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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.

ADP

  • 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

Vanguard

  • 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.

Comparison

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.

Summary

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.

Entering Early Retirement

After a 5-year hiatus on this blog, I will finally be able to find the time to blog about finance and investing again. I will be entering early retirement in my late forties in January 2017.

I plan to share on this blog the many choices that I face that are related to the various aspects of early retirement. Some of these choices include

  • Portfolio asset allocation and withdrawal strategy
  • Tax planning
  • Relocation choices
  • Medical care options
  • HSA selection

Stay tuned!

Refinance Started With First Internet Bank

It looks like the refinance train is here again. Due to the weak economy statistics, mortgage interest rates have dropped to rates not seen since October 2010.

Last week on 6/1/2011, I requested quotes from two brokers and two banks to refinance my 30-year fixed jumbo-conforming mortgage. The criteria for my refinance is that it has to be no-point and is either no-cost or has very low-fee.

Broker H

I have worked with broker H for previous refinances before. She quoted me a rate of 4.375% with a 0.375% fee.

Broker A

This broker was recommended to me from a co-worker. She told me the rate was 4.375% with no-point and no-fee at that particular instance, but the rate was valid only on that day and it was already too late to prepare the documents to lock in to that rate. She requires an upfront $25 for the credit report and another $50 to submit the loan (which will be reimbursed at closing).

Bank of America

I received a quote of 4.75% for a no-cost no-fee loan. My current loan is 4.625%, so this option is a no-no.

First Internet Bank of Indiana (FirstIB)

Based on many good reviews, including that from TheFinanceBuff, I have been watching the online rate quote from FirstIB. The online rate quote on this particular day was 4.375% with ~$1200 fee.

What I did

I decided to wait for a better rate from the brokers, and at the same time, to submit the application with FirstIB and wait for the right moment to strike.

FirstIB does not charge a fee to submit the online application, so it was a relatively easy decision, with the only “cost” being a hit on my credit report.

I submitted the online application with FirstIB’s Gary (who has received many good reviews). I received a call back from Gary about 3 hours later. He told me the rate had improved after my application was submitted, and the new rate was 4.375% with a $5000 credit. This credit can be used to pay for the closing costs (estimated to be $3000), with the remainder going into the impound account to pay for future property taxes and insurance.

Since this mortgage rate and fee scenario met all my criteria, I locked the rate with Gary on the spot. Gary told me that he expects the refinance to close in 25 days.

I am keeping my fingers crossed and will post the timeline once my refinance with FirstIB is completed.