Help Me Create the Ultimate 401(k)

[Craig]

Friends (you do seem like friends now ...) ... I'm CFO for a $170MM company, 500 employees, retailer.  We currently have a 401(k) administered by CitiStreet, with investment services provided by Smith Barney.  50% match, against the employee's maximum matchable contributions of 6% of compensation (they can of course contribute over that matchable maximum, up to the statutory limits).  5 year vesting ... 25% after 2 years, then 25% each year thereafter.

Current provider does a poor job all around, and we will be designing a new plan, and implementing as of 1/1/06.

Untouchable (for all practical purposes) ... vesting schedule, matching formula ... would require Board involvement, brain damage ... not likely fertile ground.

Decisions:

• Generally prefer one vendor ... e.g. Merrill Lynch, Wachovia, ...
• High tech interface ... as little involvement by our staff as possible ... rely on technology / 'net to help employees sign up, and manage their accounts.
• Considering a three-pronged approach ... (1) life cycle funds for those who want to keep it simple, (2) a list of low cost mutual funds, mostly indexes (likely mostly Vanguard), with plenty of international funds, fixed income funds and a T-bill money market fund for those heading for the trenches, and (3) self-managed brokerage account, for those who feel competent enough to research, buy and manage individual stocks, bonds, etc.
• Considering using Willis on a consulting basis for RFP, counsel re: design, etc. ... rather like a fee-based planner ... they will have no opportunity to particpate in commissions.  (I know ... be careful).  Yes, I / we could research and manage ourselves ... too many competing projects more critical, frankly.

Will appreciate your brainstorming thoughts ... what would you want to see in your plan, any suggested administrators, fund suggestions welcome, etc.

Thanks.

 

[rapoole]

Charles-



Thanks for asking. I like your approach. Here's the deal: if you want to create the ultimate 401K plan IT MUST HAVE LOW FEES. Merrill and Wachovia are not low fee operations, so you need to rethink that part. If I am your employee and you lock me into a high-cost 401K plan I will not thank you for all the bells and whistles. How about Vanguard? Also, make fees paid by employees transparent.

High tech interface sounds nice. Index funds are an obvious choice, and to the extent your lawyers allow, I would steer undecided employees toward indexes and non-actively managed lifecycle funds. How about a TIPS fund? Self managed brokerage accounts sound good, but come with an increase in complexity which may drive up the costs for everybody. If they cost the guy in the S&P 500 index funds extra fees, don't do it.

By all means, use a fee for service consultant to design the plan. Whatever you do, don't let the salesmen from Merrill or Wachovia design the plan.

Best,
rapoole

 

[wildcat]

I have some experience with Merrill and it was not bad. Fees were not as low as Vanguard but I had index funds (large, mid, small & international) available and active funds as well. For example, its actively managed Basic Value fund had a .56 expense ratio. Life Cycle plans were available but seemed incredibly conservative.

The service was very good. The website (technology) was very good.

 

[brewer12345]

How big is your plan in terms of assets and annual conttributions? The problem with creating the "ultimate" 401k is that small plans are more expensive to administer and the costs tend to be passed along to the employees. If you are looking for relatively high tech, low cost, and wide selection, I would say fidelity is probably the most obvious choice, if you a re big enough for them to bother with. They have cheap index funds and seem to be very competitive WRT automation, helplines, and investment selection.

 

[Martha]

I went through the same thing with my firm. We were able to find a very low cost plan that met our needs and ours is a much smaller business than yours. We left our prior plan provider because of high cost, poor performing funds, and a number of mistakes by the provider.

We sent out RFPs to a number of vendors and then met with our four favorites and quizzed them in detail. We got references from other businesses of similar size and type that used the provider and talked to them about their experience. That was invaluable.

What we were after was alow cost plan that offered a relatively small set of fund choices so as to not confuse people with too many meaningless choices, but with the option of having a self directed account. We also wanted a plan trustee who would undertake the fiduciary duty to review the fund choices on a regular basis and make necessary changes. We wanted a provider with a good history of administration of the plan to remove some of the burden from us--like proper preparation of 5500 forms, processing of loans, etc.

Three years later we are pretty happy. Still have some issues with plan administration. Can't anyone do a 5500 correctly the first time?

I can't remember anymore which providers we considered and they might not make sense for your business which is much larger than ours. But if you want me to check, PM me and I can look and let you know.

 

[unclemick]

Most 401k plans are stupid - bordering on criminal - read Winter 2002, Efficient Frontier. Bernstein waxes eloquent.

If you offer more more than a few funds - you are an accomplice.

A time bomb ticking away. Another popular topic!

 

[Sheryl]

I set up our company's plan a year ago. We are much smaller than you- 15 people - I chose the Hartford for reasons several have already mentioned - low fees, good fund choices. I liked that they did not limit funds to their own but had a selection from various providers. The fee includes "free" consulting with a local broker for those that are interested.

 

[Craig]

Thanks for all of the responses. Martha, I'll send a PM ... can use references for sure.

Currently, the plan is small ... total assets $2.5MM. Definitely looking for low fees, and total transparency. I want our employees (and management) to know their fund fees are at or below what is offered to the public. Plan / company will cover true admin costs ... so far estimated at $20/participant/year ... though I'll be surprised if it stays that low. However, it is very clear that admin costs have come down greatly over time, with tech advances.

 

[justin]

Our 25 employee company uses Fidelity. I don't know much about the fees our company pays. We have a limited (and strange) selection of low cost index funds. Target retirement/lifestrategy funds too. I guess you can pick which funds your company offers through the 401k. The participant interface is through their webpage. Our HR department has to approve changes to contributions and investments once a month I think. I haven't heard any complaints from HR about Fidelity. I do get a strange $5 fee taken from my investments every quarter or so. Others do too. I have no idea why though.

 

[WanderALot]

A few months back I was on a personal crusade to get rid of our 401k provider, Manulife/John Hancock. They not only have high fees, they also insist on HIDING the fees After looking around for a while, I found that most companies, including Vanguard, didn't want to administer for very small plans (under $1 mil). Our company only has 20 employees and a good chunk of those employees joined only 6 months ago, so our plan is very small. I guess I'll check out Hartford ... any other suggestions?

Thanks.