What Does an “A” 401(k) Service Provider Look Like?
posted by Fisher 401(k) September 5, 2017
Recently, Fisher Investments 401(k) Solutions conducted a 401(k) survey of 5,000 small businesses. As part of this survey, we asked those small businesses to grade their 401(k) providers and tell us what aspects of their relationship were most important to them. What does it take for a 401(k) service provider to get an “A” rating? What separated those top-performers from the rest, and how do you know if you’re getting the best service you can for the fees you pay?
Let’s take a look at the most important qualities of 401(k) service providers with the highest grades, according to business owners and HR managers.
Fair and Transparent Fees
Within any 401(k) plan, there are a number of different fees paid by both the employer managing a plan and by the employees participating in it. Of equal importance to business owners is that they understand the fees they pay, and also that they’re receiving the right amount of value for their money. That transparency goes a long way toward helping business owners and executives benchmark the level of service they’re receiving and the fees they’re paying against the fees charged by other providers who may offer a similar level of service.
There are four different types of 401(k) fees to consider:
- Investment Fees: These fees cover the operating expenses of the different funds utilized within a 401(k) plan. The funds chosen for your plan’s lineup may have different fees like the expense ratio, which covers the management of the fund.
- Administrative Fees: Each service provider will make use of several partners in the running of your plan. Administrative fees pay for the services of people like recordkeepers, third party administrators, or auditors.
- Fiduciary & Consulting Fees: These are the fees that cover the services you may receive from your provider beyond the most basic implementation and administration of a plan. These fees cover the cost of fund lineup management, of any investment advice you receive, fiduciary support (more on that later), and also participant enrollment and education.
- Revenue Sharing: Many mutual funds have fees, like 12(b)1 fees, which specifically cover marketing and distribution of the funds.
The best 401(k) providers will have transparent fees with an appropriate level of service for the cost.
Reliable Investment Support
Another element of top-tier service mentioned in our survey is the quality of investment support a provider can offer. Many small businesses rely upon their providers to not only help them understand their investment options, but to also give employees plenty of options to invest in a style that matches their retirement goals and their investing experience.
Top providers will set and monitor an appropriate range of investment options, including choices like QDIAs, age based solutions, managed accounts, mutual fund lineups, model portfolios, and self-directed brokerage accounts.
One of the most reliable indicators of the quality of a 401(k) provider’s investment support is whether or not they will act as a fiduciary. When a provider takes on fiduciary responsibility, that means they agree to share legal liability with you, the employer, to make decisions (including those about investment options) that are in the best interests of the employees who participate in your plan.
There are different types of advisers that take on different levels of fiduciary risk. Some, known as 3(38) Investment Managers, will take on your responsibility and liability for managing the investment lineup in your plan. Others, called 3(21) Investment Advisers, act as co-fiduciaries and share some of your legal responsibility while recommending investment options for your plan, but not managing them directly. Finally, there are other financial advisers who are allowed to provide education, but are not fiduciaries and therefore cannot offer recommendations or advice regarding 401(k) investments.
In addition to investment solutions for all types of investors, the highest-graded 401(k) service providers offer a wide range of other service options to help employers administer their plans and help employees to make the most of them. According to our survey results, these are the premium services most important to small businesses:
- Customized Options: Top providers won’t just sell an out-of-the-box 401(k) plan to every client. Instead, they will offer tailor custom 401(k) plan services and educational resources to your needs.
- Educational Support: The best service providers take an active role in educating employees to help them understand their finances, set their retirement goals, and plot the steps they should be taking to make the most of their retirement plans. Look for a provider that has online tools and calculators, and ongoing investment education in the form of webinars, seminars, and even on-site, one-on-one support.
- Simplified Administration: The best-rated providers do everything they can to make plan administration as simple and stress-free as possible for employers. This often comes down to communication, and to how a provider chooses to service an account. Indicators of grade “A” status are dedicated service teams assigned to your business, a relationship manager who is not responsible for meeting any sales quotas, and in-person review meetings on a quarterly, semi-annual, or annual basis.
Finding the Best 401(k) Provider for Your Business
Many providers excel in one of these important areas, but the top-rated providers tend to offer transparent fees (and a level of service that aligns with those fees), trustworthy investment help, and premium service options to help employer and employee alike make the most of their 401(k) plan. According to the results of our survey, most small businesses conduct a service review of their chosen 401(k) provider every one to two years. If you haven’t reviewed your current provider recently, think about these qualities of top providers and review not only your fees, but also the level of service you are currently receiving. Then ask yourself: What grade would I give my provider?