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Small-business owners and their employees have significant work to do to achieve retirement readiness. Less than 20 percent of working Americans are contributing enough to their retirement plans to maintain their standards of living and retire at age 65. A recent BizSense article highlighting the top-ranking 401(k) plans in the Richmond area offers important lessons for small and midsized employers who want to make the most of their retirement plan.
Large Richmond companies mentioned in this study, such as Altria or Hunton and Williams, LLP, have a tremendous asset base of more than $50 million in their 401(k) plan. And as expected, there is fierce pricing competition for these plans, keeping the fees very low, often less than 0.5 percent. Fees in a small plan can eat up as much as 3 percent annually and are typically hidden to the untrained eye. To get the most out of their retirement savings, owners and officers of small plans must become their own advocates.
Plans with assets between $1 million and $5 million should strive to keep their total expenses below 1.25 percent of assets. Larger plans can aim to keep total costs below 1 percent. Every extra percentage point in fees that you pay over these benchmarks will cut a career of retirement savings by 33 percent. Unnecessary fees alone can reduce your $1 million savings goal to $666,666.
Start-up plans and small plans below $500,000 typically find it cost effective to go with a bundled service approach, in which investments, record keeping, education and third-party administration (TPA) tax filing are all included. Larger plans should consider the cost savings available through an unbundled approach. Bundled plans often limit your investment menu to preselected options, which often have higher fees than are available elsewhere.
Best-in-class retirement plans also consider behavioral economics. Studies indicate that people are prone to illogical behavior that can be detrimental to financial health. For example, many employees never sign up for a retirement plan that offers free matching money. To compensate, many large employers have added an auto-enrollment feature to their 401(k) plan. Participating in a matching 401(k) plan is increasingly the assumed choice, and employees must submit paperwork to opt out. Small companies can also incorporate the auto-enrollment feature. The goal is to make the successful path the path of least resistance.
Investors routinely make mistakes that can be avoided by well-designed 401(k) plans. We all know investors who cashed out of their retirement plan investments at or near the bottom of the market. The principles of “buy low” and “sell high” can go to mush when retirement account values get cut in half during a market downturn. The largest 401(k) plans all have life cycle or retirement date funds that help remove emotions from the investment selection process. These lightly managed funds adjust a portfolio based on career time horizon and help simplify the investment menu for those who are overwhelmed by too many choices. A well designed investment menu is an easy fix to a poorly designed 401(k) plan.
Most employers experience great satisfaction knowing that their employees can save significant sums of money through the company retirement plan. With a bit of due diligence and perhaps even a makeover, any retirement plan can become a best-in-class plan. Competitive fees and intelligent design features can turn a 201(k) into a 401(k). What type of plan does your company have?