Why do employers choose the 401k companies they do?

[sheepstache]

So many people have 401ks in companies that charge really high fees.  Blessed are those few whose employers use Vanguard or Fidelity.  So I'm wondering if anyone can give me some insight into what motivates employers to choose vendors who offer such lousy deals to their employees.  Do they take on more of the paperwork burden than Vanguard or Fidelity?  Are there kickbacks?

Obviously companies are going to cut a deal that's best for them and I don't have a problem with it, I'm just curious what that deal is.

[Psychstache]

If I had to venture a guess, I would say the most important quality is to minimize costs to the employer. It would make sense that companies that have higher ER fees that hit employees can charge less to the employer and still come out ahead.

[SwordGuy]

Write your congressman today and explain to them that you want employers out of the 401k choosing business.  The system should let the employee pick the 401k plan and instruct the employer where to send the matching funds to.  Obviously, it will also have to send them with vesting instructions so the 401k company can return un-vested funds.

[kudy]

I grilled our finance guy about this - what it boils down to (at least as far as he is concerned) is this: unless your company has large sums to invest (> ~1 million), then only certain companies will offer 401k plans, and those that are offered, have higher fees. As total invested assets grow, the options become better, the leverage the company has with brokerages is better, and the lower the costs go. Basically, big fund managers don't find it worthwhile to maintain accounts for the little guy, so you're left with the high-cost guys.

My company has 6 full time folks, so our fund options are terrible. Working for a bigger company, or having your small company join a PEO will usually reflect a better 401k.

[mm31]

For some most companies, it's about kickbacks and convenience.  You sign up for a provider's plans which promotes their funds and you either get the 401(k) plan free of charge as an employer or the fee is substantially reduced. Bookkeeping is taken care of by the company. Also, keep in mind that a lot of people still don't participate in plans to justify getting a more employee-friendly plan. An employer will always pick the plan that's good enough.

Swordguy is right, companies have no business choosing a 401k plan for me. Their interests are not aligned with mine.

[AlanStache]

I work for a small company ~25 full time (mostly engineers) and we have a great 401k, can select from most any publicly available security (have never found anything on yahoo/etc I wanted that I could not buy).  Dont know what the company pays but I think the boss having to look us all in the eye daily may have had something to do with the good plain.

[oldtoyota]

Write your congressman today and explain to them that you want employers out of the 401k choosing business.  The system should let the employee pick the 401k plan and instruct the employer where to send the matching funds to.  Obviously, it will also have to send them with vesting instructions so the 401k company can return un-vested funds.

Yes! I have said that before here. People should get to pick their own!!

[senecando]

It's interesting too that it's not just the company they pick, but somewhere along the line different funds are selected.

I've had 2 401k's through Fidelity and they've had different funds available.

[sheepstache]

See, that's what I'm looking for are the specifics. My personal portfolio is microscopic compared to a corporation's, but Vanguard doesn't charge me any fees (beyond the fund management fees but those would get paid in a 401k anyway).  So what additional services are they getting or what are they saving money on?  Or is it possible the vendors are literally paying for their business?

My employer has maybe 100 staff members and maybe that amount again in faculty.  There are already 3 full-time benefits and payroll people and maybe if we had to handle more of the 401k paperwork in house it would necessitate hiring another person.  So anything less than the 50k salary +benefits they would have to cough up is worth it.  I just want to know what "it" is.

Aside from tax paperwork, someone from Principal comes to explain the plan to new hires once a year and comes 2 days a year to have one-on-one meetings with anyone who wants one.  So that's worth something, and our employer probably wouldn't ever offer the latter in house due to concerns about liability.

When I took a loan on my 401k, however, Principal didn't work with me directly.  Our in-house benefits person had to spend an hour doing the paperwork with me.

So, that's the extent of my knowledge about it.

[okiedoke]

I run a company with about 40 employees, and I am the 401k administrator.  I'll share my experience. 

When I joined the company, in 2008, I didn't like our 401k plan, so I shopped around.  The plan was small at that time (maybe $1.3m).  None of the big name firms were interested.  I couldn't get Fidelity, Vanguard, etc. to even return my calls. 

So, I went with ADP (our payroll provider).   The selling points were:  (1) they specialized in smaller company plans like ours, so they were willing to do it; (2) they offered low-cost index funds as well as higher-fee actively managed funds, in most of the core asset classes; (3) they integrated with our payroll pretty seamlessly (this helps from a compliance and record-keeping standpoint); and (4) the administration costs to us as a company were not much, and to the employees, nil.

Fast forward 4 years, and our plan had grown (about $2m last year, now probably $2.5).  I take a closer look at the fees, decide to shop around, and it's a different marketplace.  Fidelity is now interested in plans our size (both because they need to grow by adding more dollars, and so they're looking at smaller plans, and because our plan assets have grown).   And, bonus, they offer a payroll service that, by my lights, is surprisingly equal to (if not better than) ADP, and the employer costs are no more.  Given some nagging problems I'd had with ADP, and the fact that the overall fees and expenses to plan participants were notably lower, it wasn't a hard call to switch, and I've been happy in the year we've been with them.  I think it's a better overall solution and employees seem happy with it.

Bottom line lessons:  (1) lots of small employers want to offer good plans, but not all the brokerages want to go through the record-keeping hassles for a low fee -- but, at least in my experience, the marketplace has evolved over the last half decade.  (2) payroll integration is a big bonus for employer hassles (this is why Fidelity is doing payroll now).   

[okiedoke]

I should also say that, while some folks in this thread have thrown around "kickbacks," I've not even heard of something like that and can't really imagine what that would look like in the real world.  Played exactly zero part in our selection, and have a hard time thinking that it would for the vast majority of employers. 

The inputs into the equation are basically:  (1) benefit to the employees (will they like it?); (2) plan administration costs (becoming fairly standardized, as far as I can tell); (3) other marginally harder to quantify costs (hassles of payroll integration, ease of administration).