LAST REVIEWED Dec 18 2020 11 MIN READ
By The Human Interest Team
Employers and employees both want the top 401(k) plan they can get, but each party has different considerations. Employers want to offer a great benefit but keep costs low, whereas employees want an easy to use 401(k) that will help them grow their investments over time. Luckily, these two interests don’t have to be mutually exclusive with Human Interest. So, when looking for the best 401(k), whether as an employee or an employer, what are the considerations you should take into account?
Employer match: The bigger the better
Employers have a lot of leeway when it comes to contributing to your 401(k). They are legally allowed to contribute a percent of your salary and/or match your contribution to the 401(k) plan either whole or in part. Although you can contribute up to $18,500 to your own 401(k) – with an extra $6,000 per year if you’re over age 50 – your employer may contribute up to 100% of your salary as long as it does not exceed $53,000 per year for 2016. As you can see, a generous employer match is a huge benefit to your overall retirement plan, and can help you start saving more than you could alone.
Immediate vesting: When can I contribute?
The best 401(k) plans allow employees to begin contributing immediately. Many employers make their employees wait a few months before making their first contribution, and while a few months might not seem like a long time to wait, consider the amount of money you forfeit over that period of time.
Imagine Simone starts work at Cool Startup SF with a $70,000 annual salary. The company offers a 5% 401(k) match, but requires employees to wait 3 months to participate. She plans on investing 10% of her $70,000 salary in the 401(k) plan, and will enjoy the 5% company match as well.
If she were able to contribute immediately, here is what her account would look like:
Simone’s Monthly Contribution to 401(k): $583.33
Employers Monthly Contribution to 401(k): $291.67
Total 401(k) Contribution per month: $875.00
Value after 3 months: $2,625
Value after 35 years*: $28,026.03
*Assumes 7% interest and monthly compounding (source).
If Simone simply stopped investing after the first three months, she would have nearly $30,000 at retirement! By waiting to vest, Simone would sacrifice all of those gains. Clearly, even a little bit early on goes a long way when it comes to saving, so try and find a 401(k) that allows you to start saving as soon as possible.
Low 401(k) account fees
Transparency isn’t always front and center in your 401(k) account, and you may not be aware of how much you’re paying in fees. Every mutual or exchange-traded fund has a management fee: For low fee funds, you might pay as little as 0.05% of the total assets in your account, but for actively managed mutual funds those fees may trend north of 1.5%. That’s a wide span of potential dollars to be taken off the top, before your money even has a chance of growing and compounding for your future.
“Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.” ~U.S. Department of Labor’s A Look at 401(k) Fees
And that’s not all when it comes to 401(k) fees. On top of the individual fund management fees, there’s a 401(k) plan administration fee. This fee may be levied as a flat fee or deducted directly from your returns. Finally, your plan might charge ‘other fees’ for record-keeping, statements, or the toll-free help number.
At Human Interest, we pride ourselves on price transparency, and we want you to know exactly what you’re paying. Our asset fee is 0.87% less expensive than the national average because we believe that a 401(k) should be an affordable option for everyone.
Great fund choices
If your plan has a limited selection of funds from which to choose, or doesn’t offer funds that you like, you’re at the whim of the plan provider as opposed to being an active participant in your own financial future. Many 401(k) plans are surprising weak in their fund offerings with few low fee diversified index funds and too many expensive, actively managed proprietary funds. When considering a 401(k) plan, try to find one that has a variety of fund options from which to choose so that you can feel comfortable investing in the areas that you feel best align with your priorities.
Employers: How to create a thoughtful, budget-conscious 401(k) plan
We’ve previously discussed how benefits in general and 401(k) plans specifically can improve recruitment and retention – yet what makes up a great 401(k) plan from the employer’s standpoint?
Low administrator costs
Small business owners are obviously concerned with costs, knowing the thin line between the success and failure of their business. In fact, it’s widely reported that 8 out of 10 small businesses fail. Thus, spending any additional money over and above what is absolutely necessary just isn’t an option. That is why Human Interest keeps our fees as low as possible ($120/month and $4/employee/month) in order to help small business owners maximize employee acquisition and retention, while simultaneously containing costs.
Offer a competitive employee benefit
Sign up for an affordable and easy-to-manage 401(k).
Smart, flexible fund choices
“We follow the time-tested investment theories of Modern Portfolio Theory, Efficient Market Theory, and Capital Asset Pricing Model espoused by the world’s leading financial economists, and we will rebalance your portfolio automatically.” ~Human Interest FAQ
The best plan you can provide for your employees is the one that they’ll want to participate in. An excellent, low-fee, diverse set of fund choices that follow well-researched investment approaches are going to have the most appeal. As you research the best 401(k) plans, make sure the provider offers a diversified range of low-fee funds and that there are a good number of index funds available to your employees.
A top 401(k) plan that’s easy to administer
If you create a 401(k) plan that’s time-consuming and cumbersome to manage, you’ll hurt your bottom line. As a small business owner, your primary job is to run your company, and any time taken away from that mission can cost you. The less you have to worry about HR, the more you can focus on doing what it is you do best.
You need a modern 401(k) plan that is a snap to set up and administer – for you and your employees. The back-end of employee contributions, recordkeeping, and administration should be seamless. The last thing you want to do is spend time tinkering with your 401(k) in lieu of running your business.
IRS record-keeping is cumbersome. You need a 401(k) provider that is already in compliance with the IRS requirements. That means your 401(k) provider should offer:
Daily valuation recordkeeping.
Prepare IRS Form 5500, the Annual Return/Report of Employee Benefit Plan.
Offer annual non-discrimination compliance testing.
Distribute the legally-required statements and notices.
Summary: Characteristics of a top 401(k) plan
Ultimately, the ideal 401(k) should be good for both the employer and the employees.
Choose an affordably priced, well managed 401(k) administrator.
Be sure to keep best practices of investing theory in mind.
Ensure compliance with government regulations.
Offer your employees low-fee, diversified index funds in their arsenal.
Look for a company that provides a match – every little bit helps when it comes to putting away for your retirement.
As your company to support financial literacy and transparency so that you can confidently make long-term decisions about your retirement savings.
Watch out for any large fees that might arise.
Seek out plans with a diverse set of funds in which to invest.
If you want to set up or switch to a 401(k) that’s great for employees and employers, let your company know about Human Interest.
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The Human Interest Team
We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment advising, and integration with leading payroll providers.