Tag Archive: Brokerage

Setting up a Small Business 401(k) Plan (Part 2)

[Part 1: Selecting a provider, Part 2: Selecting the investment options]

In this second part, we look at some of the investment options selected for the 401(k) plan. As a recap, the following were the objectives of the plan:

  • The Plan offers a choice of low cost mutual funds that cover diversified asset classes, and
  • The Plan is not overly expensive for the company to sponsor.

Based on the criteria given, the following requirements were put forth:

  • Simplicity — Provide three core asset classes for those who value simplicity.
  • Diversification — Provide exposure to the entire U.S. stock market, most of the international stock market and the U.S. aggregate bond market.
  • Low expenses — mutual funds with low expense ratios.
  • Target Retirement funds that own the core investments, rebalance automatically and become more conservative over time.

Investment Options

I worked with the Vanguard representatives, and came up with the following list of Vanguard mutual funds:

For ease of understanding, the investment options are divided into four groups.

  • Group A : This group consists of Target Retirement funds. These funds are for those who prefer simplicity above all else. Participants just pick the ONE fund that most closely matches the planned retirement year. These funds own all the core asset classes, re-balance automatically and become more conservative over time.
  • Group B : This group offers the core asset classes as individual funds for participants to mix and match their desired ratio. Participants can also use Group B to semi-manage and re-balance their portfolio in concert with their IRA or taxable account investments.
  • Group C :  This group offers additional asset classes for participants who want to duplicate Fama-French’s research.
  • Group D : This group offers cash equivalent investments, either a stable value fund or the federal money market, or both.


Q. How are the investments options selected?

A. The investment options, in particular Groups A and B options, are modeled based upon the Federal Government’s Thrift Savings Plan (www.tsp.gov). The TSP is the largest defined contribution plan in the world and one of the very best. More information on TSP is available from searching on the web, e.g. from CBS News:



Q. Why are there so many index funds?

A. Index funds have no manager risk, no style drift, no asset bloat, no fund overlap and never below average performance. For comparison to actively managed funds, please refer to this report which studies the relative outperformance or underperformance of actively managed funds against their benchmarks.



Q. I want to use the Target Retirement fund. Which one should I choose?

A. Please use this link from Vanguard


to get more information. It helps you choose the appropriate fund given your age or years to retirement.


Q. What are the participant fees for the 401(k) plan?

A. The fees range from 0.05% to 0.31% per year. So on a $10,000 balance, participants will be paying not more than $31 per year.

Note that these fees are already reflected in the fund’s daily quoted price, i.e. there is no separate annual account fee. There is an administrative cost to sponsor the Plan; that cost is borne by the company.

Setting up a Small Business 401(k) Plan (Part 1)

[Part 1: Selecting a provider, Part 2: Selecting the investment options]

I was recently involved in helping to setup a 401(k) plan for a startup company. I thought I’d share the results of my research and my thoughts on this subject. I gathered my information from a variety of sources, including past coworkers, the Bogleheads forum and other online resources.

I was given the following criteria to work with:

  • The Plan should offer a choice of low cost mutual funds that cover diversified asset classes, and
  • The Plan is not overly expensive for the company to sponsor.

I obtained proposals from three different providers — ADP, Employee Fiduciary (EF) and Vanguard. The quotes are current as of Nov 2016, and for an initial 5 participants.


  • Setup cost = $0 (normally $1500, but waived)
  • Monthly base fee = $340 (yearly = $4080)
  • Per participant fee (per month) = $11.90
  • Asset-based fee = none
  • Note: ADP provided two options. IPS Zero and IPS Direct. IPS Zero offers low cost funds while IPS Direct offers more expensive funds and “kicks back” part of the fee to the sponsor by reducing the monthly and per participant fees. IPS Direct is not considered in this post.

Employee Fiduciary

  • Setup cost = $500
  • Yearly base fee = $1500 (up to 30 participants; additional $30 per participant)
  • Asset-based fee = 0.02% / quarter


  • Setup cost = $1000
  • Yearly base fee = $3475 (up to 15 participants; additional $75 per participant up to 50 participants)
  • Asset-based fee = none
  • Note: Vanguard offers a “recordkeeping” credit if investor shares are used instead of admiral or institutional shares. For comparison in this post, we only consider admiral or institutional shares for all three providers, so we will not apply this credit.


The following table shows the yearly base fee and the asset-based fee for the three providers:

The cost of ADP is higher than Vanguard at every scenario, even accounting for the fee waiver when setting up the plan. So ADP can be dropped and we are left with comparing Employee Fiduciary with Vanguard.

Employee Fiduciary has a quarterly asset-based fee of 0.02% (or 0.08% per year). So the cost to use EF increases when the asset under management (AUM) increases. Vanguard does not impose a fee based on AUM.

Some sample AUM values are listed in the table above. Why these numbers are chosen is explained below:

  • $270k : this is 15 x $18,000, i.e. 15 participants with maximum contributions in a year (not adjusted for growth).
  • $540k : this is 2 x 15 x $18,000, i.e. 15 participants with maximum contributions for two years (not adjusted for growth).
  • $2.47m : this is the break-even point at which EF and Vanguard have the same fee for 5 to 15 participants.
  • $3.41m : this is the break-even point at which EF and Vanguard have the same fee for 25 participants.


When the asset in the plan is small, the lowest cost provider is EF. This “lower-cost” advantage will persist until the asset level reaches around $3m. Beyond $3m, the Vanguard plan becomes more cost effective than EF.

Other Considerations

Between EF and Vanguard, Vanguard has more brand name and is very well-known and established. EF is a smaller company founded in 2004. While it has very positive reviews on the web and was very prompt and polite in response to my inquiries, we cannot deny that it is a less known entity when compared to Vanguard.

If both EF and Vanguard offer the product at the same price point, Vanguard would be my preferred choice. However, if the AUM is expected to remain small for more than a few years, using EF is probably better since this will save the sponsoring company some money.

TD Ameritrade New Account Bonus

I recently took advantage of a TD Ameritrade new account bonus. This promotion can be accessed through


and runs through 7/15/2011. The fine print is as follows

Offer valid for one new Individual, Joint or IRA TD Ameritrade account opened by 07/15/11 and funded within 30 days of account opening with $2,000 or more. To receive $100 bonus, account must be funded with $25,000-$99,999 within 30 days of initial minimum funding. To receive $250 bonus, account must be funded with $100,000-$249,999 within 30 days of initial minimum funding. To receive $500 bonus, account must be funded with $250,000 or more within 30 days of initial minimum funding. If you open a new TD Ameritrade retirement account, cash awards are valid within your IRA only and non-transferable to another existing TD Ameritrade account. Please consult a legal or tax advisor for the most recent change to the U.S. tax code and for rollover eligibility rules. Offer is not transferable and not valid with internal transfers, Amerivest-related accounts, TD Ameritrade Institutional accounts, current TD Ameritrade accounts or with other offers. Qualified commission-free Internet equity or option orders must execute within 60 days of meeting minimum funding requirements. Contract, exercise, and assignment fees still apply. Limit one offer per account type. Account must remain open with minimum required funding for 12 months or TD Ameritrade may charge the account for the cost of the cash awarded to the account. TD Ameritrade reserves the right to restrict or revoke this offer at any time. This is not an offer or solicitation in any jurisdiction where we are not authorized to do business. Please allow 3-5 business days for any cash deposits to post to account.

Taxes related to TD Ameritrade offers are your responsibility. Retail values totaling $600 or more during the calendar year will be included in your consolidated Form 1099.

Since I already have an existing account with TD Ameritrade, I wanted to check if I can qualify. This is the reply to my inquiry

Yes, you can use that promotion if you open another account.  Please let us know if you need further assistance.  We really appreciate your business.

I opened a new account online. The account application and the credit of bonus went through very smoothly and quickly. The following is the timeline:

  • 5/30/11 (Memorial Day) : Submitted application online.
  • 5/31/11 : Faxed in signature form and asset transfer request in the morning. Later that day, received an acknowledgment that the asset transfer request was received.
  • 6/3/11 : Assets were transferred into the account. The new account was credited with the new account bonus as well as 100 free trades.

From start to receiving the bonus, it took 4 business days. Now I just need to keep the assets there for the next 365 days. 🙂