Dirty 401(k) Industry
The financial services industry has been known to act against consumers but probably the dirtiest part of this dirty industry resides in employer 401(k) plans. Dan Solin frequently brings attention to this important point, most recently noting 401(k) participants could use their own Arab Spring.
Large employers have good options, such as going directly to Vanguard. Small employers, on the other hand, are usually cash strapped and accept the offer of the local financial planner offering a virtually free plan. Though it may end up being virtually free to the employer, the employees are stuck with high fee mutual fund choices. I've seen some such plans that average more than three percent annual fees. Of course, when I reveal to a client how ugly his choices are, I also make sure to advise him not to jeopardize his job by telling his boss exactly how he feels about those choices.
A client told me about their small company 401(k) offered by Employee Fiduciary Corp. It sounded too good to be true, so I checked it out by speaking to Parker Payson, Executive Vice President of Public Affairs.
Payson explained to me that virtually any mutual fund could be offered in their platform without a fee markup. In the past, such statements usually refer to any "high fee loaded" mutual fund. I tested Payson's statement by asking him the fees on three broad-based index funds. His response pleasantly astounded me.
This part passed my test with flying colors. The employee could build a diversified portfolio with about a 0.13 percent annual expense ratio. These are the same fees I pay when I invest directly with Vanguard. Payson also stated that they had a model similar to the US Government's Thrift Savings Plan, which I happen to believe is the best 401(k) plan around.
Costs to the employee are low, but could the employer afford it? I was also pleasantly pleased here as employer fees were only $1,500 annually for record keeping and administration. If plan assets get above $1 million, then a 0.06% annual charge applies to all assets. There is also a one-time startup fee of $500 for a new plan, and $1,000 to modify an existing plan.
While I happen to think Employee Fiduciary is the best solution to small employers, there are some things to watch out for. It's important to go directly to the company as they allow advisors to bring in business, paying them whatever is negotiated between the trustee and advisor. For example, in the three funds above, the employees could also end up paying an additional 1.0 percent fee, if the trustee allowed it. That advisor could also build the plan with expensive loaded funds as well.
I'm also a little puzzled at their custody fee which charges nothing for plans under $1 million but, go one penny above, you pay this fee on the entire amount. Finally, while this may be picky, I can't agree with their statement "Zero conflicts of interest & 100% cost disclosure." Most funds have hidden trading costs that are hard to even estimate, and there is always a conflict of interest any time a dollar changes hands.
No beating around the bush here - I love the solution that Employee Fiduciary Corporation offers to small employers. It's affordable to the small employer and offers employees some of the lowest cost, most diversified choices around.
If you are not happy with your employer's 401(k) plan, show this piece to your plan administrator, using much more tact than I typically display. If done right, it's a low cost plan for both the employer and employee.