Should You Buy The Cheapest 401k?
Here at Retirement Planology, we help small to medium-sized businesses make smart decisions on the retirement plans they offer their employees. Of course there are costs associated with running a retirement plan. Many businesses are looking for ways to cut those costs, one of which is to opt for a cheap 401k (or a cheap 401k advisor). But should plan sponsors go that route? Let’s explore.
There’s a saying: You can have it fast, you can have it cheap, you can have it high quality, but you can only pick two. The best way to illustrate this concept is to use an analogy that I’ve used in the past: making a salad.
The Salad Analogy
You are tasked with making a salad for a potluck dinner. What are your options, and how do they differ in terms of cost, work involved, etc.?
Option 1: Your first option is to hit the grocery store, pick up a head of lettuce, carrots, celery, mushrooms, and other salad ingredients, go home, wash/chop everything, and assemble the raw ingredients into a salad.
You’re doing all the work, but you’re saving some money by buying the veggies in their unprepped, natural state. This is the do-it-all-yourself model.
Option 2: Your next option is to get a little help: grab as many pre-cut or assembled ingredients as you can. Pre-washed and chopped lettuce, tomatoes, carrots…you get the idea.
You still assemble the salad yourself, you’ve just reduced some of the work and to do so, you’ve increased the cost – those pre-cut veggies are more expensive. This is the help-me-do-it model.
Option 3: Your final option is to outsource the salad completely by ordering it from your favorite restaurant or catering firm, delivered by DoorDash or UberEats. Done! You just need to review your order when it arrives and make sure it’s correct. You’ve outsourced the workload to someone else, and this option costs the most. This is the done-for-you model.
As we can see, all three models of making a salad have dramatically different costs associated with them and dramatically different services involved. The same goes when these models are applied to retirement plans and advisors:
The do-it-all-yourself model is generally the cheapest out of pocket, but you’re spending a lot of time on it, since, as the name implies, you’re doing it all yourself. You’ll need to be the subject matter expert and make all the decisions for and execute the work.
With the help-me-do-it model, you have a trusted advisor or vendor helping you out, but you still need to know what’s going on, what responsibilities you still retain, and do your part.
As for the done-for-you model, it may cost the most, but the vast majority of the work is being performed by the plan advisor or other providers together. You still retain oversight of the providers.
An Administrative Example
We recently had a client who, at the end of the year, found out that participants ended up with too many matching dollars in their accounts. After examining each payroll, they determined that they had accidentally included the auto-allowance in the first payroll of the month and matched on it even though it was excluded compensation. Automation is both our friend and foe.
This client used the help-me-do-it model, with trusted vendors reviewing and ultimately alerting the plan sponsor of problems.
Had they had used the do-it-all-myself model, it would have been on the plan sponsor to review all the data for accuracy at year-end (yes, on top of all the other year end responsibilities). The providers would have accepted the data as-is. So what does that mean for the plan sponsor down the road if it wasn’t caught? At least two things: wasted money in excess matching, and possible issues with a future plan audit and corrections of who knows how many years.
(You know who loves to have money taken back out of their 401k? Me neither.)
The Downside of Cost-Cutting
So where do you NOT want to cut costs? Not in the advice and guidance area, that’s for sure. You want someone on your side, helping you out with your retirement plan. Cheap 401k providers generally have fewer resources allocated for customer service (for both the plan sponsor and the participants), and while their lower costs may look attractive, it may end up coming back to bite you when you end up having to solve any problems that come up yourself.
That might sound like, “You’ll need to engage an outside provider to calculate the corrections due and also file for the VFCP. We don’t do that.” Or, “You’ll need to resubmit the year end census after you have made any necessary corrections. We will not interpret your plan document.”
You want to have someone you can call who knows what they’re talking about - credentials matter! You don’t just want a general financial advisor. You need someone who specializes in retirement plans, and who can tell you not just what you CAN do, but what you SHOULD do. Discount providers likely won’t be willing or able to help, particularly if there is a knowledge gap.
Cheaper plans typically also offer fewer features and fewer tools for both the plan sponsors and participants. Participants in general need to use these tools in order to determine whether they are on track for retirement. These tools, which include retirement calculators, online planning tools, educational resources, etc., are often given the short end of the stick in cheap retirement plans.
A Note About Notices
There are quite a lot of plan-related notices that need to go out: fee disclosures, QDIA notice, summary annual report…the list goes on. Many low-cost providers just put these notices on the plan sponsor website, leaving you to make sure your employees get and read them. A higher-quality, costlier provider will make sure the notices are sent in a timely manner, either by snail mail or email, as required.
Choosing The Cheapest Advisor
As with 401k providers, opting for a cheap retirement plan advisor may save you some money up front but cause more headaches down the road. You want someone who focuses specifically on retirement plans - they will be the ones with the proper credentials for working with corporate-sponsored retirement plans. I am NOT talking about a CFP (Certified Financial Planner) or CFA (Chartered Financial Analyst). These are not the qualifications or credentials for giving advice on running corporate-sponsored retirement plans!
Retirement plans are covered by ERISA (the Employee Retirement Income Security Act), which is a large, cumbersome law; you need an advisor familiar with ERISA in order to make sure your retirement plan is being run correctly and to the benefit of the plan’s participants. There’s also the DOL (Department of Labor) and the IRS and all their rules and regulations to consider, as well. You need an advisor who will help and knows what to look for to prevent issues down the road. You could DIY it for a time, but at some point you’re going to encounter a new problem that you have no experience with, and end up wishing you had the guidance of an experienced, credentialed retirement plan advisor to help you out.
Cheap advisors also tend to give cookie-cutter advice, not the individualized guidance your organization and plan committee need. Your business is unique, so if you want to optimize your retirement plan strategy, you need to choose an advisor that’s laser-focused on retirement plans and how they fit with your values and business strategy (and will cost a bit more than the cheap advisors who give generic advice). A retirement plan specialist will help you achieve your long-term goals through all the stages of your company’s growth and help you figure out warning signs before problems crop up.
Want lots of support and communication from your advisor? Skip the cheap firms - they’ll most likely offer limited support and infrequent communication. A higher-priced advisor will be more attentive, answer questions in a timely manner, check in with you regularly, and know how to solve any problems. This goes for both plan sponsor support and plan participant support - you tend to get more when you pay more.
Back To Our Original Question
So, should you buy the cheapest 401k? In most cases, no, although there might be a few situations where opting for the cheap alternative might work (although they are few and far between). Do you need a safe harbor, standardized plan in a box because your micro sized organization will likely not grow and does not need profit sharing? Do you just want more control and a higher contribution limit than a SIMPLE IRA or the state IRA plan offers? Are you wearing 6 hats for your very small business but have 401k and investment knowledge? In those cases, you might be able to get away with using the cheapest 401k.
Should you hire the cheapest plan advisor to help you? That’s a definite no.
If you’re working with a cheap advisor who just isn't providing the service and support you need, reach out to us! While you will probably pay a bit more for our services, you’ll finally have someone on your side who can help you through the retirement plan maze. Then again, we see a lot of high fee and low service advisors out there neglecting plans, so it’s possible you’ll get more for what you already pay.