Ask Mark Travis a question about impediments to establishing small 401(k)s and he’ll profess not to know before launching into a thoughtful and extremely detailed answer.
The president of Intrepid Capital Funds, a Jacksonville, Florida-based mutual fund and managed account shop, notes 401(k)s typically follow a four-step process—design, document, investment and administration. The first three aren’t a problem, but it’s that last step where advisors go wrong.
“The administration is where it falls apart,” Travis explained at Schwab Impact 2015 in Boston on Wednesday.
The reason, he argued, is that the “sub-50” plans (those with less than 50 participants) usually end up in a packaged insurance product like a group annuity plan. Recent policy changes like the inception of Obamacare means some employers will cap the number of employees they want to hire.
“Add to this the fact that the employer is on the hook for certain ERISA provisions going back to 1974, and it makes it increasing difficult to establish small plans,” Travis added. “All of these issues means if they do establish a plan, it will be that packaged product, which has high embedded costs.”
Safe harbor rules, in a sense, also can act as an impediment. Travis worries too many employers will simply avoid establishing a plan altogether, opting instead for a non-qualified deferred comp plan and offering nothing to employees.
“Regulations are a tax. If it impedes people from saving, it’s implicit, but it’s nonetheless a tax. The left wing in this country fears the complete privatization of retirement saving; the right wing want everyone in the market. There is an in-between. We should give 30-somethings more discretion over Social Security, while keeping those, say age 50 and up, where they are.
Travis concludes by asking three open-ended questions:
1). How do we make it easy for start-ups to immediately offer a plan?
2). How do we make it cost effective to do so?
3). How do we remove the legal and regulatory burden so small business owners can at least offer a packaged insurance product?
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
