to cut down on fees is to switch from actively managed mutual funds to passive, index funds. Actively managed funds require you to pay a team of managers to time the market and determine what stocks to buy and when to sell. Not only will you be paying more for these managers’ services, but actively managed index funds are statistically likely to underperform the market the majority of the time.

So instead, useindex mutual funds. These funds significantly reduce the fund fees that you have to pay. Index funds are automatically managed by computers, so you don’t need to use a team of highly paid portfolio managers. Index funds work by attempting to mirror their benchmarks (less fees and tracking errors).And these lower-cost funds actually perform better than active funds more often than not.

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Topics: 401k

Chris Wilmerding

Written by Chris Wilmerding

Chris Wilmerding is Principal of Thayer Partners, an independent investment management firm located in Westwood, MA providing financial planning and wealth management counsel to individuals and their families.

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