Recently a reader wrote in asking:
Do you have any recommendations for providers for a small-firm 401(k) plan? It’s just another lawyer and me. There’s currently no 401(k) plan, and I’d like to get one started. Are there any companies that can put together a 401(k) plan for not a lot of money? I don’t think I’ll be able to convince the partner unless it’s cheap.
Starting a 401(k) program at a small firm is a great idea. The 401(k) is one of the best options available for saving sizable chunks of money, particularly given the $18,500 annual contribution limit (or $24,500 if you’re over the age of 55). Regardless of whether you go with the Traditional 401(k) or the Roth 401(k), I hope you can convince the other lawyer that having a 401(k) in place is worth the fees. Since a 401(k) has costs for the business owners, when making this decision you’ll need to weigh those costs and expenses against the benefits to determine whether establishing the 401(k) is the high choice.
When I started researching this question, I wasn’t sure what I would find in the market. Employee benefit plans are complicated stuff subject to a host of regulation, so I wasn’t sure if it would be reasonable to find an administrator who would handle it for a low cost.
I know from my previous research into Solo 401(k)s that the leading brokerage firms are willing to act as a plan administrator to get your business. It looks like they’ve all “done the math” and figured out that it’s worth the hassle of taking on the administrative burden. I quickly realized that these providers aren’t interested in administering your small firm’s 401(k). For that, you’ll have to look somewhere else.
Specifically, you’re looking for a provider that can perform four core services: (1) Third-Party Administration; (2) Recordkeeping; (3) Custodian; and (4) Investment Management.
Finding a competent third-party administrator / custodian
Third-Party Administrators (TPA) provide a specific role in establishing a 401(k) plan. They handle most of the administrative burden of running a 401(k) plan, including plan design, administration, and (often) recordkeeping. TPAs do not provide you with investment advice, so you and your employees won’t be able to call them and have them help select and manage your investments. Most likely, your TPA will set you up with a Safe Harbor 401(k) since those are relatively easy to administer.
When evaluating TPAs, one of the most significant concerns is going to be fees. TPAs typically make money in two ways: assets under management (AUM) fees or fixed fees.
AUM fees don’t seem like a big deal at first. An asset under management fee in the 0.04% – 0.08% range doesn’t feel like a lot, but they add up over time and will ultimately become a significant expense as your assets grow. To correctly compare the difference between the flat fee model / AUM model, you’ll want to do a detailed analysis of the amount of money that will be contributed to the plan, along with the amount of time those assets will live inside the plan.
Fixed fees are easier to understand and will probably depend on the types of services offered and the number of plan participants (along with a standard one time set up fee).
In addition to the TPA, you’ll need some hold to hold the plan assets (i.e., the custodian). Some TPAs include the custodian fee in their fees. In fact, during my research, I found that it was often the case that the TPA bundled the custodian fee within its price. However, keep in mind that the custodian fee could be unbundled so you’ll want to make sure you understand how the custodian fee is being handled with whoever you go with.
There shouldn’t be any other fees charged by the TPA or the custodian.
Fiduciary obligations / investment manager
After your TPA establishes your plan, as the plan sponsor you will be named as the fiduciary. As the fiduciary, you are responsible for doing what’s best for the plan participants. That may seem like a low risk, but plan participants can sue plan sponsors for breaches of fiduciary duty (see LaRue v DeWolff), so it’s a risk you may want to offload.
To offload the risk, you can appoint a fiduciary advisor to take advantage of the fiduciary adviser safe harbor.
There are two types of fiduciary advisors: the 3(21) fiduciary and the 3(38) fiduciary.
The 3(21) fiduciary is an investment advisor offering investment advice to the plan participants. However, the 3(21) is only a co-fiduciary. The ultimate decisions for investment selection remain with the plan sponsor (i.e., you). You still have a fiduciary responsibility to the plan participants. Having a 3(21) fiduciary offer investment advice to your plan participants is useful if you’re not comfortable yourself but doesn’t relieve you of any liability.
On the other hand, a 3(38) fiduciary takes responsibility for the management of the plan’s assets. The 3(38) fiduciary can accept liability for investment selection and portfolio management, therefore relieving the plan sponsor of such responsibility.
Small firm 401(k) providers
While I’ve never set up a 401(k) plan myself, two providers stood out during my research: Guideline and Employee Fiduciary.
Guideline is a 401(k) plan provider developed by a TaskRabbit co-founder after experiencing frustration in setting up TaskRabbit’s 401(k) plan. Guideline is an “all-in-one” service that handles plan design and setup, administration, compliance and investment management. They can act as a 3(38) fiduciary.
Like many FinTech companies, Guideline’s value proposition is two-fold: (1) technology to make your life easier and efficient administration; and (2) low fees. Their business model is based on developing an efficient tech operation to handle the administrative and record keeping aspects of 401(k) management, which they believe they’ve achieved. Guideline charges a one-time $500 setup fee and then $8/month per participant (with a minimum charge of $40 per month, so essentially you pay for five employees whether you have that many or not). There are no AUM fees. Custodian fees are included in the pricing, so the only other expenses you’ll pay are those of the underlying investments, which happen to be mainly low-cost index funds (also note that Guideline charges a $50 disbursement fee if you leave the company and need to transfer your 401(k) balance out of the plan).
Guideline also integrates with many of the FinTech payroll processing platforms like Gusto or OnPay, so if you’re using one of their integration partners (there are many more), administration of the 401(k) contributions should be even easier.
Learn more about Guideline here.
If Guideline is the shiny FinTech company with low fees, Employee Fiduciary is the Vanguard that’s been around in the industry for a long time (and often recommended on places like Bogleheads). Employee Fiduciary charges a $500 establishment fee along with a $1,500 annual base fee (which covers up to 30 employees) plus a 0.08% custody fee of plan assets.
For the extra bottom line cost as compared to Guideline, what do you get? Well, for one you get a lot more options: Profit Sharing Plans, 457(b) plans, defined benefit and cash balance plans. If you need something that is more customized, Employee Fiduciary will probably be able to help you. They use a checklist during the onboarding process to determine what type of 401(k) plan you’ll need.
Employee Fiduciary also has a broader range of investment options. In addition to the standard vanguard index funds, you’ll also have access ETFs and self-directed brokerage accounts if you want to customize your investment options.
Employee Fiduciary can also act as a 3(38) fiduciary if you want them to.
Learn more about Employee Fiduciary here.
While it’s hard to say which company is best for you, if I were setting up a small firm 401(k) plan, Guideline and Employee Fiduciary would be the two places where I would start.
Joshua Holt is a practicing private equity M&A lawyer and the creator of Biglaw Investor. Josh couldn’t find a place where lawyers were talking about money, so he created it himself. He spends 10 minutes a month on Personal Capital keeping track of his money. He's also exploring real estate crowdfunding platforms like Fundrise which are open to both accredited and non-accredited investors.
Thirteen thoughts on 401(k)s for Small Law Firms
What about the ABA sponsored plans? They seem straightforward and economical. Did you look at those?
Yes, I looked at the ABA Retirement Funds plan discussed by Jonathan Horton below. I don’t think it’s a good deal and will be writing about it more in the future.
Did you have other ABA sponsored plans in mind? It’s possible I missed them and I’d like to consider everything.
I am looking forward to your article about the ABA retirement funds – your analysis is always good.
However, as background, my firm had much the same experience as Jonathan Horton’s below and we have used the ABA plans for the last 5 years. Compared to the other options that were available, I would second his comment that “The experience has been fantastic and we have never looked back. I don’t know why any small law firm would want to do it themselves when they can plug-and-play the ABARF solution”.
I also note that with the ABA plan you can either invest directly in their funds – or have your 401K contribution pass directly to a self-directed TD Ameritrade brokerage account with no management fees and no transfer charge. You can then but whatever fund or stock that you want – so much more flexible than a typical 401K plan. There is also no yearly fee at all for the plan.
I am looking forward to your analysis!
A glaring omission: ABA Retirement Funds is an all-in-one solution for any size firm, with no out-of-pocket expense to the firm, and unbeatably low management fees which are paid for from the invested funds. As a nonprofit program, the more funds that are added to the program, the lower the pro-rata fee is for each law firm in the program. As the Firm Administrator of a small firm for several years, I switched them over from a traditional set-up (where the firm was the trustee managing relationships with an investment bank, an investment advisor, and a TPA – all separate companies) to ABA Retirement Funds. The experience has been fantastic and we have never looked back. I don’t know why any small law firm would want to do it themselves when they can plug-and-play the ABARF solution: https://abaretirement.com.
I think that the website you mean is https://abaretirement.com
You are correct. Sorry about that!
We’ve setup a 401(k) plan with our small firm. It is becoming easier and easier for smaller companies to setup retirement plans. I think 401(k) is much better than a SIMPLE or SEP because of the mandatory employer contributions. Also, 401(k) typically allows for the larger contribution limits. While technically a SEP could probably contribute more, the downside is that the company would have to contribute exactly the same amount to each employee. No control by the employee to accomplish her own goals.
Who did you set up your 401(k) plan with?
Also check human interest and forusall.com
Not sure how it’s fair or rational for our tax code to allow the favored few employed at a firm that offers 401k to defer taxes at rates so much greater than those without a workplace plan.
There is absolutely no reason for a small law firm to go with any 401(k) custodian other than ABA Retirement Funds. (1) there are no fees to set up the 401(k) and there are no annual fees (unlike all the custodians you mention); (2) while the funds they offer in the core plan have a relatively high expense ratio, you can use a TD Ameritrade brokerage window and have access to their Commission-Free ETF List; there is no fee to use the brokerage window; and (3) although perhaps not so important to a small firm, your liability is limited (see page 2 of https://abaretirement.com/wp-content/uploads/ABARF_Program_Brochure_FINAL-1.pdf)
Thanks for the information. I’d like to track down and confirm your comment regarding access to the TD Ameritrade brokerage window. If all 401(k) account holders do in fact have access to the Commission-Free ETF list with no account fees, that would be a big deal indeed.
Hi, I never saw your reply about the TD Ameritrade account. I am personally using this self directed IRA option, but have yet to select my investment. Do you have any recommendations for this? None of the commission free ETFs look familiar to me.
Do you have a link to the commission free ETF list?