Forget Fees – it’s all about Plan Design for Small Business Retirement Plans

As a financial advisor to small business owners and their families I spend a lot of time consulting on retirement plan design, implementation, education, compliance and monitoring.  With the new DOL rule (or not so new for some of us who have been fiduciaries for a while) the entire focus has been on fees paid by employers and employees for their retirement plan platform.  While this is important, and something that we focus on, it shouldn’t be the entire reason for picking a platform for your company or quite frankly picking your advisor.  I will go over my criteria for picking a platform in another blog post but what do I think is the most important piece to help with overall costs in the small business market? Having the correct plan design for your retirement plan.

First, let’s define what I consider the small business market.  My definition is a company with less than 150 employees.  You can have one or multiple owners.  Revenue is not relevant to the plan design conversation except that you need excess revenue to fund items like employer contributions.

There are usually 3 pieces to any small business retirement plan – the record keeper, the advisor, and the plan administrator.  The record keeper is the entity that holds the plan assets, has the investments to choose from, create the statements, and for the good ones – have employee education materials.  The advisor is the person who helps pick the record keeper, the investments on the platform, does enrollments and employee education and helps the employer keep the plan in compliance.  The plan administrator’s main jobs are to create and update the plan documents, help develop the best plan design, track employee values, do the discrimination testing and completing the annual tax fillings.

Solutions for this market are usually offered in two different service models: bundled and unbundled.

Bundled Solution

This is where the record keeper not only does their job but will incorporate the administration piece into their service model.  They often claim to perform the administration functions for free or at a reduced rate.  To a lot of small business owners this sounds like a great idea.  They have less people to deal with and they get something for nothing or for very little.  The devil, as always, is in the details.  First, the plan design tends to be cookie cutter, antiquated or both.  This results in a plan design that isn’t efficient or customized and as a result, costs the employer MORE in contributions than the actual savings of combining the two.  In addition, cookie cutter plan design doesn’t allow for rewarding your best employees or the business owner themselves with additional contributions without having to contribute equally for everyone.  Bundled can be a good deal, but it’s mostly useful for companies with a lot of employees (200 or more), where it makes sense to keep the plan very simple or where the employer is never going to make profit sharing contributions.

Unbundled Solution.

Like the name suggests, unbundled retirement plans separate out the functions of record keeping and administration.  The administration piece is done by a Third Party Administrator (TPA for short).  The benefits of having a third party administrator are all the things that having a bundled solution tend not to provide.  First is customized plan design to meet the goals of the business owner.  Is it to maximize their own contributions?  Is it to take care of key employees?  Is it to encourage participation?  Second is to keep up with new strategies and be proactive in introducing them to said business owner.  Third is to work with the business owners other professionals (financial advisors, CPAs) to potentially create additional retirement plans, like cash balance, that only work well when the 401k plan design is on point.

Here’s a personal example – a local TPA and I met with a medical practice that had 3 partner doctors and 25 employees.  They were with a bundled cookie cutter plan with a well-known record keeper.  They were getting hammered with bad plan design and a record keeper who’s fees were in excess of 1.7% (which is high for the amount of plan assets).  The TPA was able to redesign the plan to save them close to $12,000 in employer contributions.  We were then able to leverage those savings by putting the additional funds into another retirement plan (in this case a Cash Balance plan) for the employees.  This allowed the Doctors to each put another $75,000 away pre-tax for their retirement over and above the $59k they each put into the 401k!  We then found an investment platform that brought the cost down well below 1%.

Again, with the focus on fees and not total cost or value derived, small business owners might be saving money in one pocket to spend more in another.

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