What 401(k) Provider Should I Use?
Choosing the Right Retirement Plan Provider
Many employers consider 401(k) plans a popular retirement plan option. However, with so many 401(k) providers available, it can take time to determine which one best fits your needs. This article will discuss several key factors when choosing a 401(k) provider.
Why is Choosing the Right Provider Important?
A 401(k) plan is a type of employer-sponsored retirement plan. These plans allow employees to contribute part of their salary to save for retirement. The contributions are typically tax-deferred, meaning they are not taxed until withdrawn during retirement. Employers may also offer a matching contribution, significantly boosting an employee's retirement savings.
Choosing the right provider is crucial because it can impact the performance and fees of your retirement savings. A good 401(k) provider will offer various investment options, low fees, and excellent customer service. A poor 401(k) provider may have limited investment options, high fees, and poor customer service, which can hinder your retirement savings.
Utilizing the help of a seasoned 401(k) advisor can help you manage the process and find a recordkeeper that meets your unique needs. A knowledgeable wealth management advisor can compare multiple retirement plan providers, benchmark fees and services, and help you implement the new plan. Financial advisors acting in a 3(38) fiduciary capacity can also manage your investment lineup.
Investment Options
One critical factor when choosing a 401(k) provider is their investment options. A good provider will offer diverse investment alternatives. Providers with an open architecture investment platform will allow the most selection to create an investment lineup. You must ensure there are enough options for diversification but not so many that it becomes difficult to choose the right one.
An adequate selection of investments across multiple asset classes allows employers and wealth advisors to build a fund lineup with a diverse selection. This can help employees create a well-diversified portfolio that aligns with their risk tolerance, time horizon, and retirement goals.
On the other hand, a poor 401(k) provider may have limited investment options, which can limit an employee's ability to create a well-diversified portfolio. This can result in lower returns and hinder an employee's retirement savings.
It is essential to have a Qualified Default Investment Alternative (QDIA) to help reduce the risk of fiduciary liability to you as the plan sponsor.
Fees
Fees are another crucial factor when choosing a 401(k) provider. These fees include administrative, investment, and individual service fees. A good provider may have low fees, which can significantly impact an employee's retirement savings. However, retirement plan providers should not be chosen based on fees alone.
A poor 401(k) provider may have high fees for the services rendered, which can eat into an employee's retirement savings. It is essential to carefully review the fees of each 401(k) provider to ensure you are getting the best value for your money.
Many providers have proprietary investments. This means the funds are produced and managed by the retirement plan provider. Because the retirement plan provider is getting paid through the funds and the recordkeeping fees, they may provide a discount for using proprietor funds.
It's important to remember that when a recordkeeper utilizes proprietary funds and provide a discount for this, they may remove the discount if you change funds. If you or the 401(k) advisor deems the funds to no longer meet the needs of the retirement plan participants, plan fees can go up when you change the funds.
Customer Service
Having access to excellent customer service is crucial. A good 401(k) provider will have a dedicated customer service team. This will help with any questions or concerns regarding your retirement plan. This can be particularly helpful when employees don't have a strong understanding of retirement plans.
On the other hand, a poor 401(k) provider may have limited customer service options, making it challenging to get assistance when needed. This can lead to frustration and hinder employees' ability to manage their retirement savings effectively.
Some providers have limited access to a call center or may have one outside the United States. Knowing if the provider has many clients assigned to each servicing representative is essential. This can cause long hold times and leave participants frustrated.
Payroll Integration
180-degree payroll integration partially integrates the retirement plan and the employer's payroll system. This integration typically involves transmitting basic employee data, such as hours worked and compensation, from the payroll system to the 401(k) plan administrator. While this approach streamlines some aspects of plan administration, it may not capture the full spectrum of information needed for comprehensive recordkeeping.
360-degree payroll integration takes a more holistic approach by integrating all relevant payroll data into the 401(k) plan. This includes basic employee information and details like bonuses, commissions, and other compensation-related variables. The aim is to create a comprehensive and accurate record within the retirement plan, minimizing the risk of discrepancies.
When you are evaluating recordkeeping providers, remember to keep payroll integration in mind. If you neglect to consider payroll integration in your overall evaluation of recordkeeping options, you may be stuck with manual processing of the payroll data. This can be incredibly cumbersome when you have auto-enrollment, auto-escalation, or a significant turnover.
How to Choose the Right 401(k) Provider
It is easy to be enticed by a provider simply by the price or fancy bells and whistles. But your duty as a plan fiduciary is to look out for the needs of the plan participants and their beneficiaries.
Assess Your Needs
The first step in choosing the right 401(k) provider is to assess your needs. Consider your company's goals, payroll system, budget, and investment needs. This will help you determine which 401(k) provider offers options that best meet your needs.
A skilled financial advisor specializing in retirement plans can help you assess your needs. This is especially helpful because they may be able to find blind spots. They can bring their experience to the table and help you see what is in the market and what has worked for other clients. They can also help you see past provider sales tactics and give you their perspective on working with specific providers.
Compare Fees
Next, compare the fees of each 401(k) provider. Look for providers with fees matching the value and service they provide. Fees can significantly impact the retirement savings of participants over time. Be sure to consider all fees, including administrative, investment, and individual service fees.
A great way to do this is to request proposals from multiple providers. A skilled financial advisor can request proposals on your behalf and analyze them for you. They can review fees side by side with you and show you the give and take of each option.
It is best practice to benchmark fees and services periodically. Even though a provider may have been an excellent choice years ago, it doesn't mean it will be the best choice perpetually. As your 401(k) plan grows, other providers may be more competitive for your situation.
Research Customer Service
Research the customer service of each 401(k) provider. Look for retirement plan providers with a dedicated customer service team. This setup can assist participants with any questions or concerns regarding their account. This can be especially helpful for your employees who may not have a strong understanding of retirement plans.
Review Cyber Security
In this day and age, hearing about data breaches and cyber security issues is common. The last thing you want to hear is that an employee has lost their retirement savings due to the lackluster security of a provider. Knowing what security protocols are in place to protect employees' sensitive information is essential.
Does the provider provide SOC 1 or SOC 2 reports? Have there been recent data breaches? Does the provider utilize two-factor authentication? Who is responsible for potential losses in the case of a security breach and theft of participant funds?
Financial Wellness
Some 401(k) recordkeepers provide excellent tools to help employees become more financially literate. They may provide training, financial aggregation tools, or personalized advice. These tools can help your employees be better prepared for retirement.
Be aware that not all financial wellness programs are free. Some providers will charge for additional advice, contact participants to upsell them on other financial services, or invoice the company for education sessions.
Plan Administative Assistance
As a plan fiduciary, there are many responsibilities. Some providers will help you streamline the process and assist you in carrying out these duties. For example, some providers may send out notices for you or help you process distributions.
Never assume specific services are included. Make sure you ask about which services are part of the package.
Conclusion
Choosing the right 401(k) provider is crucial for retirement planning. Consider each provider's investment options, fees, and customer service to determine which is the best fit for your needs. Be sure to assess your needs and compare fees before deciding.
There are a lot of financial products to choose from. A skilled 401(k) advisor can help you find your company's right 401(k). But more importantly, the right financial professional will be able to assist you long after you have chosen the right provider.