Author Topic: Small Business 401(k) Nightmare!  (Read 7489 times)

Ms Manageable Muttonchops

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Small Business 401(k) Nightmare!
« on: November 26, 2013, 01:17:30 PM »
Hello all!

I sincerely apologize if this topic is covered in an earlier post, I am fairly new to the forum and I have not had time to read every post. If it is covered, please direct me there and I will appreciate it!

I started working almost exactly one year ago at my first big girl job (post college). I am 23 years old working as an electrical engineer (EIT...i.e. not professional licensed just yet...)

Our company is very small. There are 13 people here including accounting, reception, marketing and IT (which are all contract positions within the company). The average age of the work force is about 40 years old (this is a guess).

The company benefits are minimal but acceptable, with the exception of the 401k plan. Here is the situation:

Funds to choose from
--1 cash fund (i.e. they will take plain cash from you that will not grow and charge an expense ratio of 0.69%)...seriously??
--5 "retirement 20__" funds from 2020 to 2040 - Blended funds with expense ratios ranging from 1.94% - 2.79%
--7 bond funds - expenses ranging from 1.69% to 2.7% (I am not that interested in bonds though so these are mostly pointless for me)
--4 blended funds - expense ratios ranging from 1.89% - 2.89% (each of these funds includes a percentage of their cash fund...)

The "portal" within which you create a profile is a pitiful excuse for a website. It is extremely hard to navigate and very minimal in nature. The "investment profiles" page takes you to a text list of the above mentioned funds. You can click on the fund and it takes you to one of either:
-A broken website link "error cannot be found",
-An auto download of a 400+ page PDF "prospectus" for the "family" of funds it is associated with, of which only maybe 2 pages are relevant and buried somewhere in the middle, or
-A "fund fact sheet" that is half a page of "track record" info that benchmarks the fund against an index (which it under-performs more than 50% of the time) and fee information. There are 3 subsequent pages of "fine print" I honestly haven't gotten the motivation to read.

Essentially there is no consistency in the information available about the funds and thus no way to compare them to each other and make an informed decision. On top of that, there are no simple, low fee options. Only complex, hyper-managed high-fee funds.

I was initially extremely disappointed. I am already a Vanguard investor so I am accustomed to extremely low expense ratios and fees. However, I would like to participate in my company 401K plan (my IRA is already full) and I would like to take advantage of some additional tax deferral. I ran the long term numbers and the tax savings do outweigh the increased fees, however, I am still unsatisfied with the plan.

I tried to take the high road and discuss my issues with our allocated "financial adviser" but I was very quickly stonewalled with comments like "the platform doesn't allow index funds" and "we offer high quality funds with good track records" and "lower expense ratio means lower returns". When I asked about lower fee options, they added an index fund to the options (expense ratio of 1.8%) and proceeded to tell me index funds are not supported. Basically that is a dead end. They have stopped responding to me all together.

There is no employer match for any amount contributed to the plan. I was told there was "profit sharing" but I was given no details about how that is allocated.

Now that is has taken me forever...let me get to my point. I intend to compile several options for other small business 401(k) providers and bring them to the owner of the company (who is also my direct supervisor because..well..small companies).

My question to all of you is, "who do you recommend?"
If anyone could suggest some decent plan providers and associated info, that would help me significantly. I am VERY new to all of this so I feel like I am just keeping my head above water.

My concerns:
-Expense ratios - I need low fee options, I don't trust any manager can do something magical worth 2.5% of my assets.
-I don't know what 401(k) plans cost the employer. I don't want to show up with a bunch of ideas, all of which will be an increase in what she currently pays for our plan (if anything).
-I need a strong case since, if we change providers, everyone else in the company will have to change over as well.

Our current plan is through Merrill Lynch. So far I am extremely unimpressed.

Any suggestions, comments, ideas or information will be greatly appreciated!

Thanks in advance!

Eric

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Re: Small Business 401(k) Nightmare!
« Reply #1 on: November 26, 2013, 02:03:41 PM »
Those funds look like a sort of nightmare-type scenario.  What a racket Merrill is running!

I don't really have much advice for you, but I'm also at a very small company and there is not currently a 401k plan, although I think one will be coming down the pipeline soon and I'm wondering some of the same things you're asking about at the end of your post, like the costs to the employer to run a 401k plan.

TheDude

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Re: Small Business 401(k) Nightmare!
« Reply #2 on: November 26, 2013, 02:25:04 PM »
EEk thats tough. My company uses a Simple IRA plan through TD Amertrade. I dont mind them as they have about 100 free ETFs. I would also give fidelity a call and see what they can do.

the fixer

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Re: Small Business 401(k) Nightmare!
« Reply #3 on: November 26, 2013, 02:27:04 PM »
There are two ways a provider can collect money to pay its expenses: either transparently through charging a fee to the plan participants or sponsor, or opaquely through high expense-ratio funds. It sounds like Merrill Lynch is doing the latter with your plan, and on paper to the company owner this looks like a good deal because they don't see the money they're being charged. If you're going to research alternatives, you're probably going to find that you either have to pay high expense ratios for the funds in the plan or the fees will be charged more directly some other way. Try to present these total costs as an apples-to-apples comparison of plans, and make sure your company's owner understands how this works and the advantages/disadvantages of each cost model.

Also see http://www.obliviousinvestor.com/getting-changes-in-your-401k/ though it appears you've already exhausted the easy suggestions.

willn

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Re: Small Business 401(k) Nightmare!
« Reply #4 on: November 26, 2013, 02:30:47 PM »
If you're in a metro area, see if you can find the largest independent insurance brokerage--one that isn't captive to a particular underwriter.  They should have a benefits department that does health and benefits plans.  I used to work in IT for one such agency and benefits consulting is one of the fast growing areas they work in.

One of their agents should be able to put together much better options than you are seeing and can probably present several different companies' plans.

In general 401k's are a real pain in the ass for businesses your size to manage.  Many that want to offer something go with a Simple IRA--even though I think it requires a match, because real 401k's are such a hassle.

Numbers Man

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Re: Small Business 401(k) Nightmare!
« Reply #5 on: November 26, 2013, 02:37:51 PM »
Educate the owner or else it's never going to change. Probably the best solution is to get some experience in your field and move to a better company.

huadpe

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Re: Small Business 401(k) Nightmare!
« Reply #6 on: November 26, 2013, 02:53:38 PM »
These plans are so bad, your employer may actually be in non-compliance with ERISA fiduciary rules.  With a firm this small though, you really should be able to make some inroads with the employer to find something better.

My first choice would be, wait for it, Vanguard!  They have a division for just this kind of thing, and their customer service side is pretty excellent, especially when you're a small business bringing a bunch of accounts over.

https://institutional.vanguard.com/VGApp/iip/site/institutional/clientsolutions/dc/smallbusiness

You probably want to call them on your own time to get information about what has to be done logistically to make this happen, and exactly what costs/benefits there are to the owner.  It won't help to come into this without a clear idea of what the owner is getting into.

If you want to give some alternate choices, look at Charles Schwab, who I know offer some super-low fee index funds on the personal investing side.  Again, you'll need to talk to them on the phone to get some more info about costs and logistics.

http://www.schwab.com/public/schwab/investing/accounts_products/accounts/small_business_retirement/business_401k_plan

Just pray that the broker who suckered your boss into this terrible 401(k) isn't a relative.

etselec

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Re: Small Business 401(k) Nightmare!
« Reply #7 on: November 26, 2013, 03:08:02 PM »
I second the suggestion for Vanguard. I work for a small nonprofit, around the same size as your company, and we have our 403(b) through Vanguard. It is very low-cost to the employer as well as to the plan participants (I think there is a $15 flat yearly fee per fund that each participant pays). It's just a straight pass-through and we have access to a huge number of Vanguard funds.

okashira

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Re: Small Business 401(k) Nightmare!
« Reply #8 on: November 26, 2013, 04:02:52 PM »
Taken straight from the DOL website:
You should be aware that your employer also has a specific obligation to consider the fees and expenses paid by your plan. ERISA requires employers to follow certain rules in managing 401(k) plans. Employers are held to a high standard of care and diligence and must discharge their duties solely in the interest of the plan participants and their beneficiaries. Among other things, this means that employers must:
  • Establish a prudent process for selecting investment options and service providers;
  • Ensure that fees paid to service providers and other expenses of the plan are reasonable in light of the level and quality of services provided;
  • Select investment options that are prudent and adequately diversified;
  • Disclose plan, investment and fee information to participants to make informed decisions regarding their investment options under the plan; and
  • Monitor investment options and service providers once selected to see that they continue to be appropriate choices.

One of two things are going on... The owner is oblivious and someone is buddy buddy with the investment manager you spoke with
The owner is dipping his hands into the pockets of his employee's 401k

Either way, it's illegal, not sure your best path forward. you could try a casual convo with the owner to test the waters. Or an anonymous letter. If that doesn't work, notify the DOL.
« Last Edit: November 26, 2013, 04:06:38 PM by okashira »

okashira

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Re: Small Business 401(k) Nightmare!
« Reply #9 on: November 26, 2013, 04:15:43 PM »
To give a frame of reference, my company's 401k, managed by wells fargo, has:

vanguard index for mid cap, small cap, large cap
some vanguard international index
American funds growth (very famous fund...)
pimco total bond
+few other famous, respected funds
cash fund

The all above are also special institutional shares, the vanguard ones are some obscenely low ER of like 0.03%, only available to investors with $5,000,000 minimum.
I think the highest one is the American funds growth @ 0.34% no load, but this fund is typically like 0.8%, with a 5.5% load fee (!!!), not to mention their 30+ year performance is something like 13% per year, they have really earned that ER.

Wells Fargo takes 0.07% off the top. Except the cash fund and company stock fund; they take 0%.


Surely WF would not offer such a deal to your small company, however there is no reason they could not offer similar funds, perhaps their expense would be higher to compensate, but not orders of magnitude higher like yours.

okashira

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Re: Small Business 401(k) Nightmare!
« Reply #10 on: November 26, 2013, 04:19:29 PM »
Thank your lucky stars there is no company match. I would set your contribution at a firm 0% and max your regular IRA for the time being.

chasesfish

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Re: Small Business 401(k) Nightmare!
« Reply #11 on: November 26, 2013, 04:51:47 PM »
If there is no company match, then I would opt out and just send the funds to Vanguard

My wife's employer has a simple IRA with a similar nightmarish scenario (4.25% front loaded funds, with 2%+ expense ratios afterwards).  The fees basically absorb almost the entire match.  Since there's a match and we need the tax deferral, we do it.   Also with a simple, we can make in-plan rollovers after two years of participation. 

I tried talking to the commission only adviser, but had a similar email exchange where he told me 2-3% fees through Alliance Bernstein were market. 

If they decide to have a match, then do it.

kkbmustang

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Re: Small Business 401(k) Nightmare!
« Reply #12 on: November 26, 2013, 11:45:17 PM »
It's not just the funds in the plan your employer is concerned about. She is probably using a stock plan from the provider - a check the box type of plan. Because the underlying plan has been approved by the IRS, the provider also probably keeps the documents updated and in compliance with the law. They also are likely running all of the end of year testing for non discrimination, eligibility, etc for the employer and correcting any plan failures ( for example. Going over the deferral limit for the year).also preparing the Form 5500, Summary Annual Report and Summary Plan Description -  all required  These providers bundle the services with the plan documents and quote fees based on the number of participants and dollars invested. Ask her if she is the named fiduciary and if she would allow you to investigate better options for less money. You can check MassMutual, Fidelity, Vanguard, etc.

Ms Manageable Muttonchops

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Re: Small Business 401(k) Nightmare!
« Reply #13 on: December 03, 2013, 08:12:13 AM »
Thanks everyone!

I will look into Simple IRA's and see what I can find for reasonable small business 401k.
I am glad to hear that others feel the same way I do about the atrocity that is this plan.

okiedoke

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Re: Small Business 401(k) Nightmare!
« Reply #14 on: December 03, 2013, 09:09:51 AM »
I run a small (30-40 ee) business and we have our 401k plan with Fidelity.  I'm very happy with it.  I'll share how we got there:

Five years ago, it was with one of the  MerillSmithBarneyJPChase higher-fee brokers and I shopped around for options with lower fees.   Because of the size of the plan at the time (maybe $1.2m if I recall?)  Schwab, Fidelity, and Vanguard just weren't interested -- they simply didn't return my calls.  ADP (who did our payroll) actually had some pretty good options with low-cost index funds mixed in with more traditional actively managed funds.  The integration with payroll made it easier to administer, too, which was a selling point for me.  So, if you've got a small plan and use ADP for payroll, ADP isn't a terrible option.

Last year, I shopped around again.  I had Fidelity with a previous job and liked it.  The plan assets had grown (near $2m) and Fidelity had switched its focus to catering to smaller plans like ours.  I'm very happy as both the plan administrator and a participant.  Lots of very low-cost index funds across every asset class, and their target date funds are popular with employees and also low fee per their peers.  What I like best is that it's easy to use as an administrator and they have good planning tools, etc. for participants.  And, Fidelity (recently?) started offering payroll services, and it turns out they're about equal to ADP's -- so we still get the benefits of integration. 

Anyway, not to sound like a commercial, but I'd check out Fidelity and maybe ADP, and see if your boss/HR person is interested in a platform that integrates payroll and 401k. 

Ms Manageable Muttonchops

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Re: Small Business 401(k) Nightmare!
« Reply #15 on: December 04, 2013, 05:49:13 AM »
Okiedoke,

Thank you for the detailed info! It is great to hear a success story for a similar situation to my own. Interesting that you were turned down by some firms, I suppose I didn't consider that as an option. I don't actually know the size of our plan but I have a feeling it is pretty small...hmmm

I will look into Fidelity for sure. Can I ask what the fee situation is from the administrator perspective? Is there a required employer match? Do you have to additional fees beyond the expense ratio of the funds in order to provide the plan?

Thanks.

Chiron

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Re: Small Business 401(k) Nightmare!
« Reply #16 on: December 04, 2013, 07:22:26 AM »
This is a classic tactic employed by big banks and insurance companies on small businesses with no leverage to negotiate (due to their small plan asset size). I recently switched employers to a small firm and we have the same issue.  You will first want to figure out the amount of plan assets.  Companies like Fidelity, Vanguard and Schwab are going to charge you fees that will end up being a fairly significant portion of the plan assets if they are under $2MM.  You have two options:

1) See if the provider has a self-directed brokerage option. This will allow to pay a small fee every year and then invest your money in whatever you want.

2) Convince HR/management to switch providers. Check out Employee Fiduciary and The Online 401K, which are two leading providers that specialize in small business 401ks.  You'll find their fees to be much lower than big brokerage houses or insurance companies.  If you have to do some convincing to HR to undertake this hassle, make a comparison and include as a cost of the plan an average fee schedule.  Run that over 5-10 years and show them the savings the plan participants will realize by switching, then gently remind them that they have a fiduciary duty to do what's best for all plan participants. 

okiedoke

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Re: Small Business 401(k) Nightmare!
« Reply #17 on: December 04, 2013, 08:23:58 AM »
The administrative fees (which the company pays) are not bad with fidelity, even for a plan our size.  I get the sense they are somewhat negotiable, especially if you bundle with their payroll service. 

fodder69

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Re: Small Business 401(k) Nightmare!
« Reply #18 on: December 05, 2013, 08:19:56 AM »
I have Fidelity through my work and I can say as a participant they are nice. Low expense ratios and easy to use.

If the other options fail, I wonder if you could establish an EIN of your own and do your own 401k as a side business? You could also contribute a lot more per year.

okiedoke

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Re: Small Business 401(k) Nightmare!
« Reply #19 on: December 05, 2013, 08:33:32 AM »
Okiedoke,

Thank you for the detailed info! It is great to hear a success story for a similar situation to my own. Interesting that you were turned down by some firms, I suppose I didn't consider that as an option. I don't actually know the size of our plan but I have a feeling it is pretty small...hmmm

I will look into Fidelity for sure. Can I ask what the fee situation is from the administrator perspective? Is there a required employer match? Do you have to additional fees beyond the expense ratio of the funds in order to provide the plan?

Thanks.

Re: the 2nd question, there are lots of options on employer contribution , and they are not limited by Fidelity -- you can do Safe Harbor, match, nothing, whatever.  Fidelity is the largest 401k provider in the country, so they've got plenty of options.