I am always thrilled when I hear a business owner or a staff member tell me their organization is adding a 401k or Simple IRA as an employee benefit. What I’m not thrilled about is hearing the underlying mutual fund options the employee participants will have access to.
In this brief discussion, I’ll share three ideas to consider before adding such a benefit plan. Incidentally, you are not too late to make a change.
Make Sure This Fund Family Is Included
Several years ago, I was flying to Seattle on business, and my client’s HR Director expressed her excitement about adding American Funds to their fund options inside their new 401k plan. I was not thrilled because I knew that American Funds had annual expenses on many of their funds starting at 1%. That’s not insignificant.
We then discussed Vanguard funds and why their costs are so low on their index fund offerings. I never got the facts, but I’m curious if the broker only offered American Funds because they received higher affiliate fees or commissions from American Funds. I fear that’s the case when small businesses go shopping for a 401k plan.
Without getting overly technical, never buy into a plan that does not offer Vanguard funds. Their costs are negligible. Lower fund costs mean more money employees keep, which compounds over time.
If the sales rep’s plan omits Vanguard, ask him/her about the exclusion. The number you are inquiring about is the fund’s expense ratio. To learn more about expense ratios, you can start here at Investopedia.
Get Help on Reviewing the Plan
If you are a business owner, how are the underlying funds performing compared to others in their peer groups? Are your competitors matching more than what you are doing with your employees? Is your plan dated?
We didn’t go into business to become 401k experts. We started the enterprise because we loved the thrill of creating value and selling it to others.
Accordingly, this next suggestion will be more complex than the other two. Find an independent fiduciary who can monitor the fund and suggest if the plan document needs to be updated. The key term is ‘independent.’ and not someone from whom you acquired your plan. They offer those services, but you are looking for someone who will be objective in their role.
Finding such a resource would be difficult, even in my small town of Columbia, Missouri. Ask your financial advisor and tax CPA for names. That will be a good starting point. After your first meeting with an independent fiduciary, you’ll be better prepared to ask the right questions to the following candidates for this role.
Your Employees Need to Be Investment Lifelong Learners
When I started my career at KPMG in the 1990s, the firm offered a 401k plan. However, there was little, if any, education on how to invest for the future. In subsequent positions, I encountered the same education, which was either lacking in substance or non-existent.
I don’t expect every employee to be a reader, but if I owned a business, I’d give every staff member a copy of Andrew Hallam’s Millionaire Teacher. I’d have my independent fiduciary teach a simple course on this book twice a year, and attendance would be mandatory.
My favorite part of the book is when the author explains how to weight a portfolio and how to recalibrate it annually. He teaches this as though he’s educating a high school student. He also provided fund suggestions in broad categories that I use as a starting point.
This final suggestion may seem optional. I beg you, don’t ignore this last bullet point. You’re not implementing this suggestion for yourself but for the families of those who serve you daily.
The Recap in Checklist Form
My three suggestions are incomplete. This is more venting than educating. I’ve yet to serve a new business where the employees would collectively grade their 401k options and experience as an 8-10 on a ten-point scale. Until you meet with an independent fiduciary, here’s your short checklist:
- Ensure Vanguard is included in your 401k options
- Hire an independent fiduciary to keep an eye on your plan
- Make sure your employees are educated on retirement (and consider giving each employee a copy of Andrew Hallam’s book)
