401(k) Plans for Small Businesses

A 401(k) plan is one of the most valuable investment vehicles for retirement planning. Individual 401(k) plans are typically sponsored by an employer and are a part of employee benefit programs. Large companies often set up 401(k) vehicles to help employees plan for retirement and offer employer-matched payments in addition to the salaries they provide. Small business owners have fewer options, so they need to focus on all the associated expenses when deciding which 401(k) benefit plan they are going to offer.

Traditional 401(k) Investment Vehicles

Employers generally offer traditional 401(k) investment vehicles that include pre-tax contributions. They can also offer after-tax contributions through a Roth 401(k) plan. Regardless of the retirement investment vehicle offered by employers, the primary benefit of a 401(k) plan is its matching feature. With matching, employers contribute the same amount as the employee to an employer-sponsored 401(k) investment vehicle up to a certain percentage, usually around 3%.

401(k) Vehicles

When large companies act as plan sponsors, they have the luxury of working with nearly any 401(k) provider in the investment industry. Nearly all investment companies have 401(k) plan options available. A 401(k) plan also requires an administrator, which may be the plan provider if an investment company offers administration services along with 401(k) plans. A company might hire a separate administrator for individual 401(k) employee plans.

If you are a small business owner, you won’t have the luxury of working with any 401(k) provider in the industry. However, that doesn’t mean you don’t have options. Three of the leading 401(k) plans for small business owners include the Merrill Edge 401(k), the Vanguard 401(k), and the Fidelity 401(k).

Merrill Edge 401(k)

The Merrill Edge 401(k) is provided by Merrill Lynch, and it offers one of the simplest and most convenient 401(k) plans to set up for an employer. Purchasing a plan only takes a few minutes, once the proposal is received.

Fees are minimal for the plan, and contributions are tax-deductible for the small business. The Merrill Edge plan also offers numerous model portfolios for employees. However, its model portfolio options are not as robust as options from plans with comprehensive portfolio management services such as Vanguard and Fidelity.

The fees and expenses for the Merrill Edge 401(k) plan are minimal. The plan offers a low comprehensive expense ratio of 0.52%. This expense ratio includes an investment fiduciary fee, participant servicing fee, and account servicing fee.

Vanguard 401(k)

The Vanguard 401(k) offers all of the basic 401(k) investment vehicle features with optional administration services through Vanguard. One of the greatest advantages of a Vanguard 401(k) is that it allows all participants to access Vanguard’s suite of funds.

Overall, fees and expenses vary for each plan. Vanguard’s investment funds offer some of the lowest expense ratios in the industry.

Vanguard is now working with a third party provider for its small business 401(k) plans. The company is called Ascensus. There is a $20 annual fee per Vanguard fund per account holder. There is also a $20 annual fee participant for custodial services.

Fidelity 401(k)

The Fidelity 401(k) is also a smart option for small businesses. It includes basic 401(k) plan features as well as an administrative service through Fidelity.

Similar to Vanguard, Fidelity offers model portfolios that include its own funds, which is often appealing to employers and investors.

Fidelity’s small business 401(k) is offered to businesses with two to 1,000 employees. The employer pays a $500 startup fee plus $300 each quarter for administration. Employees are charged $25 per quarter for record keeping, and 0.125% of the account balance per quarter for investment services.

401(k) Expense Ratios

Once you are enrolled in a 401(k), whether through a large company or a small business, it is your responsibility to manage the investments and their cost. This can be tricky since the investment options are dictated by the provider the employer chooses. Investment funds such as target date funds, mutual funds, and ETFs charge an expense ratio. This is a fee charged by investment funds to investors. It covers the costs of operating the funds. 401(k) investors should take care to avoid investment choices with high expense ratios when possible. Over time, high fees can seriously eat into investment returns. Luckily providers like Vanguard, Merrill Edge, and Fidelity do have low-fee investment choices. However, some employers choose a 401(k) provider that leaves employees stuck with only high-fee investment options.

In addition to the expense ratios charged by the investment funds, 401(k) plans often charge fees to investors for their services. An example would be the 0.125% fee mentioned in the Fidelity section. Since employers select the provider, employees have no control over this cost. The total cost to investors for having and investing in their 401(k) would be the sum of the expense ratios of the investment funds, plus fees charged by the 401(k) provider. Minimizing this total is key to maximizing retirement funds. All employees can do is opt for the lowest-fee funds that the provider of their plan offers. Of course, choices should match their retirement goals, and be made with sound portfolio construction principles. Investments should not be blindly chosen on fees alone.

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