What can I do to increase the participation rate in our plan?
Vanguard’s 2015 publication, “How America Saves, Small Business Edition,” shows that on 54% of eligible employees (employee weighted) participated in their company’s 401(k) plan. Studies that are plan weighted show an average of 70% to 75% participation. All studies indicate that the annual education/recruitment day has very little impact on participation. The structure of your plan is the key determinate of the participation rate. The Department of Labor’s annual review states that plans implementing an automatic enrollment provision show a jump in participation from the low 70%’s to 89%. This is why at PrinCap we start with a review of your plan documents. An Automatic Enrollment provision is but one of many ways to improve participation in and contributions to your 401(k) plan.
The funds in our plan are all no-load funds. Does that mean I don’t have to worry about fees?
Sorry, fees are an issue in mutual funds whether they charge an upfront commission or not. In fact, most funds sold to 401(k) plans today are no-load funds. The key is to understand what the operating expenses are. Commonly called an Expense Ratio, these can include significant commissions in the form of 12b-1 fees, as well as fees for research, marketing, etc. The Department of Labor has identified no less than 17 separate fees buried in a fund’s Expense Ratio
Our broker has R3 shares of every mutual fund in our plan. Is this the cheapest fund class we are able to buy?
No. While they are not the most expensive, R3 shares are a long way from being the least expensive. It is not surprising that you are confused. One of the top 10 mutual funds by dollar amount owned in 401(k) plans has 12 different share classes, each with a different Expense Ratio. Their R3 fund class has an expense ratio is roughly 2.3 times higher than their R6 shares. You should also know that you are eligible for the R6 share class. This is why we believe that going-it-alone as a plan fiduciary is a risky proposition. Unless you have an in-depth knowledge of the investment business, you risk inadvertently breaking you fiduciary duty to ensure the plan is receiving full value for the investments in the plan.
How can I tell what my funds are costing me?
Morningstar is the premier research company for mutual funds. The expense ratio for most of the funds can be found on their website (financials.morningstar.com).
How does my broker get paid if our funds are all no-load funds?
A broker receives the 12b-1 fee, expressed as a percentage of the total assets in a particular fund. Fees run from 0.1% to 1.0%, with the most common being 0.25%. While this doesn’t sound like much, it is charged year after year regardless of whether you have another transaction or, for that matter, speak to the broker. Expenses like this that start small will add up to a significant expense over time.
Does PrinCap receive 12b-1 fees?
No. As a matter of policy, we do not own any mutual fund class that includes a 12b-1 fee in its expense ratio.
How are you paid?
PrinCap charges a percentage of the assets under management. The amount varies depending on several factors, the most common being the services requested. We are not paid commissions and do not receive funds from any third party
You work with TD Ameritrade and Verisight as the other service providers for the PrinCap 401k AdvantageSM. Do they charge a separate fee?
Yes. We will identify all fees prior to signing an agreement with you. In our discussion of fees, we always use the “all-in” number, i.e. the total amount you will pay for our collective services. While it is not possible to give you a specific answer in this setting, suffice it to say we keep our total fee well below the national average.
When you say you will conduct a free and confidential review of our plan, what does that entail?
In this initial review, we focus on the authorized investment option in your plan. Our report will show total expenses by fund, along with performance over a 1, 3, and 5 year period. We will also show the Expense Ratio for the fund class and compare that to a cheaper class in the same fund if available. Finally, we measure the performance of each holding relative to their benchmark at their current expense ratio and the cheaper fund class if available. The review will offer a few suggestions for improvement, however it is hoped you will contact us for a more comprehensive review.
My highly paid employees are restricted in the percentage they can contribute to their 401(k) without triggering a violation of the discrimination rules. Is there a solution?
Once again, we strongly recommend you address problems of this nature by implementing structural changes in your existing plan. In addition to the Automatic Enrollment provision, you can have both a default contribution and an automatic escalation provision in your plan. A recent study by T. Rowe Price showed that employers could withhold as much as 20% of their employees paychecks without meeting serious resistance. While we are not in favor of that dramatic a step, we do believe it is reasonable to raise the level of contribution to 10% over a 3 year period. This should solve the problem of the restrictions on contributions for highly paid employees.
Some employees want financial planning advice. Can you help?
Yes. We have included comprehensive and interactive financial planning and retirement planning on our website. We go a step further by providing plan participants with a coaching/follow-up system that ensures they follow the plan they’ve prepared. Finally, should a plan participant need additional advice, we are available five days a week from 8 AM to 5 PM to answer any questions. Individual appointments can be made outside of that time frame at the discretion of the advisor.