Q.
I'm a solo physician with several employees. We have a 401K/profit-sharing plan filled with expensive, actively managed mutual funds. We pay an adviser's fee of 1% in addition to mutual fund expense ratios of 1-2%. I would like to reduce the fees by investing in something like Vanguard Target Retirement Funds, while still being able to max out ($51K) the account each year. I'm concerned the adviser, who is also our accountant, may be biased about this. What do you recommend?
A.
First of all, your accountant/advisor is not only biased but is not acting as your fiduciary either. He is either ignorant of things he should be an expert about (i.e. that's it's not a good idea to invest in high expense actively managed mutual funds) or he is willfully milking you like a cash cow. If he exhibits a similar level of incompetence with regards to your accounting, you probably need a new accountant in addition to a new advisor.
Limited Options for 401(k)/Profit-Sharing Plans
Your options are limited because of your business set-up. If you were an independent contractor or didn't have any employees aside from a spouse, you could use a low-cost Solo 401K or SEP-IRA from Vanguard. If you didn't want to max out the account, you could use a SIMPLE IRA, again through a company like Vanguard. But since neither of those apply to you, you still need a 401K/Profit-sharing plan.
Top-Heavy Rules
Any time you have employees, you have to be very careful about the top-heavy rules. The government has these in place so you can't have a retirement plan for the owners without providing one for the employees. A defined contribution plan is defined as “top-heavy” when key employees have more than 60% of the assets in the plan. A key employee owns more than 5% of the company, owns more than 1% and makes more than $150K per year, or is a key officer and makes more than $165K per year. In a typical practice, the docs are “key employees” and everyone else is not. Given your very small number of employees, typical employee retirement contributions, and your desire to maximize your own contributions, your plan will almost surely be considered “top-heavy.”
If you are top-heavy, you have to provide a minimum contribution to your employees as an employer match. In your case, that amount is probably going to be 3% of their total compensation. You may be able to exclude part-time employees and those who have been with you for less than a year from the plan, depending on how your plan is drawn up.
Better 401K Provider
What you need (aside from a new advisor and possibly a new accountant) is a new 401K provider. Perhaps the best one out there right now for a small business like yours is provided by a firm called Employee Fiduciary. This company has been written about by Allan Roth, one of the good guys in the business. He also refers to an article by another good guy, Daniel Solin, calling for 401K reform. Basically, Employee Fiduciary charges low fees and provides good investments. They're not mutually owned like Vanguard, but they're nearly as cheap, and besides, Vanguard won't work with a tiny business like yours.
Employee Fiduciary has very low fees, $500 to start a new plan or for you, $1000 to convert an old plan. You would then pay $1500 a year (plus $30 a year for each employee above and beyond the 30 employees that the $1500 covers) plus 0.08% of assets under management. You wouldn't get the advice you're getting now from your advisor, but as near as I can tell, you can't pay too little for bad advice anyway. You have access to pretty much any investment you desire to put into the plan, including funds from 377 fund families (including Vanguard), all the ETFs on the market, or even a brokerage window run through TD Ameritrade (the same one used by HSA Bank). So all in, it'll cost you $1000 to change plans, then $1500 a year. Beyond that, you'll pay 8 basis points to Employee Fiduciary and less than 20 basis points to Vanguard each year. That's about as cheap as 401K plans get. You can use your current advisor, hire a new one, or not use one at all if you prefer, but any advisory fees you choose to pay will be above and beyond these fees.
Readers, what do you think? Have you reformed your 401K? Have you used Employee Fiduciary? What'd you think? Any other low-cost 401K providers you can recommend? Comment below!
We have a small practice 401k that is top heavy. The tax efficiency more than makes up for what the employees receive in extra profit sharing. We use a fee based accounting firm to do all the paperwork that costs about $1000 a year and NO percent of assets under management. This firm is separate from the local one that does our payroll and taxes. The plan itself is invested at Schwab. We do not pay any advisory fees with Schwab. So our only fees are expense ratios and low cost trading fees, but of course we chose low cost funds and ETFs which we do not trade often. We come out quite a bit better than the example above. It is worth the time to learn enough about finances to either not need an advisor or to at leadt know when they are fleecing you.
I haven’t used it, but when I was looking into my own practice vs joining a group I was interested by 401K offerings at Costco of all places. Costco also provides payroll services and other business offerings.
There 401K offerings are mostly Vanguard and all their funds are composed of index funds I believe. Average expense ration is 0.06-0.50 plus $1.50 a month for employees. Employer pays a variable monthly fee for management based on size of business. (Its offered through MorningStar)
I looked up costco’s startup fees: $375 one time, plus $70-90 a month for most small businesses.
I’ve spoken with Employee Fiduciary, but don’t have a client account there yet. I’ve liked what I’ve heard and read about them. Also check out Paychex, the payrolling company. You don’t have to have your payroll run through them to use their 401(k) administration services. It sounds like Paychex does more “hand holding” than Employee Fiduciary, but I might not have learned everything about EF yet or just had a good Paychex rep.
Those are my current top two third party administrator (TPA) choices.
There are a growing number of us (Independent Registered Investment Advisors) who charge a much smaller % of assets under management than this example used. Do some homework and either go directly to the TPA or hire someone like me who uses low cost index funds and a very low % of assets and no additional set-up costs. If you skip the advisor, be prepared to answer all the questions from your employees. My neighbor (an anesthesiologist) has a co-worker who advises everyone in their office and they cut out the advisor cost. There are some liability issues with that, but nothing that can’t be managed.
I’d love to hear some personal stories about EF if anyone here is using them.
DO NOT USE PAYCHEX. They are a rip-off and have no idea what they are doing. We left a company called Verisight, because of bad customer service, but out of the frying pan and into the fire. We are now “Paychex refugees” and switching to a local company called Primark Benefits. Our fingers are crossed…..
Great post!
I think Vanguard is now actually doing some small plans (new since we changed plans).
—-snip—–
A comprehensive service for 401(k) plans from start-ups to $20 million-plus in assets. The service offers low-cost investments, transparent fees, high-quality recordkeeping, and participant education at a low all-in cost.
—-snip——-
When I looked at it about a year ago (right after we moved plans, unfortunately!), I was disappointed that their small business 401k site was not as nice as the retail VG site (where I have my backdoor Roth IRA). It might be better now.
We changed our 401k plan from a plan where there was “no corporate cost” but the participant fees were absurd (greater than 1 percent for a index 500 fund!).
Our plan is a top heavy plan, so we do a 3% safe harbor match, and now restructured the fees so that the corporation pays every single possible fee we can. (Fees are now around 0.17 for the target date funds where most of the money is invested.)
This means every dollar we defer has more opportunity to grow. Since most of the money is the partners’ money, the partners are happy to pay this as a corporate expense. (This decision that benefits the partners benefits the employees even more!)
We (corporate) pay our recordkeeper 7500 + 0.1% asset fees and the investment advisor 6000 + 0.1% asset fee.)
The funds selected for our plan are modeled after the Federal Thrift Savings plan. The finance people try to encourage you into a higher cost “pre-selected” plan so you don’t have to figure out what funds to include. We decided that if it was good enough for the Feds and all their employees, probably good for us!
I’d love to see some doctor to doctor benchmarking data
We do not go as cheap as I would like since my partners prefer to have an independent advisor as part of our 401k plan. The advisor meets with each of us 4x/yr to go over similar topics that WCI discusses. His views are very similar to WCI, which I appreciate. For the partners that don’t want to DIY, I think the advisor works well, but I wish I wasn’t locked into paying the advisor fees. The advisor fee is 0.4% of 401k assets, but he advises on all the client’s assets, insurance, reviews tax strategy, etc. We use Transamerica for the administrator of the 401k. After adding in fund fees, administrator fees and the advisor fee, the average expense ratio is 1.0-1.5% (depending on which mututal funds are chosen–index vs actively managed).
What an interesting read. Thank you for sharing these information!
One of the practices I recently interviewed at had an 401k plan with an upfront advisor fee (load) of 5.85% for every new transaction. On top of that, the cheapest fund in the bunch had an expense ratio of 0.61% (unless you wanted a money market account with an expense ratio of 0.38%) and ranged up to 1.17%. Yes, that high even with a nearly 6% load.
That’s frankly highway robbery.
Talk about a total waste of tax advantaged space and a drain on their employee’s etirements and savings. I wonder how many of them were even aware this was going on.
Scary CM! I hope you passed on that practice. It seems like a red flag and could be a warning that other parts of the practice are run just as poorly.
Keep in mind, especially for those who are the fiduciary for your plans, you can be held liable for such poor 401(k) plans. If you have any friends at that practice, I think you should alert them to the danger they are playing with.
Fidelity Netbenefits is a process that enables you with an easy-to-use online site. This can help to Fidelity investment members to view and handle their 401(k) retirement accounts. Call now at: 800-900-5867 to get more information.
This one thing cleared many things in my head..Great resource..ookmarked it for future reference
Careful! I noticed a couple references to using a money market as a default investment alternative. This is no longer permitted by the DOL, except for 120 days following an initial enrollment.
Also, although I’m not completely familiar with Employee Fiduciary as a provider, be careful with “do-it-yourself” providers. All articles seem to discuss the fact that employee lawsuits over investment losses are unlikely, but seldom do articles mention the very real risk of substantial fines for non-compliance. I’m not an advisor, nor am I an ERISA attorney, but it may be prudent to hire an ERISA attorney to review your plan for the relatively small one-time cost. I review retirement plans daily, almost exclusively for small businesses, and well greater than 75% of the plans I review have some material non-compliance issue. This would be in line with the DOL’s statistic that 70% of retirement plans audited in 2013 received a penalty for non-compliance. I can also tell you that darn near close to all plan sponsors I meet with grossly underestimate how much their employees pay for the plan. This would also be in line with the GAO’s (Government Accountability Office) study that found almost no plan sponsors that accurately were able to determine complete plan costs. This is because it’s much, much easier to hide fees in a retirement plan than in individual investments.
The 2012 fee disclosure law did little to help with high 401k fees. While it did create some awareness, it also gave a lot of sponsors a sense of false security – sometimes what is on the disclosure isn’t the whole picture. I won’t mention the provider name (to avoid liability, and because it’s common enough that many large providers are doing the same thing), but they’ve found a way to legally avoid disclosing certain fees because they can vary, and they’ve also found a way of disclosing the highest fee charged in a very concealed way. I read these disclosures every day, and the first time I read one from this provider, it took me an hour with a calculator to figure out that they were charging an extra $7,000 than was showing on the fee disclosure.
Back to my original point, the DOL expects you to have full knowledge of ERISA law, and especially after all the bad press retirement plans have gotten, “I didn’t know” is no longer a valid excuse – nor is, “my 401k company told me I was covered”. In fact, the DOL specifically states that you’re responsible for breaches from a service provider, because hiring them was a fiduciary decision in the first place. I actually met with a Dentist whose 401k provider did a “full plan review”, told him his plan looked great, and that all was well. Oops, they forgot to mention that his Fidelity Bond coverage was $70k light. Small offense, and likely one that will never get you fined… unless you’re one of the small businesses the DOL decided to make an example of a few years back by dismantling your plan for it.
Don’t take my post as negative toward low cost or self service providers – that’s not at all my intention, I just want to stress the importance of due diligence when choosing ANY provider. Don’t make an assumption that your provider has you covered, or that they even know the rules, in the case of a small firm. I had to provide a local 401k provider with the 2010 DOL deposit timing guidelines because they swore to me that the 7 day safe harbor was in proposal stage but never passed. Who gets penalized (and that can be a hefty one) when the plan gets dinged? Not the provider – the sponsor.
I own a small medical group and we started our 401k 3 years ago. I started by finding an SRI financial advisory firm (Socially Responsible Investing important to our group). They set up our 401k with Retirement Plan Consultants. Our financial advisers are fee-based. The 401k company (RPC) charges $39 per participant at .65% if assets. We’ve been happy to far and I think the costs are lower than average for a small business. We have a 4% safe harbor match.
While 0.65% might be lower than average, it’s still much more than you need to pay.
That’s not the only cost behind SRI either. It’s fine if you want to invest that way, but understand what it causes you to leave on the table.
https://www.whitecoatinvestor.com/low-fee-socially-responsible-investing-an-oxymoron/
Yes, I read your post on SRI awhile ago, and have Tom’s book (thank you for pointing me that way!). I will say I’m fortunate that many of my worldviews line up with SRI screening principles. I will also say, in my religious worldview, you’re always only serving one master and should invest accordingly. I might get to retire 7.5 years earlier investing in weapons manufacturing companies and Exxon, but how much and for how long I’ll get to enjoy the retirement lies at the mercy of factors other than a mutual funds performance.
I’m also the descendant of Afghans who had to leave their country due to war and married to a descendant of Syrians who’s parents had to recently leave their country due to war. The only winners of these wars are weapons manufactures, I’d easily work an extra 10 years of my life to know I wasn’t profiting off the kind of suffering that some of these companies thrive on.
So, though I understand your point, I’m very happy with the lowest cost SRI investing I can manage…
I am leaving my FA and American Funds, together charge me ER of 1.6% ( 0.75% on FA fee, so I was told, how could the funds EF ratio is incorporate with FA fee ?, anyway, its too high) on my Target date fund.
Shopping for new 401K provider; currently talking to Employee Fiduciary, price is right ($1125/year plus 0.08% AUM fee, this is w/o TPA service), they even provide service to take over ERISA 3(38) responsibility at 0.1% fee. however, their line up platform is kind of limited. It does have some Vanguard index Fund etc, about 15 Funds or so, you can do lazy porfolio so it’s adequate. I and my company max 53K /year in my 401K, so I might need little more choices down the line. Now I am thinking if should go with a company like vanguard which charges $2500 flat fee (w/o TPA, I have my own TPA service) plus 3(38)service fee optional. I figure Vanguard has a lot more options in their platform (this also could be a bad thing for me). Any advice?
I think you’ve already won when those are your choices. The keys are to make sure there are reasonable investing options and pricing as low as you can get. Personally, I wouldn’t let having “only 15 options” bother me. The TSP only has 5 funds plus various combinations of those 5 in the lifecycle funds and I think that’s one of the best 401(k)s in the country. Would I make a little tweak here and there? Sure. But they wouldn’t make a big difference.
Did you ever move forward with Employee Fiduciary? How has it gone these past 5-6 years? (do you recall the annual fees you’re paying now?) Thank you.
I know the orig article is getting long in the tooth, but since it still comes up in search results, it’s worth noting that since the orig post, there are more and more online options which meet ERISA requirements and allows quality investments with low fees. Those savings from lower fees compounded over 20, 30, 40 years can add up to tens of thousands of dollars per employee. Check out companies like Guideline, Betterment, Employee Fiduciary, Ubiquity. Also consider whether you’re looking for 3(21) and or 3(38) fiduciary.
This post was from many years ago. However, any update on the cost-benefit of using vanguard’s small business 401K option? (compared to Employee Fiduciary and others, as I def do not want an AUM fee) – for myself and one employee.
Here are our recommended providers: https://www.whitecoatinvestor.com/retirementaccounts/
This isn’t an area where Vanguard shines due to poor service and cookie cutter options. The good news is that you can relatively easily design a great plan that allows you to invest in Vanguard funds without having to deal with the Vanguard customer service issues. They also want you to go through one of their advisors who…guess what? Charges AUM fees.
Now if you don’t have any employees, I think the Vanguard individual 401(k) is a perfectly good option as long as you’re good with the “cookie cutter” plan and don’t need anything special.
Thanks for the recommended provider link.
Yep, as a membership-based practice, I have whittled my employees down to one (aside from myself), yet am not able to do it all solo just yet 🙂 Thus, the solo 401K option is sadly a bust 🙁