Do workers know something that legislators don’t? Or do lawmakers have selective vision when making rules that govern enormous pots of money?

Consider these very obvious problems.

Limited Choices

Some will say that a few choices are better than no choices at all, but that’s certainly open for debate. For example, in some states the default investment is intended to earn nothing. It aims to earn zero, and to lose zero. But participants pay for the privilege of putting their money in this non-interest earning fund. They would be better off stuffing their cash in the mattress.

Even with those investments that earn money, the dividends are usually small. An investor with a small amount of education and ambition could easily get a better return from a private IRA, a brokerage account, or sometimes even a money market account at their local bank. 

Limited Portability

Portability was touted as a feature of state secure choice plans, but it doesn’t take much looking to discover that portability of these accounts is a bigger problem than a solution. The idea of the account belonging to the participant instead of to the employer is solid, but the practicalities get in the way.

The portability only works if the participant moves from one secure-choice-participating employer to another. And since most states have fewer than half of their businesses participating, the likelihood of multiple jobs all offering the same plan is low. What happens to the state-run IRA account if the employee moves to a company with a 401(k)? What if the participant pursues employment in another state? 

Now the employee is saddled with an account that no longer functions as intended (as a payroll-deduction plan) and cannot be rolled into a 401(k). Participants are left to pay for an account they may no longer be using, or withdraw the funds and pay taxes on them. Most of these funds never make their way into another retirement account. Is this good for workers?

Limited Flexibility

Most of the states are implementing Roth IRA plans, which are good for some, but certainly not for all. Since they are designed to cater to a broad population, they are not suitable for everyone’s financial circumstances or goals, and they do not come with the ability to select a non-Roth option.

Roth accounts tend to be useful for younger workers, who will probably have a larger income in retirement than they do currently. They are often less useful for older workers who are at the peak of their earning potential. 

Roth IRAs do not allow employer contributions, so even those businesses that can afford it and want to contribute cannot do so with this type of plan. Add to that the much, much lower contribution limits of an IRA as compared to a 401(k), and you have two big reasons why the earning potential within a 401(k) is far greater than with an IRA.

And the flexibility problems don’t end there. High-income earners are often not eligible to contribute to an IRA. And those employees who have private IRAs already will not increase their savings potential at all, since contribution limits are not enforced per account, but rather per person. In fact, employees that aren’t watching closely could find themselves in trouble if they over-contribute because they now have two separate IRA accounts.

Government Involvement

Secure choice plans are all created by state legislation, and all overseen by government entities. Governments, even those in the most responsible states, are not known for their competence or efficiency, leading most small business owners to prefer that states engage a private company to provide the management. Do you really want the government involved in your retirement savings? Trust in government sits at an astoundingly low 14%.

The upside of government involvement (at least theoretically) is worker protections, but since state IRA plans are not subject to ERISA rules, those protections do not apply.

And consider the potential for political interference, turning retirement accounts into political weapons. Or changes to legislation that might make it difficult for workers to plan appropriately. Or restrictions to participants’ freedom to use their funds. And what happens if the federal government makes laws that interfere with the state laws?

Who really has the power over these plans?

Fees, Fees, Fees

Because state IRA plans are free to employers, it is the workers who pay all the fees. In some states these fees are within industry norms (at least for now), but in others the fees are very high. California, for example, charges almost a full 1% to participants, triple what they would pay with a privately-held IRA.

These fees add up over time, not just in dollar amounts, but also in lost growth. The fees paid to managing bodies are dollars that could have been earning much-needed dividends. And, if they are invested in funds that are not bringing a good rate of return, the fees could actually make them lose money in their retirement savings accounts.

Which leads me to wonder, who benefits from state IRA plans?

The Players that Benefit Most from Secure Choice Retirement

It’s hard not to see state-mandated retirement plans as a money making scheme for the government and a very small number of private companies. Just two big corporations manage almost all of the state plans. States are creating new regulatory and oversight boards, and vast bureaucracies to manage accounts and serve participants.

Increasingly, the movement looks like one big “good ol’ boys” club, aimed at enriching the wealthy and empowering the powerful at the expense of the average American employee.

It’s not as if the retirement industry was pure as the wind-driven snow before the states stepped in. The legacy retirement plan providers are behemoth companies that have spent their energy focusing on whales — the largest businesses with the wealthiest retirement plans. For four decades, they have ignored the vast majority of workers, those that work for small companies.

It’s no accident that the state solutions started coming about at the same time that fintech solutions were entering the market. The need was so great that someone had to act. But in terms of which has the power to make a substantial difference for workers, fintech 401(k) plans are vastly superior to state IRAs.

For the sake of brevity, I’ll just mention a few quick bullet points to illustrate my point.

• Contribution limits for 401(k) plans are almost 10x what’s allowed in IRAs, making them a much more effective savings vehicle.
• Employers have the option to provide funds to their employees within a 401(k), again increasing their ability to save.
• Most of the fees are paid by the employer, so the fees to the participant are kept within reasonable limits. Because fintech companies are relying heavily on automation, they are able to keep costs very low for both employers and employees.
• While 401(k) portability is not as good as it could be, it is possible to roll one 401(k) into another, or leave the old one in place for what is often a reduced fee.
• Scrappy fintechs provide much better customer service than government bureaucracies. Governments have no competition and don’t care if you leave them a bad review. 
• Fintech 401(k)s are built specifically for the market that is the most left behind and the most in need — small companies with fewer than 100 employees. In fact, even those with fewer than 5 employees can still get an affordable retirement benefit for their employees.
• New 401(k)s come with lots of tax credits. IRAs come with zero.

Don’t Fall for the Hype

If your company is one that is being forced to offer a retirement benefit, let me offer two pieces of advice. 

First, at least investigate a fintech 401(k) option before choosing the state plan. There is a reason why more than half of small companies will choose a private option over a state IRA, and another 25% of those that choose the state plan will change their mind.

Second, seriously consider seeking the counsel of a good financial advisor. Regulations and economic forces of all kinds are plaguing small companies, and a smart advisor could save your company thousands of dollars, as well as helping setup and manage a good retirement plan.

Stick it to the good ol’ boys club and talk to 401GO. We can help you get a good retirement plan setup in just minutes at a price point you can actually afford.

The post Is Secure Choice Good for Workers? No. It’s Not. appeared first on Fast and Affordable 401k for growing businesses.

I have started over a dozen companies in the past decade. I’ve had successful exits from most of them and a few failures all while gaining a tremendous amount of experience along the way. At one point, I had about 15 different companies all going simultaneously which, in hind-sight was a terrible idea. I would often have people ask how I was able to keep track of everything from a food-truck (one of the failures) to a paint distribution company (still going). The secret was in finding the right employees to delegate the day to day management and administration to. I also learned that while I could find good employees while offering average pay and benefits, it was always much better to offer above average pay and above average benefits to get above average results. This leads me to what I feel is one of the top benefits, the 401(k).

The Search for a 401(k) Plan

Early on in my entrepreneurial endeavors, I had a few employees and was looking at offering a 401(k) mostly as a way for me to stash more than the IRA limits would allow into a retirement plan. I’ll admit, at the time I was more concerned with my own retirement than that of my employees. The best option at that time would have cost around $6,000 the first year and another $4,000 or so each year after that. Plus, there were all the hidden fees I wasn’t even aware of at the time. Overall, it was a lot of expense for a very sub-par 401(k) plan. I ended up abandoning the idea after realizing that there wasn’t anything affordable and decent for a small company like mine. Several years passed and demand for quality employees increased while the supply decreased. In order to compete I’d have to do better than my competition in terms of benefits and pay.

Recruit, Retain and Retire

Offering better pay is easy; I simply log into my payroll providers app and change some numbers and suddenly the staff is a little happier but that isn’t very sustainable nor does it always make sense from a financial perspective. Benefits on the other hand, well, that’s a mixed bag. Sure, health benefits are a must but most employees have a hard time really seeing the value in that since, unless your company pays the full premium, the employee still shares some part of that benefit expense (their net pay decreases). I see health benefits more as a box that has to be checked in order to recruit and retain talent.

Now, the 401(k), that’s a game changer. Of all the benefits I offer employees, the 401(k) is the one they get most excited about. Maybe it’s because they don’t expect a small company like mine to offer one so it’s seen as a bonus but I think its more because this is the first time most of them have ever been offered that benefit.

Birth of 401GO

So, how did I finally find the solution for offering a 401(k)? I had a friend in the finance industry, a 401(k) advisor at the time. He put me in touch with a few people and we looked around and found there wasn’t really a good option for a company of my size. My advisor and I discussed the current state of the industry and the aversion to small plans and figured we could do better. We assembled a small team and set out to do the impossible. We found some of the most innovative leaders in the 401k space and our little team created 401GO. After a year of hard-core development, I’m proud to say, one of my businesses was the first client to join the platform.

I’m now passively involved in a few of those early companies as my time is now primarily dedicated to 401GO but I still get excited, as I’m sure my employees do, when I log into that first 401(k) plan and see 100% participation rates and the collective amount our little company is saving for retirement. Also, I’m very confident that the full benefit offering of my company competes with businesses much larger than me and allows me to recruit and retain talent that was previously out of reach. I have been able to steal away several key employees that left the ‘security’ of a large corporate organization to come work at one of my scrappy start-ups due to a better overall offering from my company. Sure, it isn’t just the 401(k) benefits but they do play a key role and I’m confident the plan we offer is better than anything they’d find elsewhere.

Everyone Wins with 401GO

When 401GO was started, the focus was always first on the employee. We learned that the way to do what is best for the employee is to also do what is best for the employer. Through automation and technology we were able to build the industries most efficient and automated 401(k) administration platform. This leads to cost savings and massive scalability. Suddenly, we could do plans for companies as small as a single employee (often just the employer). This tech-centric approach also makes it possible to offer access to the same premium fund selections and portfolios that the ‘big guys’ can offer while keeping costs low. In fact, while the industry average asset under management fee (AUM fee) is above 1.5%, for clients on the 401GO platform that fee is ZERO. For the employer, the fees are incredibly low too, at $9 per employee per month it is certainly the least costly benefit for a company to offer and well below industry average. As for hidden fees, start-up fees, monthly minimums, we’ve set those to ZERO as well.

401GO wasn’t created just for small businesses, as business owners ourselves, we recognized the importance of businesses advisers such as CPAs, benefit brokers, insurance providers, payroll providers and such. Because of this, our platform is designed to work with them and help them make their jobs easier. For example, integration with payroll systems makes the ongoing work of administering the 401(k) virtually disappear. For financial advisors and CPAs that want to offer their clients a 401(k), we handle all the paperwork, administration and compliance associated with a retirement plan so that adviser can focus on advising and taking care of their clients more pressing needs.

For me and my small company, the search for a 401(k) resulted in a “happily ever after” ending. It took over two years to build the solution we were looking for and it is still in constant refinement but the end goal has already been met. I’m proud to say, my small business now offers a 401(k) and best of all, its a plan that is more efficient, and ultimately more beneficial to employees than anything my biggest competitor offers. Now, all small businesses can offer this amazing benefit.

The post Why I Waited to Offer a 401(K) appeared first on Fast and Affordable 401k for growing businesses.

Tax Tweaks in 1978

A Game-Changing Discovery

The Rapid Growth of the 401(k) Plan

Non-Discrimination Assurances

Automatic Enrollment in 401(k) Plans

The Big Business of 401(k) Programs

The post The Origin of the 401(k) Plan appeared first on Fast and Affordable 401k for growing businesses.