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Hi I'm Mike Dayoub I run a Registered Investment Advisor in Georgia. I am qualified
to advise 401k plans anywhere in the United States.
If you're clicking on this video then you're asking the question is a 401k from ADP a bad
deal? Or is a 401k from Paychex a bad deal?
Well the answer the short answer is it depends on the deal.
Not all proposals are identical from these payroll processing giants.
Let me show you how to look at the proposal and compare it to other proposals
Now I know this could get tedious it could be a long video but it will save you and each
of your participants hundreds of thousands of dollars EACH
by the time they retire So it'll be worth it if you shop around a
little bit. You're a small business owner and your payroll
processing company they gave you a well packaged presentation a proposal
to set up and administer your 401(k) for your business
They made it sound simple and you're clear they won't screw things up
They've clearly done it a thousand times before But how do you know you're being offered a
good deal? Should you shop around?
Definitely you should it could mean a big difference for you
but really you should shop around not just to save money for yourself but as part of
your fiduciary responsibility to your participants. That has to be your primary motivation in
terms of what you do with your 401(k). So how do you shop around?
How do you compare apples and oranges from these different 401k providers?
Especially when they're bundling their services into one fee so you can't tell exactly what
you're paying for a particular service. I do that for my clients as part of my advisory
service. Here's the spreadsheet I use to fold all the different costs into one document.
I have the annual costs and the up front costs -- the one time only
costs. A 401k administered by these payroll companies
-- I haven't found one yet to work out to be a good very good deal for you or your employees.
Before I go into the details of all these costs let's jump over to a webpage. Let's
talk in some generalities. One EASY place to get the ratings for a 401k
is at www.FutureAdvisor.com Go there.
If you already have a 401k maybe it's already rated there.
Some of the smaller ones are not. But a lot of them are.
Take a look at the plan ratings on this webpage. If you can look up a plan.
One star to Five stars. What's it rating on?
Well, this webpage it rates by one criterion only.
Low fee 401k plans with great index fund options get higher ratings -- get more stars.
But what about all the other things that a 401k plan has to do?
I can think of plenty of other criteria that would be deal-killers if an administrator
or plan couldn't do them right. Take a look at these.
I won't read them off to you right now. Hit pause.
Why would this webpage only rate on one thing? Because, the answer is, it's the MOST IMPORTANT
thing. If you don't have great index fund choices
inside that 401k each of your participants is getting drained
out of their account hundreds of thousands of dollars by the time they retire.
Click on this video here if you want a demonstration of that.
That's why employees roll over into an IRA when they terminate a lot of times.
Unless the new employer has a good 401k A 401k has tons of advantages over an IRA
-- well, a few anyway -- but if a 401k is no longer matching and the mutual funds have
expense ratios in the 1% range instead of the 0.2% range, rolling over to an IRA is
the obvious decision to make when they leave the company and they're no longer getting
the employer match. So if you don't have a 401k yet why would
you bother going to this webpage? Well maybe you know a small business with
a 401k plan administered by ADP or Paychex. And maybe you can look up their plan rating
on FutureAdvisor.com Look up the plan and see how it rates.
here's another idea. As long as you're on that webpage.
Take a look at the actual 401k providers themselves. Their retirement plans for THEIR employees.
Look up ADP -- well look up Automatic Data Processing Inc. or Paychex.
See how they rate if you only see one star there that's my point.
One star means their employees are limited to a set of investment choices.
Don't get stuck with a plan like that. If you're making the initial decision to set
up your 401k don't take the easy choice and go with your payroll provider.
I would never use mutual funds in the 1% range. As a Fee-Only(TM) planner, I have the freedom
to pick out low cost index funds like those from Vanguard or Schwab in the expense range
of a FIFTH of a percent. That makes a big difference.
Alright. Well. Let me be fair to these payroll service providers.
What do they do well? I'd like to spell that out.
Just to show that I'm looking at them even-handedly and not just looking at the uh Expense Ratios
of the funds that you're limited to by these providers.
Let's see how these payroll companies do in some of these other selection criteria for
why you would pick them as your 401k service provider.
Ease of converting or implementing the 401k. Actually, they do that pretty well.
There are some other service providers that do it pretty well, but I have to admit they
don't screw it up usually. You have to have your ducks in a row.
If you've got things fairly well proceduralized then you can move it over to a different 401k
provider too. Now what about the cost of converting to the
401k? Actually, it depends.
Sometimes in their proposals these payroll service providers don't even tell you what
the cost of converting is. A lot of times they bundle these services.
into a single charge, so you're not sure exactly what you're paying.
but I've got that as a line item on my spreadsheet. and if we can designate a cost, definitely
account for it. Flat cost per participant.
It depends. If a cost gets listed, I don't see them cheaper
as any other administrators that aren't these payroll service providers.
But a lot of times the actual cost per participant it gets discounted because of the mutual funds
that you're limited to in the 401k menu. Bundling services obscures those fees.
It makes it more difficult when it comes time to benchmark your plan costs. And you should
benchmark your plan costs if you're the plan sponsor.
or you're open to a fiduciary liability if you don't benchmark costs AND performance.
What you want is a complete accounting of all your plan costs.
Take a look at my spreadsheet. That's what I do.
Quality of education and guidance to participants. How well do the payroll companies do here?
Well. Gulp. This is important. How can they actually provide fiduciary level
advice to your participants when they have a conflict and they're actually rewarded by
steering your participants to the higher fee funds in that plan lineup?
And the reason they would do that is because they actually get a kickback -- a 12.b.1 fee
-- back to them, or back to "overhead" in the plan. They don't always get the complete
fee kickback There are ways to account for it and actually
get some of that back into the general plan funds and distribute it to all the participants.
But for the most part, they have a conflict of interest
and I don't see them as being capable of providing fiduciary level advice to your employees.
So their publications come up short as well. They have standardized publications -- it's
not like they're going to spend a lot of time advising your participants.
They're going to steer you to some publications. Some columns.
Some webpages. that don't necessarily offer the best advice
to your participants. I think they fall short there.
I don't think their advice is very good. I think you can get better advice from a better
plan provider. And I don't necessarily always have to GIVE
advice to each of your participants but I can steer them to better advice from the lower
cost mutual fund companies that do have good standardized advice, webpages, and even sometimes
a hotline number to call for advice. What about the quality of guidance to the
plan sponsor? You. The plan sponsor. The boss. The employer. Or the plan sponsor committee.
These payroll companies they have a recipe. They don't necessarily spend a lot of time
advising, they spend time selling. So they don't necessarily spend a lot of time
keeping you out of the danger zone, avoiding any fiduciary liability, making sure you're
following all the best practices, benchmarking costs, performance, doing annual reviews,
quarterly meetings, and documenting that work to protect you.
So now you have a general opinion of what the payroll companies do well.
But in terms of plan performance, just remember, the single best predictor of a mutual fund's
performance is one thing. The expense ratio for that mutual fund.
The higher the expense ratio, the poorer that fund performs in the long run.
There is no other statistic that comes close to predicting the performance of a mutual
fund. Not um anything to do with the advisors of that fund
it's just one thing lower expense ratios that track the index
better and they give you the participant a better retirement because of those better
returns. All the rest of it is noise.
All the rest of it is marketing. So a better plan lineup, it makes more sense.
Alright. Now. What do I do that a giant payroll company
doesn't? Well I've shown you the spreadsheet.
I do analyze plan costs. I do help your plan committee analyze costs,
benchmark them, benchmark performance and make sure you're getting the best deal.
And I do it for a fraction of what these payroll companies actually charge when you look at
it on the spreadsheet. I offer better mutual fund choices.
I don't limit you. I'm fee only so I'm independent unaffilliated.
I'm not married to Vanguard funds but they're one of my preferences. They're well known.
They do what they're supposed to do in terms of tracking a specific index.
a sector. the asset class. Better administrators.
Than a payroll company? Yes, actually.
I do know better administrators who have, um, reliability guarantees and guarantees
for timeliness. And if they fail to meet those metrics -- good luck from the payroll companies
on that one -- if they don't meet the metrics the administrators I pick out
they actually pay penalties back to you the company sponsor back to the company if they
don't meet their metrics in terms of making sure that the
deposits are make correctly and the deposits are made quickly
into the 401k accounts Better plan design
I design plans that encourage them to defer more and participate more
Better advice to the plan committee. Well I already said that.
Make sure they follow best practices. Document what they do.
Better education program. Well I pick out better materials.
And I make sure that your partipants have access to them.
I remind them of when they can make changes to their plan I remind them that they can
educate themselves. You can't DeLUGE your employees, your participants,
with constant emails, you just have to pick the right times.
Give them the best opportunity to make good decisions for themselves.
And I do that for a quarter of a percent directly
where the payroll companies indirectly end up charging you more than a full percent.
I run a registered investment advisor, I'm well qualified to be a fiduciary advisor
to your plan. That's more than what the payroll services
companies can do. Give me a call if you want help shopping for
a better deal for your 401k. Call me if you want help understanding the
proposals you've already been presented. and I can convert that proposal into a single
spreadsheet so that you can compare apples to apples
I know you're busy with your business. But if you spend a little time with me
it'll greatly improve your 401k performance by the time you and ALL your participants
retire. Thanks a lot for listening.
Give me a call if you have questions about this video.