Small-Business CEOs, Your 401(k) Plan Matters (Tim Quillin Expert Advice)

The biggest financial purchase of people’s lives is based partially on circumstances beyond their control. Yes, we’re talking about retirement — that boring, pesky topic that ends up at the bottom of the “to-do” list week after week, year after year. Most people depend on their company 401(k) plan as a primary source of income for their eventual retirement, but their company picks many of the features and options of the 401(k) that impact the quality of that retirement.

As a small-business owner, if you happen to have a dedicated, experienced 401(k) administrator focused on continually improving the plan, then you might have a matching program, personalized counseling and high-quality, low-cost fund choices. Congratulations, your retirement plan might enable your employees to actually, like, retire, and maybe even take a vacation once a year.

If you’re not lucky enough to have someone on your team that is knowledgeable and passionate about improving your retirement plan, your employees might be buying a 401(k) lemon without even knowing it. There’s no standardization of 401(k) plans. They’re all different, often with bewildering fund choices, hidden fees and little guidance. Caveat emptor and good luck.

Here’s the biggest issue with 401(k)s: Your eyes are starting to glaze over. This stuff is complicated and boring. The industry that services plans for small businesses thrives on complexity and apathy. The industry throws around jargon like “deferrals,” “3(38) fiduciaries” and “expense ratios.” Even the term 401(k) is gobbledygook borrowed from a line in the tax code that spawned its creation. Whether by design or not, the language obscures reality.

Most small-business owners don’t have an in-house expert nor the time to navigate this sea of complexity on their own, so they rely on outside financial advisers who often have serious conflicts of interest. The advisers might charge a fee based on a percentage of the assets in the plan, and that fee becomes a tax on the 401(k) participants’ investments. Some advisers get kickbacks, with the nondescript label of 12b-1 fees, from the funds that are offered in the 401(k)s. Some advisers also sell insurance and have a vested interest in pitching whole life policies rather than 401(k) savings.

Many small businesses end up offering 401(k) plans with relatively high, opaque fees and do not provide individualized education with unbiased advisers. While business owners and executives choose the options and features of a 401(k), most fees are passed along to participants. And most 401(k) participants don’t even know they are charged fees.

If you’re still reading, you must really care about retirement planning. That’s awesome. This doesn’t have to be a difficult topic. The 401(k) world is rapidly evolving in a way that makes it relatively easy for small-business owners to offer high-quality plans. You can improve the quality of your plan by driving down fees, simplifying fund choices and providing individualized counseling.

In every facet of 401(k) plans, fees are declining. There are three primary hands in the 401(k) cookie jar: recordkeepers/third-party administrators, investment funds and advisers.

One key to reducing fees is unbundling the plan to get a clear view of each. Recordkeepers typically charge a per-participant fee and will often lower the fee if you seek competitive bids. You can minimize investment fund fees — typically stated as expense ratios — by selecting passively managed index funds, which are appropriate choices for most individual investors.

While adviser fees are often stated as a percentage of plan assets, the more common-sense way to evaluate the fees is on a per-employee basis, and they should mostly reflect time spent training, educating and counseling employees.

In terms of fund choices, keep it simple. A full slate of target retirement-date index funds is often the best default choice for employees. A line-up of perhaps a dozen other index funds should be sufficient to support more tailored portfolios.

The most important element of a high-quality 401(k) plan is individualized counseling with credentialed, conflict-free advisers. The benefits of this counseling can extend beyond retirement planning and address topics like debt management, college savings and household budgeting, which promote overall financial wellness.

If you’re a small-business owner or executive, please go through a formal review of your 401(k) plan. Chances are you can do better. A high-quality 401(k) plan shows employees you care about their long-term future and often provides peace of mind that makes your workforce healthier and more productive. It matters.

Tim Quillin, a certified financial adviser, is a partner with Aptus Financial in Little Rock. Email him at Tim@AptusFinancial.com.