Small Business 401k (American Funds)

[JWeb]

My wife and a partner own a small business (with only one other employee). They recently started a 401k with American Funds. Her 401k is scattered through out the various American Funds you see below (ticker, name, fund breakdown, ER). There are no other options for her other than American Funds. This is quite frustrating for us as the ER is around 1 for all of them. Also, she is 33 so the fact that around 6-7% of her account is in "cash" is not ideal. And that cash is losing 1% per year due to the ER.  Putting these funds in the morningstar xray also do not provide much analysis which is quite annoying.

Does anyone know of a company that offers index funds via a 401k for a small business? Vanguard costs $3600 per year. Fidelity doesn't do small business 401ks.  The American Funds 401k is "free" yearly, but of course have the high ER.

Thanks

RGACX	AF GFA 82 US/12Intl/7Cash	0.98
RFNCX	Fund Investors 82 US/12Intl/6Cash	0.96
RNPCX	New Persp 49 US/43 Intl/8Cash	1.11
RIDCX	Income F 55 US/18Intl/22Bond/5C	0.92
RLBCX	Balanced 54 US/5Intl/34 Bonds/6 Cash	0.94
RICCX	Investment 81 US/12Intl/8Cash	0.95
RBFCX	Bond 94 Bonds/6Cash	0.91

[litovskyassetmanagement]

It takes multiple providers to get you the best low cost index funds.  First, you need a good Third Party Administrator for plan design and compliance.  Next, an ERISA 3(38) fiduciary can provide plan level advice (as well as advice to the plan sponsors), and through the right record-keeper you can get access to all of the best funds available (including Vanguard and DFA).  In addition, your plan adviser can build portfolios for participants (which makes investing a lot simpler).

Vanguard provides only the record-keeper, their TPA services are not adequate for custom-designed plans that are typically utilized by doctors and dentists (and other high earning professionals).  And they don't provide any fiduciary oversight for your plan, so in fact they are simply a record-keeper.

If you leave American funds you will most likely have to also dump their record-keeper (because they only provide American funds) and also potentially the TPA (unless you have a standalone TPA not working for American Funds whom you like).

So you basically would need to get a new plan at that point. Here's some reading on what really matters for a small practice plan:

http://www.dentaltown.com/blog/post/579/how-to-run-a-successful-retirement-plan-a-guide-for-medical-and-dental-practices

http://www.dentaltown.com/blog/post/3376/small-practice-retirement-plans-how-they-are-different

The #1 goal is to have the best TPA/ERISA 3(38) fiduciary that are compensated with a fixed/flat fee (not AUM fee).  Low cost open-architecture record-keepers are available, just don't expect them to do anything beyond record-keeping.  A TPA has to be hired directly to work for you so that you don't have to dump the TPA when you change plan providers.  Also, an open architecture platform is the best, so that you can replace the TPA but keep the record-keeper without any trouble (or vice versa).

There is significantly more to retirement plans than just investments.  Compliance is a much overlooked topic, and even though you have a small plan, it still has to comply with ERISA, and with IRS/DOL guidelines.  This is where most plans get penalized by the government by the way, and fees are the last reason that happens - it is primarily via administrative/compliance oversight.

The great thing is that you can have everything for a fixed/flat fee - there is no need to pay asset-based fees from your plan's assets.

 

[scott]

I was with American Funds briefly, but switched for a multitude of reasons. I transferred my 401K to America's Best 401K. I believe their website is www.ab401k.com. Talk with Tom Zgainer - he is very knowledgeable on what your options will be. Their platform is all varguard funds. Good luck.

[litovskyassetmanagement]

scott wrote:

I was with American Funds briefly, but switched for a multitude of reasons. I transferred my 401K to America’s Best 401K. I believe their website is http://www.ab401k.com. Talk with Tom Zgainer – he is very knowledgeable on what your options will be. Their platform is all varguard funds. Good luck.

Click to expand...

There are many bundled platforms out there, and this is just one of them.  They make their money primarily via cookie-cutter one size fits all services and asset based fees which are quite significant. Once the sales process is over, you are pretty much on your own working with a large record-keeper (and not the best one by any stretch). You can get a plan for significantly lower cost than charged by ABK.  The problem with bundled platforms in general is that they

1) Do not have a TPA who works for you.  This is something you will find out very quickly - you don't have access to their TPAs and you will never know whether your plan design is optimal. That alone can cost you significant money by having too much employer contribution.

2) Despite having 'an ERISA 3(38) fiduciary', all such platforms do not have an independent fiduciary who works for you that you can ask for advice (or who can provide proactive advice) on your specific situation.  They are just a part of the bundle, and not of much use to you personally.  There are just too many things that a small practice plan requires, including proper salary setting, help with using your plan effectively, such as doing backdoor Roth or asset consolidation, and lots of advice on fiduciary and investment matters.  For one thing, having someone explain the investment strategy is also a big plus because you won't get that with bundled plans.

3) Are not taking care of your compliance and fiduciary issues. They are also not going to be analyzing your plan with a fine tooth comb to make sure that you are following all of the rules.  They simply do not have the staff for that.

When you go to such a platform, they will sell you a plan but they will never provide advice to you as fiduciaries.  That's why I recommend using open-architecture providers, starting with your own TPA and fiduciary adviser.  A record-keeper is secondary, but there are much better ones available than used by the bundled platforms.

As far as fees, our fees are significantly lower because they are fixed/flat, which can be demonstrated with this calculator:

retirementplanhub.com/retirement-plan-cost-calculator/

And in general, you can find fixed/flat fee providers who work exclusively for you, and that alone would save you significant money over the long term because fixed fees nearly always beat asset-based ones in this case.  While bundled platforms might be convenient, 401k plans for practices with employees have many moving parts, so you want to hire the best providers to take care of your plan cost-effectively.

[JWeb]

Thanks a lot for all of the info. This is certainly a lot more complicated than I would like it to be. . .

[litovskyassetmanagement]

JWeb wrote:

Thanks a lot for all of the info. This is certainly a lot more complicated than I would like it to be. . .

Click to expand...

How I wish it wasn't so.  My entire business grew out of exactly the same frustration - how can one get the best retirement plan for a business cost-effectively, and where to find this magic provider.  The only solution I found was that there was no solution that works for everyone, and that it is much more cost-effective to build your own plan from various components than it is to buy it all in one package.  The packages turn out to either be too costly, too one size fits all, or simply 'barebones' without the necessary components to make the plan work best.  So that's why I do not want to 'package' anything, though that's definitely what's out there.  Lots of 'packages' that try to get as many clients quickly as possible, but without providing enough support for more complex situations.  Those with simple safe harbor plans might find the existing platforms adequate, but I only work with those who have complex plan needs, so I'm speaking from my experience working with such plans (which often started out at a large record-keeper, but quickly found out that these are not good at building and managing complex plans, or their cost is sky high for small plans because they don't have enough assets).