Small Companies Can Offer Big-time Benefits
Web-based 401(k) platforms offer lower fees, less paper and better plans.

by Keith Heil, CPA/PFS

Administration of 401(k) retirement plans can be cost-prohibitive for the typical small business. Until recently, most insurance brokerage and mutual fund companies wouldn’t pursue plans containing less than $2 million in assets.

In an August 2001 “Financial Planning” article, Dennis Ceru, director of online brokerage practice at the Tower Group research firm, stated that 85 percent of businesses with more than 100 employees offered some form of a retirement plan, but only 15 percent of companies with fewer than 100 employees offered similar benefits.

Fortunately, there are now Web-based platforms that can reduce administrative costs, so that even small companies can access high-quality 401(k) plans. Small business 401(k)s now can receive:
•    Easy enrollment and access to reports that are updated daily,
•    Tools for participants to change their asset allocations and rebalance their portfolios,
•    “Pre-fabricated” lifestyle investment portfolios that simplify the enrollment process while allowing participants to accurately reflect their personal risk tolerances,
•    Thorough, easy-to-follow investment and retirement education,
•    Plan sponsor tools that minimize data entry and simplify in-house administration, and
•    Proper compliance testing and reporting.

With such features and competitive fees, many more small firms are selecting Web-based platforms. It is important, however, for plan sponsors to be informed before establishing such programs.

The Bottom Line
The plan sponsor’s first concern should be offering high-quality, prudently diversified investment options. Of course, affordability plays a significant role but should be secondary to selecting a plan in which participants can invest part or all of their life savings with confidence.

The Value of Education
Investment education is another major concern. Employers have a fiduciary responsibility to provide some form of investment education. Online education helps meet that fiduciary responsibility. Web-based 401(k) platforms can offer very useful online educational materials and guidance. However, that may not be enough. It’s important that the Internet not entirely replace on-site employee seminars.

Administrative Costs
Many 401(k) providers offer what appears to be low-cost administration and compliance testing services. For example, plans exist that offer annual fees to the plan sponsor as low as $600. The problem is that $600 does not begin to cover actual costs. The remaining costs end up being paid by the plan participants in the form of fees buried inside the mutual funds in which they invest. A typical internal mutual fund expense is  1.5-2.5 percent. However, in some funds additional fees as high as 0.8 percent or more are built into special shares offered only in the 401(k) plans. These fees to cover administrative costs are somewhat hidden, but nonetheless very real.

What is a reasonable price for the service? How much should it cost the employer/plan sponsor and how much should it cost the employee/plan participant? If the combined costs are more than 3 percent of the plan’s assets per annum, the plan’s mutual funds will need to achieve exceptional performance to come close to achieving “market rates of return.”

Who Should Pay?
The employer typically has the option to cover most of the costs or to pass those costs on to the plan participants. In small businesses, the owners are likely also participants, so their assets often represent a major portion of the plan. In these cases, it may be to the employer’s advantage to cover a majority of the costs as the plan sponsor, deducting them as a business expense rather than paying for them out of their own tax-sheltered retirement funds as a plan participant.

A typical plan with 20 participants should have annual costs ranging from $1,700 to $3,000, and an annual basis point charge of 1.4-1.8 percent. These costs should include everything: mutual fund expenses, record keeping, compliance testing, IRS forms, investment advisor fee and participant education.

Players In The Industry
Now that the Internet has opened doors to a more affordable small business 401(k) market, mutual fund and insurance companies are recognizing the new opportunities it presents. Even so, smaller companies logically have smaller plan balances, and therefore may ultimately pay relatively higher fees. And, 401(k) providers generate most of their revenue from larger plans and so may not offer the same degree of hands-on service to their smaller clients. For this reason, plan sponsors may want to consider smaller, but reputable, investment advisor firms that are aligned with a Web-based 401(k) platform.

By considering Web-based retirement plans, small-business owners stand the greatest chance of combining low cost with an acceptably wide range of appropriate products and services.

Keith Heil, CPA/PFS, is a certified public accountant and investment advisor with Cornerstone Wealth Advisors, LLC. Keith can be reached at 913-381-0280 or by email at