At one time, the cost and complexity of administering 401(k) plans made it difficult for most small businesses with fewer than 100 employees to offer them to employees. Fortunately, this is starting to change, as many third-party administrators now offer cost-effective online administration of 401(k) plans for small businesses.
Unlike simplified employee pension plans, which are fairly easy for small businesses to administer themselves, 401(k)s require more complicated recordkeeping and administration, usually provided by third-party administrators. But online 401(k) administration has reduced fees and costs by 50 percent or more compared to non-Web-based plan administration. In addition, it enables sponsors to offer a variety of new conveniences and benefits to plan participants, such as real-time account monitoring and reporting and the ability to instantly reallocate plan assets.
Application service providers are responsible for maintaining, updating, and supervising software-based 401(k) administration and recordkeeping tasks and handling all routine day-to-day functions.
But there are trade-offs when opting for an online 401(k) plan. The biggest is a lower level of personal service and attention from the administrator. You’re not likely to receive a dedicated account representative, for example, but instead may have to rely on online support or maybe a toll-free help line.
There may also be fewer investment options available to plan participants. Many online 401(k) plans limit options primarily to exchange traded funds and index funds, which are not actively traded by a portfolio manager like most mutual funds but instead track the performance of an investment index (such as the S&P 500, for example). Exchange traded funds and mutual funds may very well be part of a diversified retirement portfolio, but participants may want to balance their portfolio with actively managed funds as well.
As you investigate providers, keep these points in mind:
- What types of fees will be charged? Typically there will be a setup fee as well as ongoing maintenance fees based on the number of plan participants. Be sure to ask upfront about the plan’s fee structure.
- Does the plan provide any employee education? Onsite employee education is common with traditional high-fee third-party plans but may cost extra with an online plan, if it’s offered at all.
- What type of support is available? You probably shouldn’t expect in-person support from an account manager. Instead, online, e-mail, and telephone support is more likely. Ask what hours this support is available, how timely responses to your questions will be, and whether there is an extra charge for this kind of support.
Be sure to consult with your attorney, accountant, or tax advisor about the details of online 401(k)s and whether they are the right solution for your company.
Don Sadler is a freelance writer and editor specializing in business and finance.