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Why the 'Father of the 401(k)' is both right and wrong about small plans

Small 401(k) plans may have flaws, such as cost, but there are trade-offs involved in using alternate solutions

Aug 1, 2018 @ 4:50 pm

By Fred Barstein

There's no question that smaller companies are under greater pressure than ever to offer a retirement plan to workers, either because of state requirements or to attract employees in a market with a historically low level of unemployment.

But Ted Benna, known as the "Father of the 401(k)," has made headlines by claiming that 401(k)s are too costly and complicated for small companies and has developed what he thinks is a better solution, called the Benna 401k.

Mr. Benna's plans, which are basically payroll-deduction IRAs, come in three models; they have no set-up fees, which he states are typically $1,000 to $1,500, and no administrative costs, which he claims can run up to $2,000 annually. Further, Mr. Benna says participants will pay 0.25% in annual fees under his scheme, versus 1.5% to 2.75% in traditional small 401(k)s, and that employers will save on payroll taxes in some of his models, which would not require matching, safe harbor rules or discrimination testing.

Employers would have no investment fiduciary liability, since employees select investments from their brokerage account of choice. The aforementioned details all make sense and seem similar in concept to the automatic-enrollment IRA schemes promoted by states, as well as multiple employer plans. The construct probably makes sense for the gig economy and companies with low-wage employees who turn over frequently, especially seasonal workers.

But there are, in my opinion, some basic flaws with such a 401(k) solution.

First, 401(k) plans are sold, not bought — a hard lesson the federal government learned when it offered a similar solution in the 1990s, and more recently with the Treasury Department's myRA program. Unless there is a government mandate, most employers are not likely to even start a plan unless they're prodded by a financial professional — in person.

Which brings up another flaw — without help from an adviser, third-party administrator or record keeper, employers and employees are basically on their own to set up the plan and figure out how to comply with tax laws. Though Mr. Benna lauds investment flexibility within his schemes, too much choice for unsophisticated investors can cause, at best, inertia, and at worst extremely poor decisions. Even if these investors could find an adviser willing to work with them given their low account balance, the fees would be very high.

In addition, for two of Mr. Benna's three models, the maximum contributions would be $5,500 or $6,500, as with IRAs, which is hardly attractive to people making the decisions. With each employee choosing a brokerage account to use, it's likely that payroll companies would add on fees; plus, many financial institutions and mutual funds have minimums.

So is there a better solution for small companies that strain under the complicated requirements of the Employee Retirement Income Security Act of 1974, as well as high fees and fiduciary liability within 401(k) plans?

The basic appeal of defined-contribution plans goes beyond tax savings and the power of automatic payroll deduction. There is also power in the pooling of money. Employees within a company can getter better deals and access to better financial professionals than they would be able to get on their own.

That is why everyone, even in partisan Washington, D.C., supports legislation creating "open MEPs," which would allow unaffiliated companies to band together to get better deals while offloading most of their fiduciary responsibility. MEPs would allow each employer to customize plan design using auto-enrollment and auto-escalation and could likely offer even lower investment fees than Mr. Benna's schemes while cutting the costs to the company.

Mr. Benna is right that today's 401(k) is not right for most small companies, and his scheme may be great for gig and low-wage retail workers. But open MEPs may provide most of the benefit — giving employers access to financial and industry professionals. And, if open MEPs are enacted, they might take off because someone will be selling them to busy owners of small companies.

Fred Barstein is the founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews'Retirement Plan Adviser newsletter.

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