Then again, the stakes are often a little lower. Larger employers, thanks to plans that are stuffed with thousands of workers’ life savings, tend to have better investment choices and lower costs. Smaller employers, with little leverage and few or no assets, routinely end up with expensive plans and lousy investment choices.
And then there’s Alan Wenker, the controller for Feed Products North, a small company in Maplewood, Minn., that sells minerals to animal feed mills. Armed with a pretty good understanding of the markets, he still spent an entire decade engaged in stop-and-start efforts to find a better plan for himself and the 25 or so colleagues he has today.
Yes, you read that right. Ten years. It should not take that long, and the marketplace for retirement plans for smaller employers has improved a bit since Mr. Wenker set out on his quest.
Still, anyone at a smaller employer who would like to cut costs in half while also improving the investment choices, as he did, would be wise to consider the hurdles he had to clear and the obstacles in his way.
So why are all the details so important ? Most people starting their careers now will spend 45 years trying to save enough so they can stop working someday. But if the investments and fees inside of your 401(k) or similar fund average, say, 1 percent of your assets each year instead of 0.25 percent, the difference can cost over $100,000 by the time those 45 years are up.
And that’s just the fees side. Most actively managed mutual funds, which try to pick investments that will do better than an index of similar securities, often don’t actually outperform that index over long periods of time. Even so, many employers, either out of ignorance or blind faith, don’t provide a full menu of index funds inside their retirement plans.
Alan Wenker was only beginning to understand all this in 2000, when he went to work for Feed Products North. He’s 47 years old now, but he’d spent the bulk of his adulthood paying off his student loans and hadn’t paid much attention to the details of the 401(k) plan he had access to at a previous job.
His new company had no plan at all in 2000, so he decided to start one. And he took the path of least resistance, signing up for the 401(k) plan that his company’s payroll processor, ADP, offered. When Feed Products North switched to Paychex a couple of years later, Mr. Wenker moved the plan as well.
All along, however, his opinions about investing were evolving. He’d read Andrew Tobias’s book “The Only Investment Guide You’ll Ever Need” and became a fan of the public radio show now called “Marketplace Money.”
As Mr. Wenker became more aware of the importance of diversification and low costs, he said he realized that his Paychex plan had no index funds and was costing him and his colleagues about 2 percent of their balances each year. (Paul Davidson, director of product management at Paychex, said the company had done some research and discovered that the high costs resulted from Mr. Wenker getting assistance from an outside broker. Mr. Wenker countered that his Paychex representative had urged him to use a broker but that no broker even called him for two years to help with the plan until he urged Paychex to intervene.)
After his realization, Mr. Wenker started shopping around, even picking up the phone when the cold callers rang. “But you always end up at the same place that you already are,” he said. “which is a set of mutual funds and a nice guy with a glossy brochure. But the funds are essentially all the same. They tend to have higher expenses, because they have to pay for the guy in the suit with the glossy brochures.”
As Mr. Wenker got wise to the sales pitches, he often found himself dumbfounded. “I once had a stockbroker nearly yell at me that there was no such thing as a no-load mutual fund,” he said, referring to the front-end and other fees that mutual fund companies sometimes charge and that the broker was insisting were mandatory. “I stared at him in utter disbelief. There are people that believe that humans and dinosaurs walked the earth at the same time. So I can’t convince you to believe something you don’t want to.”
Why such ignorance? Jessica Weiner, who spent years working at insurance companies that pitched plans to small businesses before starting a consulting group called the Value Quotient, has an explanation. “One of the realities you have in the smaller market is that the brokers who get involved with a plan are typically benefits experts,” she said. “I call them incidental brokers.”
As in, 401(k)s are incidental to them. An afterthought. Where they really make their money is pushing health, life and other insurance, especially policies aimed at senior executives and company owners.
At one point in his search, Mr. Wenker thought to call Vanguard, since it had the broadest selection of index funds and the lowest costs at the time. But Vanguard does not administer 401(k) plans for small companies.
Here is what is supposed to happen today if someone like Mr. Wenker calls Vanguard, according to Gerry Mullane, a principal in the company’s institutional investor group: The representative should refer the caller to a local financial planner or smaller administrator who can help set up a retirement plan that includes Vanguard funds.
Mr. Wenker did not receive a referral when he called several years ago, so he continued his hunt. “Maybe I should have called Vanguard back 25 times until I understood it completely,” he said. “But that’s not all I have to do. A sense of practicality jumps in there as well.”
And therein lies one of the biggest challenges for anyone like him. If you run the finance operation of a small company, you have hundreds of tasks to take care of. Fixing a middling 401(k) plan is something you end up doing on your own time, if you can even make the time when you’re also a father, as Mr. Wenker is.
His breakthrough came in 2008, when he stumbled upon an article about Dimensional Fund Advisors, a mutual fund company that does not attempt to pick stocks but constructs its low-cost portfolios in a way that often ends up outperforming index funds by a bit.
Mr. Wenker called the company for help. Generally, it only lets people invest in its funds only through financial advisers. So it put him in touch with Stephen Varley in Minneapolis, and within a year, Mr. Wenker and his colleagues had a new plan with better funds, personalized advice and an overall cost that was more than 50 percent less than what they had been paying before.
Tales like these don’t always have happy endings. The company owner may be a friend or a relative of the person making money by servicing your retirement plan. Or you may have delusional colleagues in charge of the retirement plan who think they can pick market-beating investments with their third arms when they’re not doing their day jobs.
But if you’re like Mr. Wenker, whose boss let him make the call, there are some options available now that can help. Many, in fact, are cheaper than using funds from Dimensional Fund Advisors while also paying for a financial adviser’s time.
I’d start with administrators like Employee Fiduciary, the Online 401(k) and Invest n Retire. They should all be able to provide a plan with low-cost mutual funds or other investments. The ShareBuilder 401(k) plans are also worth a look, as is Charles Schwab’s new initiative to set up plans that include only exchange-traded funds.
If those five don’t work for you, or if you ultimately decide, as Mr. Wenker did, that you want a professional adviser on call, you can phone Vanguard at 1-800-841-7999 and ask for the referral that Mr. Wenker didn’t get several years ago. Dimensional offers referrals, too.
This sort of pursuit will require a bit of baseline knowledge on your part. If you don’t have a head for numbers or lack confidence in your analytical skills, draft someone who does and reel in other allies if you can.
“You have to be a nerd like me to even care about this,” Mr. Wenker said. “For me, it was a labor of love.”
And if it isn’t love for you? Just think about the $100,000 you stand to lose and see if that inspires your inner nerd.