Are you a veterinary practice owner or manager wondering whether your hospital has the “right” employee 401(k) plan? Before you start investigating, it’s best to have a credentialed, impartial adviser to guide you — someone operating as a fiduciary, not a salesperson. These professionals can help you navigate the situation while considering your unique needs and goals.
First, let’s consider the various plan recordkeepers. Name-brand examples are Fidelity Investments, Vanguard, Empower, American Funds, Principal Financial Group, T. Rowe Price, Voya, Charles Schwab, John Hancock, ADP and Paychex.
Next, here are the five questions you should ask your 401(k) provider or potential partner.
1. How is the pricing determined?
Pricing models should be one of the first things you consider when selecting a retirement plan provider for your business and employees. The models range from asset-based fees to per-capita pricing to flat fees to combinations of more than one.
Pricing is typically based on various factors, including time requirements, the size of the plan, the number of employees, the average account balance, the complexity of plan provisions, the frequency of loans and distributions, and enrollment needs, to name a few.
Asset-based fees are common, especially with insurance company 401(k) plans. The insurance company determines its required revenue and converts it to a percentage of the plan’s assets. For example, if the provider needs to make $5,000 and your practice’s plan value is $500,000, you’re charged 1%.
Per-capita pricing means the provider divides its required revenue by the number of covered employees. So if the company needs to make $5,000 and you have 25 employees, your practice pays $200 a person.
Under a flat-fee model, your practice is charged a set price for a stated period. So again, if $5,000 is the required revenue, you pay $1,250 each quarter, guaranteed for one or two years, for example. After that, the pricing can be revised and guaranteed for another period.
Note that providers commonly combine asset-based and per-capita pricing.
Beware of purely asset-based fees. If your plan adviser doesn’t aggressively lobby with the provider on your behalf, charging that same 1 percent on a growing 401(k) plan means the recordkeeper collects more and more fees for the same work.
2. What is the quality of the (401)k participant experience?
Consider factors such as usability, accessibility and convenience when evaluating the 401(k) website experience. We advise clients to ask the provider to demonstrate their participant website and mobile app.
Aside from the basics, like checking balances, reviewing investment performances and rebalancing accounts, what else can a 401(k) participant do on the website and app? Modern 401(k) recordkeeping systems should allow employees to change salary deferral instructions in real time, request rollovers or withdrawals, and update beneficiaries. They often offer educational resources, too.
Does the system offer account aggregation? This feature means a participant can ask the 401(k) website to sweep in “read-only” access to retirement, investment and bank accounts (and even liabilities) for real-time retirement projections.
3. Does the 401(k) plan integrate with my practice’s payroll system?
Payroll integration is a tremendous timesaver. A decade ago, only the largest payroll companies, like ADP and Paychex, offered the feature. Today, the best 401(k) recordkeepers integrate with nearly all payroll providers. We know of one outfit that works with over 400 of them.
Payroll providers sometimes charge a fee to integrate with a 401(k) plan. While efficiency and timesavings are helpful, consider whether you need integration. The benefit often isn’t worth the cost at practices employing fewer than 25 people, especially if submitting payroll contributions each pay period is delegated from the practice owner to an office manager.
4. Who is the plan intended to benefit the most?
Some of our veterinary clients offer no profit-sharing or employer matching, so their 401(k) is merely a connection to payroll, allowing employees to invest for retirement in each pay period systemically. Other clients incentivize plan participation by offering a contribution of, say, 25% of the first 8% of W2 earnings contributed to the 401(k).
Still others offer a Safe Harbor plan, meaning the employer automatically contributes 3% to everyone’s account regardless of individual participation or provides a 100% match of the first 4% deferred.
The 3% non-elective contribution and 4% match must be immediately vested. In exchange, any owner or key employee can contribute up to the IRS’s maximum deferral of $22,500 (or $30,000 for those age 50 or older), no matter how much their employees contribute.
Remember that 401(k) plans are subject to discrimination testing, which often limits how much owners or key employees can contribute. However, a Safe Harbor 401(k) plan means you pass automatically.
Finally, certain employers offer a profit-sharing contribution on top of 401(k) options. Some clients are egalitarian, meaning they pay equal dollar amounts or percentages of pay. Others maximize the amount contributed to owners’ and key employees’ accounts.
As you can see, plan designs vary widely. Your 401(k) recordkeeper must be able to accommodate them. Ask whether they can.
5. What are the investment options?
Some 401(k) recordkeepers work with a single fund manager. Others are “open architecture,” meaning they accommodate offerings from various investment managers.
The most crucial investment decision you’ll make as a plan fiduciary is your choice of the Qualified Default Investment Alternative (QDIA). It’s a fund or series of funds used if an employee in your plan doesn’t pick an investment option.
Currently, most QDIAs are a target date fund series. These are age-based funds, so the diversified portfolios have a broad mix of investments that gets more conservative as participants near retirement age. Many mutual fund providers have a version of target date funds, but the investment performances can vary greatly. Evaluate your choices carefully.
Further, do you or your employees want to align 401(k) investments with personal or business values? Did you know you can offer investment solutions based on principles such as faith, sustainability, social responsibility and climate activism?
Ask a prospective provider about the investment options available to you and your team.
Selecting a 401(k) provider is a critical decision for any business, but you don’t have to do it alone. The prudence, care and guidance of a fiduciary plan adviser can help you find the best plan for you and your employees.
FEES MATTER
Among a practice owner or manager’s primary roles as a plan fiduciary is to know 401(k) plan fees and whether they’re reasonable. If you can’t explain either one, it’s time to consult an adviser and get an unbiased second opinion.