©KaraGrubis/ISTOCK/THINKSTOCK
The goal is to recruit new, qualified hires while simultaneously rewarding and retaining existing employees all while being limited by a tight budget (relative to a large Fortune 500 company). To make matters worse, the 401(k) industry is not known for its low costs. Here are five tricks to negotiating a Fortune 500 quality 401(k) plan at reasonable costs for your business:
Negotiate, Negotiate, Negotiate:
All 401(k) plan costs are negotiable. If your 401(k) plan has higher than 1 percent total costs – calculated by dividing your total fees including mutual fund expense ratios by your total asset base - you could be paying too much for your plan. All-in fees for many 401(k) plans average 2 percent and can be as high as 4 percent of plan assets; however, high-quality 401(k) options do exist for mid-sized and small business owners to pay a fraction of that cost.
Gather competing proposals and negotiate with your 401(k) provider to lower fees. Specifically, look to see if your 401(k) provider or financial advisor is receiving additional compensation from the mutual funds in your plan in the form of 12b-1 rebates or service-transfer fees.
Analyze Mutual Fund Share Classes:
Many business owners don’t realize mutual funds have share classes with different investment fees. The same mutual fund can vary in cost depending on the share class in your 401(k) plan. Although mutual fund companies advertise that certain share classes with lower expense ratios are only available if your 401(k) plan has a large amount of assets, these expenses are also negotiable through your 401(k) provider. You can get institutional share classes even though your company is a new plan with no assets, which can save your employees over 0.50 percent per year in plan costs.
Get Financial Advice for Employees:
As complicated as 401(k) plans are for companies to offer, many employees are lost in the 401(k) process. Surveys by Charles Schwab show two-thirds of employees want help to determine how much to contribute and which investment portfolio best matches their personal financial and risk situation. Part of your 401(k) provider evaluation should include the strength of their employee advising programs. Truly helpful financial advice can add as much as 2 percent per year to employee investment performance by helping them determine the proper risk allocation for their personal financial situation.
Look Into Outsourced Plan Compliance:
Many business owners are not 401(k) experts. Hiring a retirement plan expert that can double as a full-scope 3(21) or 3(38) fiduciary can handle this plan compliance as an outsourced fiduciary to your 401(k) plan, which makes them legally responsible for their advice as a plan fiduciary. Some 401(k) providers will try to charge as much as an extra 0.50-1.00 percent of plan assets per year for this service. These services can be included in their base packages to their clients and on a negotiated basis.
Never Sacrifice Convenience:
Many employers choose not to offer a 401(k) plan due to administrative complexity. Few 401(k) providers today have technology integrations to payroll and HR systems. Integration to payroll and HR systems can save you the hassle of managing employee onboarding, payroll uploads and annual testing.
Consistently rated as one of the top employee benefits requested by employees, your 401(k) can strategically recruit the best talent while rewarding existing employees. By following these five steps, your 401(k) plan, too, can beat those of your Fortune 500 competitors.
Monte Malhotra is author of The Young Investor’s Guide to Retiring Young and CEO of 401(k) provider MoneyIntel.