Setting up employer 401k

[Georgialivin]

Hello everyone. I would love some thoughts on this.

I work for a smaller start up right now. They are setting up a 401k plan for employees with a 5% match. I am soon to be salaried, so this directly affects me.

Right now we are talking with a company that recently was blasted by John Oliver for over the top fees. The expense ratios seem normal- but looking through the fine print, I think it may be alarming.

I have been tasked with looking around and making sure we are getting what will be best for the employees and the employer. I have requested information from Fidelity.

I'm really just asking for insights and thoughts or maybe things I haven't considered. I'm no guru, but I'm the most knowledgeable at this time. So I would appreciate the help.





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[travelover]

It is not uncommon for employers to hire someone to run the 401(k) that basically screws over the employees. The best you can do it to cry loudly to get the total fees flushed out so the decision makers can see them.

Worst case, just contribute to max out match and put more in IRAs.

 

[Bamaman]

Expenses are one issue. The funds available under a given company's plan is another.

Fidelity offered MegaCorp employees a couple of risky funds, a couple of medium risk funds and a bunch of really conservative funds and money markets. They didn't let us as investors make too many mistakes--protecting our investment somewhat. But they didn't offer many of the really great Fidelity funds. During those years, MegaCorp was paying Fidelity's fees.

MegaCorp eventually opened all of Fidelity's funds to us--if we were willing to pay the expenses. I jumped that option, and for quite a few years I studied Fidelity Investments closely. I made substantially more (after fees) playing their hot funds than I ever made in my earlier years.

The quality of the mutual funds and programs offered is extremely important. Many 401K's I've looked at have insurance company mutuals and other sub-par investments offered. I wouldn't be so thrilled to be in such a position.

 

[Ronstar]

Look into a "safe harbor" 401k. I had several years where I couldn't max out my 401k because the owners failed the highly compensated test. Though more expensive, the safe harbor plan ended up putting more $ in my pocket.

Good move on researching Fidelity and other options. We originally had ours through a bank and the returns were not so good.

 

[Earlyout01]

I set my small business up with a Safe Harbor (definitely the way to go) 401k directly with Vanguard. I was able to choose any of the Vanguard funds that I wished to choose. I also added the Vanguard Target Date funds to cover some of the fiduciary liability. Also, I added a self directed option so that an employee could choose any non Vanguard option that they wanted. Low fees and fairly easy to do.

 

[dallas27]

With my (tiny) company, we just use tdameritrade, cost = zero, unlimited purchase options.


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[Sunset]

Vanguard did a fine job , naturally low costs for an old small employer of mine.

It was such a wonderful thing when they switched from the expensive 401K to Vanguard.

 

[Georgialivin]

Well I finally got a breakdown. Looks like our plan has a total of 1.79% in fees, with 1.59% billed quarterly to plan sponsor. .5% of that goes to our financial advisor which I'm not sure we need as he is not acting in a fiduciary capacity and is only there to teach or advise employees as needed.


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[Georgialivin]

We also pay about 2500 annually for third party administrators.


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[travelover]

...... .5% of that goes to our financial advisor which I'm not sure we need as he is not acting in a fiduciary capacity and is only there to teach or advise employees as needed.
...........

What a juicy treat for basically doing nothing. Set up a few of these accounts and take a half percent of millions, then take questions from the golf course.

 

[Texas Proud]

I set one up for the small company where I used to work...

The lowest cost firm that would take the plan was Fidelity... they have a small business unit... their bid will be based on how much money is there now and how much they think it will grow...

IIRC, the company paid $25 per account (which means if someone leaves they still have an account... however, we elected that the employee paid if they left)...

There are also fees for doing the various legal matters.... you can do it on your own if you want, but the fee is like $1,000 or $2,000... cannot remember...

The plan had almost 300 funds to choose from... they recommend that you choose 10 to 20 (sometimes less) plus their standard year based retirement funds... I chose like 60... I had a group of funds that people who wanted to speculate could... gold, sector funds etc. etc... I had a group of 'brand name' funds.... (the list has a bunch that are NOT Fidelity funds) for people who wanted that style... and another group that were very low cost index funds for the index investor....


The benefit of Fidelity is that when the assets grow, the 'fee' does not... all direct costs were fixed... they only got money for any investments in Fidelity funds from the ER...

 

[Avocadorunner]

The administrator for my 6 person 401K plan charged about $1500 annually. They prepared the year end reports, filed the Form 5500, handled distributions upon an employee termination. We used Vanguard for the investments. I think it was a reasonable solution.

 

[gmcleary2011]

Thank you...this is great information!

 

[Earlyout01]

With my Vanguard 401k with 13 participants, the administration fees were $3000 per year paid for by the sponsor (me). There were no other fees except for the Vanguard mutual fund expenses. There was a free Morningstar advisory service and I included VG target date funds to cover fiduciary responsibility. I hope that helps.

 

[Texas Proud]

With my Vanguard 401k with 13 participants, the administration fees were $3000 per year paid for by the sponsor (me). There were no other fees except for the Vanguard mutual fund expenses. There was a free Morningstar advisory service and I included VG target date funds to cover fiduciary responsibility. I hope that helps.

Just curious... when did they set this up? Also, how much money invested when it was set up?


I tried to get a quote from Vanguard when I was looking for my last company and they did not want to bid... we had $1.6 mill at the time and it was a professional company with 25 employees... was really surprised they did not want it...

 

[Evie]

John Hancock tends to be one of the "go-to" companies for companies starting their first 401k plan. A lot of companies have minimum requirements for the size of the plan. I suspect advisors like to suggest them because they do get a good commission off of them.

I've never tried to start a group 401k plan with Vanguard, so I can't offer any insight on that. I recently started an individual 401k plan with Vanguard and that has been decent.

Third party administrators typically charge somewhere around $1500-2000 per year.

If your plan isn't a "safe harbor" plan, you may be limited in your contributions, depending on your income. I think the threshold for being a highly compensated employee was around $105K maybe about five years ago. I haven't had to deal with a 401k plan for my work, so not sure what it is now.

The owners and highly compensated employees are restricted to only being able to contribute the average of the regular employees plus 2%. So if EVERYONE put in the 5% to get the match, you would ultimately be limited to 7%. However, as you would suspect, some people contribute nothing, which brings that average down.

When the third party administrator does the testing for the year you cross the threshold to become highly compensated, the "average + 2%" limit shouldn't apply. It will the following year. I'm not sure how it would work for new plans. Definitely something to discuss with your TPA.

Either way, if you're not sure, you can always over-contribute. Anything that is deemed to be over the limit will be refunded to you with a 1099 that you will have to file declaring the money as income, if it was pre-tax.

 

[racy]

More and more companies are being sued by their employees because 401k plans have too high fees. Check this: Employers must monitor 401(k) fees, Supreme Court rules - LA Times

 

[Big_Hitter]

I'm not sure how it would work for new plans. Definitely something to discuss with your TPA.

you can be a HCE in a new plan - it's all based on prior year total comp with the plan sponsor/cg. The current threshold is $120K.

 

[Earlyout01]

Just curious... when did they set this up? Also, how much money invested when it was set up?


I tried to get a quote from Vanguard when I was looking for my last company and they did not want to bid... we had $1.6 mill at the time and it was a professional company with 25 employees... was really surprised they did not want it...

It was about 3 years ago and we only had about $600k in assets. They had said that they had just started doing small company 401k plans.

 

[Georgialivin]

I got quoted for vanguard for a start up plan with very few employees and no assets. I am nowhere close to HCE, and it is a safe harbor plan. Thanks to everyone chiming in


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[Texas Proud]

It was about 3 years ago and we only had about $600k in assets. They had said that they had just started doing small company 401k plans.

OK, that makes sense.... the one I set up was 6 or 7 years ago.... I always thought it was stupid not to go after these plans since they try hard to get individuals with way less money....