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How to select a 401(k) plan provider

How to select a 401(k) plan provider

At Brex we aim to provide useful insights to startups, ecommerce businesses and others on how to set up financial and operational processes. Among the articles we’ve published so far, our piece on offering 401(k) plans to employees has been rated as one of the most helpful ones. 

Brex Internal 401(k) Plan Update 

Brex is now in its second year of offering a 401(k) plan to its employees (we started doing so when we had 8 full time employees). At this point, we have over 80% of employees participating in the program, even without Brex matching employee contributions. This statistic is particularly remarkable given that Brex has a relatively high proportion of employees who are not permanent residents in the U.S. (these employees often opt out of U.S. retirement programs as they are uncertain as to whether or not they will retire in the U.S.). Contributions are quite substantial, with the average employee contributing almost 5% of their salary.  

Our data indicates that 401(k) is an employee benefit that has broad, multi-generational appeal. Other benefits like student loan repayment assistance and tuition reimbursement tend to appeal to younger workers, while life and disability insurance are highly valued among older workers. However, retirement is something that pertains to all employees, regardless of their age, parental or marital status.  

Key Factors in Selecting a 401(k) plan provider

Startups and small businesses have a number of strong options for 401(k) administration providers including large legacy players with well-known brands like Fidelity, Vanguard and Charles Schwab, and newer, more nimble startups like Guideline, Human Interest and Betterment.

When selecting a 401(k) plan administrator, you should consider the following criteria:  

  1. Payroll integration - This is one of, if not the most, important factors when selecting a plan administrator. When employees elect if they want to participate and how much they’d like to contribute, the money must flow from payroll to the plan administrator. This is much easier if the payroll / onboarding system and the administrator talk to each other. 
  2. Brand - This is a factor to consider in any vendor selection. Employees are putting their hard-earned money into a 401(k) so they need to be comfortable with the vendor choice. 
  3. Investment offerings - Your employee base will benefit from a broad array of investment options offered via your plan administrator. Look for investment options from brand-name asset managers like Blackrock, State Street and Vanguard and for lots of low-fee, passively managed ETFs and index funds. 
  4. User interface - Employees today are accustomed to clean, intuitive interfaces in software products. Select a 401(k) provider that can offer a smooth and painless user experience to your employees. 
  5. Compliance - The practice of offering employees 401(k)s is regulated by the Department of Labor. You want to make sure your provider helps file the required annual forms and disclosures. Moreover, you must ensure your administrator offers enough low-fee options to employees, as there has been a recent uptick in lawsuits against employers for offering high-fee investment options in their 401(k) plans.  
  6. Price - Most 401(k) plans charge a version of a monthly or annual fee to the employer on top of a per user per month fee.   

401(k) Vendor Landscape Among Brex Customer Base 

There are a number of 401(k) providers that serve the startup and broader small business community. Brex looked at data across its customer base to determine the most popular 401(k) vendors and found that Guideline was the clear winner with 77% of market share among our customers, followed by Human Interest with 17%. The remaining 6% was spread evenly among Vanguard, Fidelity, Betterment, and Charles Schwab. 

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Interestingly, even with something as important and sensitive—both financially and in terms of personal data security—as 401(k) administration, startups are favoring startups over legacy providers.

One important point to consider is that Gusto, a popular payroll software among startups, has a direct integration with Guideline. Among customers that use Gusto for payroll and have a 401(k) provider integrated, 77% use Guideline for 401(k) plan administration, while among those that use a provider other than Gusto for payroll, Guideline’s market share of those using a 401(k) provider is only 29%. 

Also, as a reminder, as part of the Brex Rewards program, Guideline is offering a three month free trial for all Brex customers.

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