Pension Plans for Everyone

On the horizon: new 401(k)s that are affordable and easy to run

At Circumerro Inc. in Jackson Hole, Wyo., employees can dress casually. They're allowed to bring dogs to work--in fact, most days there are 13 people and 8 dogs in the office--and can listen to their favorite tunes on the office stereo. They go rafting on company time and get an extra week off at Christmas. But missing from these perks-a-plenty was one benefit with real staying power: a 401(k) retirement plan. It was something Latham Jenkins, the 31-year-old president of the travel-guide publisher, very much wanted to provide for his young workforce. Still, he found himself ready to abandon the whole idea one day last summer when his local stockbroker dumped a stack of impenetrable 401(k) documents in his lap. "Why should I have to jump through all these hoops to understand this?" Jenkins recalls thinking after spending two futile hours trying to make sense of it all.

Then, in September, a Fidelity Investments newspaper ad caught his eye. The mutual-funds giant was promoting a retirement plan that is handled entirely online. Jenkins went on the Web and learned from the interactive site what an entrepreneur should consider in designing a plan--from vesting schedules to loan provisions to how much of an employee's contributions a company should match. By January, Jenkins had decided to take the plunge, and by April, he had his "e-401(k)" plan up and running for an annual cost of $2,000--about half the quote for a traditional plan.

That puts Circumerro in an elite group: Only 35% of companies with fewer than 500 employees offer a retirement plan, mostly because of the expense and complexity. But TowerGroup, a research firm in Needham, Mass., projects that the percentage will nearly double in the next five years, to 65%, due largely to the growing popularity and availability of these online plans. "E-401(k)s promise to bring inexpensive and accessible 401(k) plans to every employer that wants one," says Dennis J. Ceru, TowerGroup's director for online brokerage and investment.

As the name implies, the new e-401(k)s are sold, set up, and managed almost exclusively online. Not only does your company handle all administrative functions over the Web but your employees also choose their investments and make changes online. The e-401(k) market is still in its infancy, and there are no hard numbers on how many entrepreneurs have signed up. But there is no shortage of new players--at least nine at last count. Fidelity, which has the most 401(k) assets under management, launched the first e-401(k) in late 1999 and now serves 1,200 online customers. Last year, rivals began to follow. Newcomers included another industry titan, Principal Financial Group, as well as a raft of Internet startups, such as 401(k) Pro, GoldK, and Emplanet.

Among the selling points: low cost. Online administration means e-401(k)s are much cheaper to set up and manage--as much as 25% to 50% less than conventional plans, according to the 401k Provider Directory Averages Book, published by HR Investment Consultants Inc. in Baltimore. Fidelity's traditional plans, for instance, cost $1,500 to set up and $3,500 a year in administrative costs, while Fidelity's e-401(k) plan charges $750 for setup and $2,250 for administration, a 40% savings.

Setup tends to be quicker, too, cutting a process that can take months down to just a few weeks. When Nicole Stansbury Anderson first sought an affordable 401(k) for her six-person info-tech services company, her insurance broker told her that Hi-End Technology Services in Falls Church, Va., was too small to even be of interest to conventional providers. "I got desperate," she says. She had four new hires coming on board from a larger company where they had had a 401(k), and she knew they would expect a similar benefit at her company. Finally, she typed the words "small business" and "401(k)" into a search engine. Two weeks later, Stansbury Anderson had established an online plan with Principal, paying $500 for setup and $800 a year in administrative fees.

Once they're in place, e-401(k)s usually offer employees a greater variety of investment choices. The typical 401(k), big or small, offers a measly dozen or so choices. By contrast, providers such as 401(k) Pro and Emplanet offer access to thousands of funds--until now, an unheard-of option in mass-marketed small plans.

Nevertheless, the new online plans aren't for everybody. The online route could be problematic if you or your employees aren't Web-savvy or lack high-speed Internet access. These 401(k)s also tend to require more hands-on involvement. In some cases, you may have to file your own reports to government regulators. That's a tedious process, and doing it incorrectly can cost you thousands of dollars in penalties. For entrepreneurs who need more handholding, a traditional plan could be a better choice.

Indeed, the U.S. Chamber of Commerce decided to find a new preferred provider for its members when its contract with Fidelity expired in December. About 1,000 member companies had contracted for traditional Fidelity plans at discounted rates, but the Chamber felt Fidelity was trying to move its members to an online 401(k), says Jane Kotlarski Sanders, a Chamber vice-president. "Our focus groups indicate that people want someone in the local community to provide support," she says, referring to the brokers who often sell small-company plans. The Chamber took its contract and at least 300 members to SunAmerica Inc., which offers a traditional plan. A Fidelity spokesman denies that the Chamber members were being pushed online.

Even if you are comfortable with the idea of an online plan, there could be another drawback: Such plans tend to take a cookie-cutter approach to design. That's not a problem for most small businesses. But it could be trouble for closely held corporations in which an individual or family controls a group of companies and there is a big gap in the salaries of top-paid employees and everyone else, cautions David W. Huntley, a principal at HR Investment Consultants. If too few of the lower-paid workers sign up or if too many of the benefits go to the top people, the plan can run afoul of federal pension laws. You might find yourself unable to make a full contribution, or the plan itself might lose its favorable tax treatment.

So how do you choose among the providers? Here are some key issues to consider:


Some of the new e-401(k) startups are offering free setup to companies that choose their plans. But don't forget to ask about the sales fees that are assessed on each of your participant's accounts as a percentage of the balance, as well as administrative fees. "Make sure you take into account all asset-based fees when you calculate the cost of providing the plan," warns Huntley. These fees are far and away the largest chunk of any plan's cost.

For the average 25- to 50-person plan, you can expect to pay administrative expenses of about $2,000 a year, compared with $3,000 to $4,000 for a traditional 401(k) plan. However, costs for online plans vary. For a 25-person company, Fidelity charges $2,250 a year, while Principal charges $1,200. Also, check whether the plan charges extra for producing government-mandated reports and fairness tests. Fidelity, for instance, charges an additional $1,000.


Whichever e-401(k) you choose, it's likely that you'll be able to set it up faster than you would a traditional plan. The online programs walk you through a series of questions and drop-down menus to select your investment options, set your plan's eligibility requirements, its loan provisions, and the company match. Several Web sites say you can create a plan in as little as 15 minutes. Mike Budiac, a GoldK client and president of CPA, which helps clients find accounting software, says he set his up in just six minutes.

What happens if you have a problem as you're designing your plan? Several sites have customer-service representatives monitoring visitors and they will answer questions via a live Web-chat feature or by phone. At the end of the setup process, these sites will generate all the necessary paperwork, from money-management and trust agreements to the plan's formal documentation. Of course, you will still need to print out and sign these documents and send them back to the plan provider.


A key consideration here is how payroll contributions are handled. Some e-401(k) plan providers, such as Emplanet, link directly with payroll providers. Most e-401(k)s, however, require you to import data from your payroll system or even input the data yourself every time contributions are electronically transferred into the plan. That sounds more burdensome than it really is. "I pop online, enter the contributions, confirm the deductions, and I'm done," says Kathy Conklin, Circumerro's office manager.


Whichever online plan you choose, you're likely to have more options than you would get with a traditional plan; these often restrict the number of investment choices to a dozen or fewer. Many e-401(k)s allow for scores of options from multiple fund families. But even among the online plans, big differences exist. For example, Emplanet offers a choice of 2,099 funds from 30 fund families; at Fidelity, you and your employees will choose from among just 26 Fidelity funds. That's "pretty limiting," says Chip Marvin, Circumerro's 33-year-old Internet project director, who has been investing since his 20s and wishes he had more choices. Nevertheless, he says, his new e-401(k) is "pretty cool," especially since Circumerro is one of the few employers in Jackson Hole that offers a 401(k) at all. Besides, the choices aren't too shabby: The funds offered in the e-401(k) cover different investment objectives and include 18 that received a four- or five-star rating from Morningstar Inc., the mutual-fund rating service.


All online plans handle enrollment, statements, contributions, and investment elections over the Web. They also educate your employees through online tutorials and provide them with retirement-planning tools, such as online calculators to determine how much they need to save to reach a retirement goal. Mostly plans differ in how much phone support they provide. For example, both Principal Financial and Emplanet offer a toll-free number to customers. Fidelity does not publicize its 800 number to online plan participants.


Critics argue that e-401(k) startups won't last. There is "absolutely the risk" that your plan provider might tank, warns Joshua D. Dietch, a consultant at Cerulli Associates Inc. in Boston. Entrepreneurs who run the new e-401(k) startups dismiss such warnings as sour grapes: "The word is getting out in that clubby environment that there's a new player in town, and they don't like it," says Jim Gilbert, president of 401(k) Pro Inc., which markets a plan called 401(k) Easy. But even if the startups were to fail, that would be more inconvenient than dangerous. Your plan's assets would still be safely invested in registered mutual funds. Given that these providers have state-of-the-art systems, your plan's records should be in good condition and easily transferable to another vendor. Still, if you want to get some idea of the company's soundness, examine how well the startup is funded and whether its client base is growing. "You want to see them adding clients," notes Huntley. "If they're not, they won't be in business long."

That's not to say that you shouldn't consider them. You just want to make sure they'll be around at least as long as your company is.

By Virginia Munger Kahn

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