It is a fairly safe assumption that big means cumbersome. We often don’t think of large objects as nimble and marvel at them when they are. When it comes to 401(k) plans however, the smaller the plan the greater the issues facing it. Consider a plan like the one IBM offers. They have four tiers of investments for every level of participant expertise. A plan with as many options as this plan offers might seem as though it would be extremely difficult to navigate the problems that often plague 401(k) plans (compliance and management, fees and overseeing the fiduciary responsibilities). Turns out it is quite the opposite.
In many instances, it is the largest plans that have the most people dedicated to making sure that the liabilities that could occur in these plans, do not. That leaves most smaller plans suspect and your retirement dollars in trouble. Let’s break it down in simple terms.
Who’s in Charge?
The larger the firm the greater the chances you will have someone who is dedicated to the plan. They may actually be a retirement specialist, even an attorney who is well versed in ERISA law and compliance. A smaller company will have a greater likelihood of delegating the responsibility to their HR department. The difference in execution can be vast. The larger firm who has experienced people understand the need to review what the plan provider is doing on a regular basis, ensure that the plan is in compliance and the offerings in the plan are suitable for the workforce that use them.
The smaller plan may have too direct a link to the owners of the company. Not that a relationship with the owner has its problems with intimacy, but simply handing down the plan to a staff that might not be as knowledgeable as they should be but versed in the costs of running the business makes for bad bedfellows.
These plans can come with some big problems if this group does two things: relies on the plan provider to check itself for accuracy and execution and believe that they can shave a few pennies off the bottom line. This is not the place to do either of these and failure to do what the plan should can cost the business a great deal more than it would have cost had they done it right in the first place.
You might think that, at least on an economic scale, that if you get everything as package, you will save money. In 401(k) plans, this isn’t necessarily the case. When a large firm goes shopping for a plan provider, it knows who its employees are and is concerned with keeping the best for as long as possible. Statistics have proven that the better educated you might be, the greater the use of the plan. Larger companies have a much greater stake in keeping employees using their benefits than do smaller firms. Smaller firms generally try to retain employees through potential.
But when they shop, the don’t go directly to the plan provider as smaller companies do. They enlist the help of a third party administrator or TPA. Yes this adds a layer of costs to the plan but this group also adds an indispensable layer of protection.
With less emphasis on the plan itself, and looking for ways to maximize limited cash resources, smaller firms will often look for bundled type plans. These are bought direct or through an insurance company. And although the emphasize that the products they offer don’t come with the fiduciary responsibility that these plans must have, most small employers and the departments they assigned the plan to, assume they do.
The “Get What You Paid For” Advisor
Small companies, as I mentioned more than once so far, look to cut costs wherever they can. Its understandable. But efficiencies have their limits and those limits can have negative effects in the 401(k). True, they need to manage the costs of the plan so as to make it more attractive to their employees. And true, free seems like a good price. The belief that they can eliminate some fo the costs by not hiring a plan administrator often finds them paying more in fees for the plan that they would have had they simply spent the money in the first place.
Financial advisors need to have experience. If they do not or only have a few plans under their supervision, this is a red flag. In all likelihood, this will lead to compliance problems for the participants, particularly the highest paid employees who tend to use these plans the most.
Why Do I Tell You This?
If you are working at a company with less than 100 employees, the chances are excellent that your boss has failed to do everything she/he could have done to protect the plan and its assets. All you have to do is ask. Ask if there is a third party administrator in place. Ask if there is a financial advisor looking after the investments and is not affiliated with the TPA. Ask if there is attorney involved who is versed in compliance and auditing. these three resources, while on the surface might seem to cost more than they might be worth, act as a system of checks and balances. Call them the product testing team.
If your plan does not have these entities in place, there is a good chance that once the company begins to grow, the plan will begin costing more in the way of employee retention and fees that should have been reduced as the plan grew.
Most folks do not usually think about their 401(k) plan when they look for a job. And once they get it, they often fail to realize some of these problems which could be shaving off potential earnings from the plan. A surprising amount of people don’t even know what or when their vesting in the plan takes place and the smaller the company, the less likely anyone will be able to explain these issues.
Yes, small business is the engine of opportunity in the country and when they grow, all boats rise so to speak. But unless the ship is seaworthy, your “vested” interest in the business could be costing you more than you think.