As we’ve been discussing these past several weeks, you have more options than you realize when it comes to setting up a retirement plan for your business. Whether you go with a traditional 401(k), a SIMPLE IRA or Cash Balance Plan, there are almost always ways to improve your plan and save more money.
Many retirement plan providers are bundled platforms when it comes to servicing small and mid-sized businesses. Think of this as a payroll provider that will serve as your 401(k) plan administrator. This often means the design of the plan isn’t going to give you the flexibility you need and the plan will likely cost you more than it should. On the other hand, many 401(k) plan providers such as insurance companies charge even more. In 2018, a 401(k) fee study conducted by Employee Fiduciary found that the total all-in costs of 401(k) plans were 2.1% of plan assets. This means a $1,000,000 plan would require over $21,000 in annual fees each year. Those figures are out of line.
So, what can you do to reduce your retirement plan costs? How can you save thousands each year and potentially millions over several years? Illumination Wealth offers up these five tips to help you save on your retirement plan:
First and foremost, it helps to understand where all your service fees go and all the different administrators who might be making money off your plan. The more you know how it all breaks down, the better you can structure your plan with fair compensation to the following players:
Most retirement plans have you paying higher service fees as your assets grow, even though the provider services really don’t change. A percentage here or there may not seem like it’s making a difference. However, over time it could be costing you hundreds of thousands of dollars in extra fees that could be going back into your own investment account.
Look for a Third Party Administrator and plan provider who charge a fixed-rate (flat) fee. Compare and contrast what your service fees will be over the long run by running calculations based on your projected growth. Find the plan that provides the features you want but won’t break your back with increasing asset-based fees.
Having an independent fiduciary advisor for your plan is a good idea because you’ll have someone who is working in your best interest. They will select the most ideal, low-cost investment options and build the portfolio appropriately. This is another instance where paying extra for a knowledgeable advisor can make your plan more money over time with the right investment policy statement.
There are so many different options involved in a 401(k) plan. You will want to work closely with your advisor and TPA to structure the plan and design it to be the most beneficial to you and your employees. Just going with an off-the-shelf plan is not the best idea. The more you can customize it to your needs and goals, the more you can save on fees, reduce taxes, provide employee benefits and earn on your investments.
The best way to get more flexibility with your retirement plan is to stay away from bundled platforms aimed at small businesses. Do your research and look for an open-architecture platform that allows you to improve the plan design as described above.
These are all issues that an experienced financial advisor can help you with as you select and then customize a retirement plan that suits your business and will benefit you and your employees over time. When you do it right, you can save a lot of money on the plan costs while also increasing your earnings within the plan.
For help with establishing a retirement plan for your business or restructuring your existing plan, contact Illumination Wealth today. Let us put our knowledge and expertise to work for you!