Someone has the fiduciary responsibility for the investments in the plan. You need to know who's on the hook for that. Usually it is someone at the company sponsoring the plan.
My company can do your 401k.
In seriousness, the poster above noted a majority of active funds can't beat their indexes. The question you have to answer is can the person(s) selecting the funds pick good managers? There are a lot out there, but you have to do the due dilligence to find them. If you don't think you can, go the index route. Either way, you need a good set of funds to give the participants diversification, including in fixed income. Target Date funds are good as well, but you better understand the philosophy behind them (to retirement vs through retirement) and what they are investing in.
You also need to consider who is assuming the fiduciary obligations. If you or someone in your company selects the funds, you better know what you are doing or you can face lawsuits from participants.
People don't understand that these things aren't cheap to run. Somebody has to pay for it and the best thing is to disclose who and how that is done.
It seems we have ~180 funds available to us with the Paychex/John Hancock option (we had ~40 with ADP/Wells Fargo). I would be involved in selecting a number of funds out of those 200. Are you asking if I can pick good managers? I don't even know where to start with finding the information to do that. We also would have a financial adviser who probably has more input than me. Is he picking funds based on a good manager or how much of a kickback he gets? How do I even find out?
This is my dilemma, where can my company get a 401k plan that best represents the needs of our employees?
I have no idea what the advisors connection is. I would think you could ask what his role is (is his comp determined by which fund he picks or is he paid same regardless?). I know there were some new ERISA regs passed recently about fee disclosures, but I'm not sure in the specifics.
Unfortunately I am an investment guy and my ERISA knowledge is limited, mostly picked up from working with our retirement group. If you have some detailed questions, PM me and I'll see if I can get an answer.
Our owner has fiduciary responsibility. He, and the book keeper, have left the fund selection to the financial planner with input from two of us.
I believe our adviser gets 50 bps regardless of what fund he puts us in, but I'm not sure of that. In the fee disclosure it also mentions he may get 1% of deposits in the first year and .25% in subsequent years. We're trying to find out if "may" applies to our plan or not, the paperwork isn't clear. The fee disclosure also says the admin costs are about .625% of the total plan. That seems like it's in addition to the ~$2500/year we'd be paying Paychex, because .625% of our plan value is a higher # than $2500. The disclosure also isn't clear where this fee comes from. Does this fee come out of the expense ratio too?
Is the financial planner a 3(21) or 3(38) fiduciary for the plan. Your owner is a fiduciary but the financial planner may be as well. You will want to know this as the more responsibility they have the more fee they should be worth potentially, plus you just want to know who are liable parties within the plan.
I would speak directly with the planner and find out his fiduciary level if any (ask if 3(21) or 3(38)), ask how he gets paid his 50bps in the plan (is it built into the Expense Ratios that participants see...it may be... so for example you pick a fund with ER of 1%, his 50bps may be factored in already). Ask him about the platform fee from John Hancock. How much is that. Ours for example at Great West is .1% which is charged on top of your ER of funds.
Ask how John Hancock was selected. Were they the most competitive platform or....is there another incentive that you are unaware of. (ie did the financial planner get money...they may have and this is not bad as long as John Hancock is a low cost option for your needs)
Third Party Administration are they taking any fiduciary responsibility? What is their fee? Will john Hancock be subsidizing the fee The TPA would charge you?
I highly doubt the admin fee from the plan is built into the Expense ratio but when in doubt ask.
In a nutshell ask all fiduciaries, fees and relationships be disclosed. From TPA to Financial planner to Financial Platform provider
Sorry long and rambling. I am going through this now so I thought it might help.
Thanks for the input, it does help.
We were able to find out a lot more information today. The financial planner's cut is .25%, which comes out of the published ER. The .625 is John Hancock's cut, out of the published ER. Paychex gets their ~$2500 management fee, which is billed to the company directly. I do not know if they get a kickback from John Hancock.
The proposed funds are all Class A funds.
John Hancock was recommended by the Paychex rep. Paychex also offers another set of funds, but they all come with higher ER. Our planner told us today that John Hancock is recognized as being the lowest cost for small 401k plans (under $5 or $10 million, I don't remember which number he said).
So I think we now understand all the fees associated with the plan and they are not bad, and not drastically different than our previous ADP plan (but different than what this novice Paychex rep stated last week).
I'm not completely convinced it's the right plan for us.
Our planner did say that we could set up individual self directed plans through him with Wells Fargo. We would have a full brokerage account with access to institutional class mutual funds, etfs and even stocks. He would charge .8 (of which I think Wells Fargo takes .55) and would use an actuary that would be less than $2k to the company. .8 + institutional mutual funds ER is more than Class A ER on the handful of funds I checked, but I am wondering if since he has access to everything and anything, he should be able to offer something in every asset class that can beat the class A return after accounting for his .8.
Anyway, that's where we are at the close of business on Friday.
ETA - I'll find out on the fiduciary responsibilities of the planner, thanks for that tip.
Edited by Dragons, 01 February 2013 - 01:50 PM.