How to fix your small business 401(k)

This week President Obama’s administration gave a strong endorsement of the Department of Labor’s plan to impose fiduciary obligations on investment brokers and advisors working with retirement plans. The controversial proposal is based on a belief that new rules are a needed consumer protection to prevent billions in costs due to bad advice. Most consumer advocates support the proposal. My firm Freedom Benefits opposes the action not because we disagree with the intent but rather because the side-effects of the “cure” are likely to be worse than the current symptoms. As a result of the media play, investors and employers who sponsor 401(k) plans are taking a second look at their plans to see if there is room for improvement.

Where does all of this leave you with your 401(k) plan? Employers and investors who followed the news might well be left with the impression that their 401(k) plan is a disaster that needs to be addressed immediately. If you want to consider the subject further, consider these three basic points:

1) Find disinterested advice. Use of the terms “conflicted advice” and “unconflicted advice” as used this week to describe advice  in this context and discussion might not actually be useful in helping you decide if you should take any action or make any change. If you are going to get advice it needs to be from someone who does not make a living in the retirement plan market. 401(k)s are complicated and the service contracts are often difficult to understand so third-party advice may be warranted. But make sure that advice comes from someone who does not have a role in the sales, investment management or administration of 401(k) plans.

2) Pay attention to bundling. A 401(k) plan is actually a collection of financial services that are bundled together. Legal services, enrollment, investment management, customer service, sales, electronic banking transactions and tax return preparation are just some of the components of a 401(k). It is possible, but not always practical, to un-bundle those services and reduce fees and/or increase performance. I prefer to use the term “re-bundling” as descriptive of the way to investigate ways to achieve these goals. It may or may not make sense to do so, depending on your own unique experience and requirements.

3) If it’s not broke, don’t fix it. Don’t be unduly influenced by the media coverage this week that implies something is wrong with your 401(k). If you like your plan service and investment choices then there is no reason to think that it is a rip-off just because of the wording of Treasury Department press releases. Your current plan’s cost structure may well turn out to be the lowest cost bid that provides an acceptable level of service and performance.



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