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He says small-business owners and managers should look for the following in a plan:
· Total fees of less than 1.25 percent a year. Some small-business plans charge participants 3 percent a year or more to cover investment management, broker’s commissions, and recordkeeping, an amount Bergman calls “outrageous.” These high fees come out of the employees’ investments, meaning they’ll have less for retirement. Most broker- and insurance-sold plans lack fee transparency. “In some plans, you have to peel the onion a few layers to reveal total plan fees,” he says.
· A diverse selection of low-cost, high-quality funds. Plans that offer mutual funds from only one or two fund families don’t give participants enough choice. There should be a choice of well-regarded funds from different companies. Investment selections should go beyond ordinary stock and bond funds, to include, for example, natural resources and inflation-protected securities funds.
· Careful monitoring of fund managers. The plan trustee must keep close tabs on the performance of all mutual funds in the plan. If any consistently underperform, they should be replaced. This is the same kind of monitoring any good investment advisor is already doing for its individual clients.
· Participant education. The plan provider should offer investment seminars, quarterly market commentaries, and general investment advice via email and a telephone hotline.
Competition Comes to Small-Biz 401(k) Market
Running 401(k) plans has been a moneymaker for big insurers and brokers because plans were layered with many hidden fees, according to Bergman. That began to change when Caterpillar’s employees sued their employer, claiming it failed to fulfill its fiduciary duty because of a fee-heavy 401(k).
“That suit, which was settled for $16.5 million, was a wake-up call. Many plan fiduciaries quickly reevaluated their plans,” Bergman says. Soon, big employers were winning fee reductions from major 401(k) vendors.
Small-businesses don’t have the same clout, and most are still stuck with high-cost plans. According to a 2009 Deloitte Consulting survey, plans with fewer than 100 participants paid 2.03% in total fees, on average. But the trends are going in the right direction, he says.
First, pending federal legislation and regulations will require complete transparency in fees. “They won’t be hidden anymore,” Bergman says.
Second, the Pension Protection Act of 2006 confirmed that independent investment advisors may advise 401(k) plans. The dominant plan providers—the big insurance companies and brokers—now have competition in the small-business 401(k) market.
A registered investment advisor, who should assume a co-fiduciary relationship with the plan trustee, can work in tandem with a plan administrator that provides recordkeeping and other administrative services. The two entities combined can offer full 401(k) services that are as seamless as those offered by a single company, often reducing total plan expenses.
Palisades Hudson’s small-business 401(k) plan roster is growing, and Bergman says it’s putting a major effort into expanding in this market.
Palisades Hudson Financial Group is a fee-only financial planning firm headquartered in Scarsdale, NY. It offers estate planning, insurance consulting, trust planning, cross-border planning, business valuation, family office and business management, executive financial planning, and tax services. Its sister firm, Palisades Hudson Asset Management, is an independent investment advisor with about $950 million under management. Branch offices are in Atlanta and Ft. Lauderdale. Website: www.palisadeshudson.com; blog: http://palisadeshudson.com/current-commentary
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