Not long ago, I received an email from a company I had met with years ago. When we first crossed paths, they were a small company, but they were doing quite well and growing quickly. They weren’t interested in a 401(k) plan at the time, but they’ve since grown and have been shopping around for a plan with their financial adviser. In their email, they asked for a second opinion on the quotes they’d received from three different providers: a mutual fund company, an insurance firm, and a payroll firm.
Let’s take a look at the three mistakes they made in their evaluations, why those mistakes can cause problems, and what you can do to make sure you’re making well-informed decisions when it comes to 401(k).
First Mistake: Not Reading the Fine Print
When I dug into the proposal prepared by the mutual fund company, I found a table that summarized the fees associated with their plan. One component of their fees is the “average expense ratio,” listed as 0.38%, which reflects the annual fees charged by the funds. Now, I noticed a footnote mark on the word “ratio” and dug into the footnote, which revealed that the actual ratios paid by their clients ranged anywhere from 0.27% to 2.85%. That’s up to seven times the amount shown in the table!
The lesson here is that you can’t always take everything in a 401(k) proposal at face value. You need to read the fine print and make sure you understand all of the potential variables and cost ranges. Some providers won’t provide those specific details until you sign up and receive a welcome packet. Make sure you demand any and all documentation of potential fees up front. Ask for the fine print, welcome the fine print, and make sure you read it.
Second Mistake: Not Evaluating the Adviser
When I returned to the adviser’s summary of all three proposals, I was surprised to find that in his cost comparisons, he kept the mutual fund’s average expense ratio as 0.38%, despite what I found in the fine print. This tells me that the adviser isn’t very familiar with 401(k), which means small but important details like this were likely to fall through the cracks.
Most of the time when something goes wrong for an employer when choosing a new 401(k) plan, it’s because the adviser helping them with that task isn’t really a 401(k) specialist. 401(k) plans are complicated and service offerings differ greatly from provider to provider, with lots of considerations and details that can be easily overlooked. Ask your adviser how many 401(k) plans he or she has under their management. In my experience, only a small percentage of advisers have more than 10 plans, and it’s hard to believe any adviser who is managing less than 10 plans is experienced and knowledgeable about the industry. Before you even take a look at the details of one plan provider or another, be absolutely sure that your adviser is experienced in 401(k) and won’t miss the fine print.
Third Mistake: Not Thinking Holistically About All Factors
Even if this company’s adviser had accurately reported the potential costs of the mutual fund option, his summary only referenced price. Of course, if all three proposals were identical other than cost, it would be smartest to pick the cheapest one. But they weren’t. The three providers in this case were very different kinds of companies who structure their platforms in different ways. Some may offer certain services or perks that others won’t, and that can make all the difference.
After all, the purpose of the 401(k) is to help people retire. You and your adviser should be looking to see that your provider offers resources to educate and empower people to reach their retirement goals. Ask how the providers will engage employees in retirement planning. Review the providers’ track records for helping people successfully reach retirement. Finally, make sure your adviser reports on potential conflicts of interest with each potential 401(k) provider and their investment solutions. In the summary I saw, there wasn’t anything about education, success rates, or conflicts of interest. All of those factors are just as important as price, if not more so.
I’ve developed my R.E.T.I.R.E.SM framework with this in mind as a comprehensive, structured methodology for evaluating 401(k) providers and their solutions. Start there, be thorough in your review of your options, and remember: this is about more than finding a good price. It’s about giving your employees a secure financial future, and that’s absolutely worth the effort.