Many organizations call about Social(k) and the first question is "How do your funds do?" The question should be about the account. "What types of accounts does Social(k) offer that would be appropriate for our organization?" Once the account has been identified we can look at providers AND then investments.
The account and the provider vary, the investments available to each are almost identical - all with huge libraries of funds. See The Monster List of Funds under Mutual Funds below the list of ESG screened funds.
Like my bucket of blueberries?
You'll need to choose which bucket
best fits your investment needs.
Retirement Plans are a Bucket for Investments
Separating the Account from The Investments when considering a plan for your organization can simplify the process. When comparing performance, service and cost, look at the account type and who will provide the bucket, then the investments.
The Bucket. Usually in the form of an IRA, a SEP, SIMPLE, 401(k), or a 403(b). Any type of retirement account can be considered a bucket. These can be simple or complex, depending on what you need, and that’s where the costs vary. Once we know what type of account fits your organization we can pick service providers.
The investments go into the bucket. Mutual Funds, Exchange Traded Funds, Managed Portfolios, Certificates of Deposit and other investments can be held in your bucket.
Bucket (aka Retirement Account) Fees
There are many types of retirements accounts. There’s your IRA at the local bank, the IRA with an online provider, an old 403(b) from when you were a substitute teacher, a 401(k), SEP-IRA, or SIMPLE IRA. There are costs to own any type of account. The fee could be in the form of a direct annual bill, an annual debit from the account, or it could be embedded into the cost of the investments purchased in the account. The fees for the bucket can be charged as an actual dollar amount or a percentage of assets.
An IRA is an easier account to maintain and will have a lower fee than a 401(k) or other group account.
An account can be larger and more complex than an IRA, like a 401(k) with multiple employees in a company plan. For these group accounts your employer hires a recordkeeper to keep the values and details of the master account, held at a Trust Bank, the custodian. They also need a Third Party Administrator to do the work of maintaining the plan document and filing annual plan reports with the Dept of Labor, the 5500. The fees for this work can be in the form of a direct bill to the employer, a direct fee to participants (i.e., you), an added percentage to plan assets, or as payment from asset managers. An example of “hard” dollar costs is the annual bill the record keeper will send for $1,000, plus $40 per participant, to do the work of tracking the value of the accounts. Other ways to collect fees are “soft” dollar costs, when the expense ratio of the investment fund is raised to accommodate other fees.
The Green is Gold Mutual Fund might charge 1% to operate, but a recordkeeper could add 0.25%, for a total of 1.25% cost against investment returns. The advisor to the plan may also direct bill, deduct accounts or add fees to the mutual fund expense ratios, depending on how the plan is structured. The recordkeeper tracks, collects and pays these fees. Contributions go direct from your bank account to a custodian trust bank, never stopping with any service provider.
Fees for The Investments
The typical investments in retirement accounts are Mutual Funds and Exchange Traded Funds. These have expense ratios — the amount each investment manager charges to manage your money, given as a percentage of assets under their control. For example, you may be told the annual fee to manage a specific fund is 1%. Keep in mind the percentage depends on underlying cost structure and asset base under management. If cost is fixed at $1,000,000 annually, a smaller fund pays a higher percentage than a larger fund. A small fund might charge 1.5% annually, while a large one might charge 0.5% and bring in the same dollar amount. Compare the expense ratios of these funds to that of their peer groups. Some investments cost less, some more. Performance is shown before and after the fund expense ratio is applied. For example, you may see that the fund made 10% last year but you only saw 9% The fund kept 1% for the work. Obviously, a lower fee for the work is better, but overall performance against peers is also important. Fee disclosure for funds is by prospectus. Service provider fees are disclosed for your plan.
Any fee to purchase mutual funds in a group account is waived. The share class used in the plan will vary by custodian. Each share class of a mutual has different expenses ratios. An A share might have 1% expense ratio, but an Institutional share class might be at 0.5%
I know this is a lot of information to take in, but once you understand what you will be paying for your bucket and what’s in it, it will become easier to shop around and find the perfect bucket for whatever you plan on filling it with.
Request a proposal, and we'll be in touch to discuss what plan would work best for your company. While you wait for us to contact you, you may also wish to browse these pages, maintained by the Department of Labor, to learn about different types of Retirement Accounts and what they offer:
Small Business Retirement Plan Resources
Fact Sheet About Employee Contributions
Fixes to Common Plan Problems