While doing background research for this article, I came across
Los Angeles Times'
Retirement at Risk
series.
Part 3
of the series on teachers is especially sickening.
(Quick summary: teacher unions endorse ripoff annuity pushers
in return for cash.) Moral of the story -- picking the
right vendor can make a huge difference in the performance
of a retirement plan. Of even bigger consequence for employers
are the recent
lawsuits over 401k expenses. Leaving open the possibility of a lawsuit 20 years in the future claiming unnecessary fees has penalized employees millions is a bad business decision -- never mind the hit owners & management would take as 401K participants.
With costs and fund choices forefront in the equation, my company chose Employee Fiduciary to administer our Safe Harbor 401K.
Costs
As of this post, Employee Fiduciary's cost schedule is:
Under our previous 401K plan, the per employee administrative fee was less at $1250/year. However, the employer paid an additional asset fee starting at 0.50% and gradually decreaseing to 0.10% at the 5M total assets. Crunching the simple math, eliminating the employer asset charges pays for the $1000 conversion fee and $750 termination fee in less than a year.
The average fund expense ratio from our previous plan was 0.74%. An additional non-decreasing 0.50% asset charge against employees was added on top. Added together, 1.24% is par for the course when compared to the average 401K plan. However, I'm used to investing directly at Vanguard for 0.25% so that was sore spot with me. Given our current contribution amounts, a 1% reduction in fees could be another million dollars for plan participants after 20 years.
Fund Choices
Employee Fiduciary uses an open architecture for investment choices. This means you can choose almost any mutual fund as long as you meet the fund requirements. From what I can tell, most investor-class fund shares have no minimums for group retirement plans. For example, Vanguard's minimums are usually $3000 for individual investors -- however, I was able to add Vanguard funds to our lineup even though I did not yet have the target dollar amounts for each participant. (I ran into the "almost" with Northern Global Real Estate -- no idea why this plan was not available to us.)
ETFs are also available under Employee Fiduciary's architecture. However, the cost is an annual $500 per ETF offered to manage discrete share issues. Because it is a fixed cost, high plan assets are needed before ETFs become the better choice. Let's use a simple example with Vanguard Large Cap Index:
With costs and fund choices forefront in the equation, my company chose Employee Fiduciary to administer our Safe Harbor 401K.
Costs
As of this post, Employee Fiduciary's cost schedule is:
Type Amount Period Paid By
------------------- ----------------- -------- --------
New Plan Setup $500 One Time Employer
Existing Plan Setup $1000 One Time Employer
Administration Cost $25/employee Annual Employer
$1500 minimum
Asset Charge 0% assets < 1M Annual Employee
0.06% assets > 1M
The 0.06% asset charge is a passthrough fee from MG Trust
which is the entity that actually holds plan money. Since,
Employee Fiduciary is not in control of this fee, there is risk
MG Trust may increase it in the future.
Under our previous 401K plan, the per employee administrative fee was less at $1250/year. However, the employer paid an additional asset fee starting at 0.50% and gradually decreaseing to 0.10% at the 5M total assets. Crunching the simple math, eliminating the employer asset charges pays for the $1000 conversion fee and $750 termination fee in less than a year.
The average fund expense ratio from our previous plan was 0.74%. An additional non-decreasing 0.50% asset charge against employees was added on top. Added together, 1.24% is par for the course when compared to the average 401K plan. However, I'm used to investing directly at Vanguard for 0.25% so that was sore spot with me. Given our current contribution amounts, a 1% reduction in fees could be another million dollars for plan participants after 20 years.
Fund Choices
Employee Fiduciary uses an open architecture for investment choices. This means you can choose almost any mutual fund as long as you meet the fund requirements. From what I can tell, most investor-class fund shares have no minimums for group retirement plans. For example, Vanguard's minimums are usually $3000 for individual investors -- however, I was able to add Vanguard funds to our lineup even though I did not yet have the target dollar amounts for each participant. (I ran into the "almost" with Northern Global Real Estate -- no idea why this plan was not available to us.)
ETFs are also available under Employee Fiduciary's architecture. However, the cost is an annual $500 per ETF offered to manage discrete share issues. Because it is a fixed cost, high plan assets are needed before ETFs become the better choice. Let's use a simple example with Vanguard Large Cap Index:
0.07% Vanguard Large Cap ETF 0.12% Vanguard Large Cap Admiral 0.20% Vanguard Large Cap Investor Investor class to ETF: 500 / (0.20% - 0.07%) = 384K Admiral class to ETF: 500 / (0.12% - 0.07%) = 1MFor more exotic asset classes not offered at Vanguard, the spread may be much less. Let's look at International Real Estate for example:
0.48% iShares S&P World ex-US Property Index 1.07% Fidelity International Real Estate FIREX to WPS: 500 / (1.07% - 0.48%) = 85KCome by next time to read about choosing a fund lineup.
Subscribe
Leave a comment