A Common Sense 401(k) Plan for Small Businesses
The Thrift Savings Plan (TSP) is a 401(k)-like plan for Federal employees. By combining index funds and low cost administration services, the TSP offers participants professionally-managed market returns with very low drag from expenses. In an Aspen Institute article last month, I wrote 401(k) plans modeled after the TSP are the key to incentivizing retirement plan sponsorship by small businesses — which today sits at a low 52 percent. This rate is a big problem because American workers are 15 times less likely to save for retirement when their employer fails to offer a savings plan.
I think TSP-like 401(k) plans offer indisputable value to participants. They make it dead simple for participants in even the smallest 401(k) plans to achieve professionally-managed, market-correlated returns for a very low all-in fee. Their value makes it easy for 401(k) plan sponsors to demonstrate their plan pays reasonable fees — an important fiduciary responsibility.
In short, I think TSP-like 401(k) plans are a common sense retirement plan — a safe harbor of sorts from the confusing array of services, fee structures and investments offered by 401(k) providers today. That said, these simple and effective plans are not for everybody. Sometimes, 401(k) investments and investment-related services with higher fees are a better fit for a small business and its employees. Not sure if you’re one of these businesses? Compare these services against a TSP baseline to decide if they are worth the extra money.
