To pick up where we left off last month, the basic ingredients of any good employer- sponsored retirement plan (like a 401k) are always the same: Plan Provider, Financial Advisor, and Plan Administrator. For this month’s purposes we’re going to dig as deep as we can into plan providers and their associated “Dos and Don’ts.”

  

The Plan Provider is simply the company hosting the plan for the sponsoring employer (aka, Plan Sponsor). This provider is most often either an insurance company (like MassMutual, John Hancock, Prudential, etc…), or held directly with a mutual fund family (like American Funds, Oppenheimer, Fidelity, etc…). Each 401k Plan Provider has their own pros and cons, but there some extremely important, general aspects to be aware of that can and will make all the difference in the world.

  

Mutual Fund Direct – This is often the best (and sometimes only) option for smaller plans, generally under $500,000 in total assets, first-time/start-up plans, or those just looking for cheap expenses. If you go mutual fund direct, the employees will be limited typically to investing only in mutual funds provided by that particular fund family. Investing 101 shows us clearly that no one mutual fund family has all the best answers. However, if you’re a new 401k plan or a small one, there’s little alternative and there are some very nice fund direct 401k providers out there.

  

Life Insurance Company – These are quite diverse in capabilities from one to the next. Some insurance-company provided 401k plans can lock you into their own brand of funds (similar to mutual fund direct plans), while others have a fully open architecture allowing each employee to custom design their portfolio from as many as 100 different high-end mutual funds. These plans often won’t even look at you without at least $250,000 in assets, but if you’ve got that in your plan now, you should shop these guys. The better insurance companies (like MassMutual and John Hancock for example) even have fiduciary warranties with their plans to help protect the employer and the plan itself in the event of lawsuits.

  

Much of what separates the options between smaller and larger plans is based on pricing, and that’s why we typically see smaller plans go fund direct. Think of it as going to Sam’s Club in Slidell, having $25 to spend, and buying that 10lb block of cheddar cheese for your party. Now pretend you’ve got $250. With that kind of budget, you’ll probably hit Rouses and Fresh Market and buy a magnificent assortment of the finest and freshest cheeses they have. That’s going fund direct on a budget versus open architecture.

  

Now, putting all your eggs in one basket is a little cheaper and easier, but why do that if you have 732 eggs? At plan levels of $1M and above, the option to secure an open architecture platform can be very close in price to going fund direct IF even more expensive at all. It’s simply a matter of collective buying power. This type of platform offers a wide swath of different mutual funds from various fund families, providing what is typically a far superior diversification for the participants and, in turn, a better meeting of fiduciary responsibility for the plan sponsor/employer. Remember, these fees and investments are borne by the employees, not the employer. Oh, and remember this too, “You get what you pay for.”

  

Now, sometimes you’ll see fund direct plans with a small smattering of pollutants from other families. For example: a Fidelity Funds 401k plan might have 10 Fidelity funds and allow 2 or 3 from someplace else. Some fund direct carriers allow outside investments like this but have a very strict proprietary minimum, whereby the plan MUST carry a certain minimum percentage of the hosting fund company’s funds (in this case, Fidelity). These proprietary minimums tend to be very, very high – usually between 70 -90%. There’s a good reason for this though. In order for these providers to keep their fees low enough, they need assets held in their own funds. Again, I believe these providers and minimums work just fine for smaller plans (I’ve written several), but they’re simply not the best choice for larger ones in my opinion, even though I’ve run across a number of $10M+ plans that do just this.

  

Plan Fees is an issue that has caused a great deal of litigation in recent years, or rather, their lack of full and clear disclosure. This is broken down into two main components: Administrative Fees (usually pretty simple) and Investment Fees (usually pretty complicated). With investment fees you typically have some sort of mutual fund expenses at the very least. These fees are embedded in the funds themselves and usually vary greatly from one fund to the next. Sometimes there’s also an advisory fee atop the fund expenses depending on plan size, number of participants, average account balance, plan provider, etc… Both mutual fund expense ratios and advisory/WRAP fees are expressed as a percentage of total assets. So if your mutual fund expense ratio is 80bps and your plan has a 70bps advisory fee, your total investment expense would be 1.5%. Where plans have gotten in trouble over the years is the “Hidden Fees” that get buried in fine print or back-end sales charges no one ever seems to be aware of when they select the plan.

  

Employers/Plan Sponsors can best manage their fiduciary responsibility by shopping many providers regardless of plan size and understanding that the cheapest plan isn’t necessarily the best option. Next month: Plan Administration.