401k Companies

For employers who have a choice of 401k companies from which to choose, knowing how to compare them properly can be a critical part of any planning process. Employees also need to know how to compare these offerings so that they can determine whether their participation in any given plan is worthwhile. Here are some of the most important considerations that must be made during any effort to compare these plans.

The single most important comparison strategy that must be used is to compare similar policies with one another. That means looking at the full scope of any plan when comparing it to other opportunities. Include not only the opportunities the plans provide, but also their overall costs. That means asking pointed questions about the range of fees that are charged by the 401k company.

Recognize that the costs associated with most employee plans are primarily due to investment fees. In fact, these fees can be quite high in many cases. In most instances, those fees account for more than three out of every four dollars spent on maintaining the plan. This is so common in the industry that most of the real plan comparison that needs to be done will end up focusing on the other characteristics of the plans in question.

One area in which comparisons will always need to be made is in the area of investment choice and opportunity. Some 401k companies offer only a limited range of investment opportunities, and many times those opportunities are ones with which they are closely associated in some manner. Other firms provide access to a full range of investments to ensure that their clients have the broadest range of options from which to choose.

For employer-based plans, it is common for the employer to have the greatest voice in determining which of these options he prefers. Employees who want to ensure that the plan they participate in offers the most freedom of choice should always try to focus their employer’s attention on companies that offer broader selections. This selection variety can enable them to have more creative freedom in determining where their money actually gets invested.

It is also wise to research the way in which any company responds to customers. Since these accounts are offered to the employees as well as management, those employees will undoubtedly have questions from time to time. It is important to determine whether there are representatives at the company who will field these questions or whether the client employer will have to try to do so on his own. Most employers would prefer the former option.

Given that seventy-five percent of administrative costs consist of the previously mentioned investment fees, the employer should always find out as much as he can about the other less noticeable fees that the company may charge. Often times, a company managing this type of investment account will charge so many administrative fees that they effectively negate any real earnings on the account. This should be avoided at all cost, so that participants have a real chance of meaningful earnings.

Some 401k companies may be reluctant to provide this information, but they will do so if pressed. It is the responsibility of the person setting up the account to ensure that he aggressively seeks all relevant plan details before agreeing to anything. Savvy employers will want to consult with at least a few of their employees to get their opinions on any given plan structure prior to making a commitment.

Employers should also obtain information about the company’s reporting policies, to ensure that progress and result reporting is done in a timely and efficient manner. It’s important the company be committed to transparency, so that every participant can be confident that he understands exactly how his money is being managed over time. IRA companies that are remiss in their reporting duties should be avoided at all times.

Even after a proper comparison of the various offerings has been made, some employees may still be less than satisfied with the options chosen. These employees should always remember that they are free to forsake participation in any employer-based plan, and may instead opt for an alternative means of retirement planning. IRA plans, mutual funds, and other strategies may then be appropriate.

Of course, there is simplicity in employer-based plans that are appealing to most employees. And most employees do ultimately end up participating in employer-selected plans, especially when there are matching contributions involved. Because of that commitment, employers should work to ensure that they have properly compared 401k companies before making their final choice.