As traditional pensions become increasingly rare for private sector employees, 401(k) plans are the standard retirement benefit the vast majority of employers offer to their staff. However, as anyone who has ever had to choose or administer a plan for their employees knows, not all 401(k) plans are created equal. With huge variances in important factors like investment options, fees, ease-of-use, and startup costs, choosing the right plan is not only a critical decision for your company, but for your employees as well. Below is an outline of what factors to look out for when selecting a new 401(k) plan provider and our recommendation on the best 401(k) providers for your small business.
What is a 401(k)?
A 401(k) is an employer-sponsored retirement plan that invites employees to contribute up to $19,500 [IRS.gov, 2019] of their income towards their retirement savings. Employers can choose plans and providers that offer different selections of mutual and index funds (that come with a range of fees) for their employees to invest in. Employers can choose to match a portion of their employees’ contributions, but that is 100% optional.
Even if you, an employer, aren’t offering a match, employees looking to save more money per month in a tax-advantage account can do that in a 401(k) plan. Traditional retirement accounts, such as IRAs, only allow for contributions up to $6,000 per year in pre-tax income [IRS.gov, 2019]. That means for employees who are looking to save more than $500 per month, the additional income they are saving can be put in a 401(k) and they won’t miss out on thousands of dollars each year in tax savings. By providing access to a quality 401(k) plan, employers allow their staff to reduce their taxable income by anywhere from 5% to 30%, a huge benefit to employees, even if you aren’t offering a match.
What to Look For:
When selecting a new 401(k) provider, the four most important factors to consider are the quality of investment options, fees incurred by both the employer and employees, ease-of-use, and startup costs that you, the employer, will have to pay. For HR professionals who may not be familiar with investing, it can be difficult to understand the difference between the investment options of competing providers.
The most valuable factor is the expense ratio, or fees that employees will indirectly pay, that comes with each fund option. An expense ratio of less than 0.3% is good, 0.3% to 0.6% is pretty high, and avoid anything over 0.6%. Vanguard funds, which are generally viewed as the gold standard for index funds, have the majority of their investment fees in the 03% to 0.05% range. At first glance, it doesn’t seem like there’s a big difference between 0.2% and 0.7% fees. If you have $1,000 invested, 0.5% is $50 per year. But this is when compound interest comes into effect. A difference of 0.1% over 40 or 50 years can be the difference of tens of thousands, if not hundreds of thousands of dollars in the final value of the portfolio.
For example, an employee who contributed $1,000 per month to their 401(k) for 30 years (assuming an average annual return of 8%,) the final value of their portfolio would be $1,468,000. If that annual return was changed to 8.5% (taking away that extra 0.5% in fees), the final value of the portfolio would be $1,617,000, a difference of nearly $150,000!
Even if a fund has low expenses, it might not be a worthwhile option if that fund doesn’t have a good track record, which is also known as their historical returns. Be weary of funds that are far below average. For each fund option, you can view their 1 year, 3 year, and 5 year average returns. Compare these to benchmarks like the Dow Jones Industrial Average or the S&P 500 and get a sense of how well those particular funds have been performing in comparison.
Another important factor when choosing a 401(k) plan is the ease-of-use of their platform. The workforce population, especially those under 40, grew up in the age of the internet and have little patience for bad user interfaces. Dated or difficult to use platforms will negatively impact the participation rate of your staff contributing to their 401(k) plans.
Finally, the last factor to consider is the startup costs that you as the employer will incur. All companies are operating on a budget, and even if a particular 401(k) provider checks all the other boxes, if the cost to implement is out-of-reach, then the other factors don’t matter.
That being said, here is a list of our top 5 401(k) providers for small businesses.
The Top Five:
5. Fidelity Investments
Breakdown: Fidelity is one of the largest financial management companies in the world. With nearly $2.5 trillion (with a T!) in assets under management, Fidelity has carved its place as one of the most common and well-regarded 401(k) providers in the business. Many of the fund options they provide in their retirement plans are regarded as some of the best in the industry.
- Large, prestigious firm with a variety of high-quality, low fee investments
- Website and brokerage platforms are well-designed and easy to use
- No specific plans or products tailored to small businesses
- Cater to massive Fortune 500 companies, meaning their customer service isn’t as concerned with smaller clients
- Difficult to determine costs final costs since their plans are often more expensive for companies with under 100 employees than many other providers
4. Charles Schwab
Breakdown: Similar to Fidelity, Charles Schwab is a massive investment management firm, with a total of $3.25 trillion in assets under management (AUM). Despite their size and in contrast to Fidelity, Charles Schwab offers a 401(k) plan specifically designed for organizations with only a handful of employees. This plan, called Index Advantage, allows small businesses to offer many of the same investment choices and products that larger customers receive, but at a much lower cost to the employer.
- Specific plans for small businesses, that comes with lower costs
- Large suite of services, for an additional price, depending on plan preferences
- Low fees compared to many other 401(k) providers
- Well-designed and easy to use website and brokerage platform
- Several high-quality, low-fee investment choices for plan participants
- Pricing can vary depending on preferences and costs, so depending on your needs, fees can climb quickly
- Actively managed fund options are not available
3. Employee Fiduciary
Breakdown: A much smaller organization compared to Fidelity and Charles Schwab, Employee Fiduciary focuses primarily on providing retirement plans to small businesses. Their average client has approximately 30 employees. Employee Fiduciary prides itself in only working with smaller companies and touts their higher level of personalization and customer service compared to larger firms that cater to big, multinational corporations.
- Caters to the wants and needs of small businesses
- Very strong customer service
- Low startup costs compared to larger, more established firms
- Fees are very easy to understand with few surprise costs
- Much smaller, and lacks the resources or recognition of larger firms
- Limited investment choices for plan participants
- Fewer financial services provided to users compared to Fidelity or Schwab
- Website and brokerage platform can be difficult to use, especially for users who aren’t extremely technologically savvy
2. Betterment for Business
Breakdown: Newer, high-tech company that is known as one of the original retail “robo-advisors,” a new industry where users have their investment funds automatically allocated to appropriate funds based on a questionnaire about their age, risk-tolerance, financial situation, and long-term goals. Betterment for Business now offers companies the chance to create a tech-first 401(k) plan with a specific focus on organizations with under 200 employees.
- Excellent user-interface and technology platform that’s well-designed and easy to use
- Low fees, designed to be more tech-intensive, allowing employer costs to go down
- Great investment choices with low expense ratios
- Their technology platforms helps users develop long-term investment plans
- Contribution rates from users are ~2% higher than the industry average
- New, less established company can be a turn-off from users who looking for a long track-record
- Because of their emphasis on technology, many users may be frustrated with the lack of human interaction and support a turnoff
Breakdown: One of the fastest growing small-business focused 401(k) plan providers in the United States. Guideline gets our nod as the best 401(k) plan providers for small businesses because of their high quality, low-fee investment choices (which are all Vanguard funds), their ease of use for both users and administrators, and their very low and transparent fees.
In addition, as a tech-intensive company, their website and investment interface is well-designed and easy to use for employees of all ages. For administrators and users who may want more human support to answer their investing and finance-related questions, they may find Guideline lacking in this area.
Choosing the right 401(k) plan provider is critically important for not only you as an employer, but also for your employees. By choosing a provider that offers high-quality, low-fee investments with a friendly user-interface, you can help your employees save thousands more towards retirement each year. While many of these plan options help users save more for retirement, that only covers a portion of employees’ concerns. Many have more pressing financial concerns like high-interest credit debt, student loans, or difficulty managing money, as nearly half of all Americans are living paycheck to paycheck.
More employees than ever are looking for their employer to offer a more holistic financial wellness benefit to help with things like debt elimination, paying off student loans, budgeting, learning the basics of investing, buying a home, saving for their children's college, and anything else they are struggling with.
For more information on our top financial wellness providers, check out our list here.