Do You Have A Good 401(k) Plan? With 401(k) Forensic Consultant Paul Sippil

0:00On Builders, I interview entrepreneurs, CEOs, and leaders about their businesses and careers. And today we have a bit of a departure from our normal interview in that we're not talking about career advice or business building per se. We're talking about your 401k plan. Paul Sippel, my guest, is a 401k forensic consultant. We put his website in the show notes and he describes the hidden fees that cost you as an employee or an employer money at the expense of transparency and maximizing your benefits.

0:39Hi, Paul. How are you? Good to see you. I'm doing great and it's great to be here. We're recording this in December, but we're probably going to air in January. We were just talking offline about how our two football teams, the Seahawks and the Bears, might be meeting in the playoffs in early January or shortly thereafter. Hopefully that happens. On this podcast, Builders, we often talk about building your business or building your career, but we don't often talk about benefits you as a business owner, business leader provide employees and why they matter. And also conversely, as an employee, choosing an employer that has a good 401k package can really make a difference.

1:15Let's start in the basics, if you don't mind, Paul. Sure, sure. What is a 401k and why is it such an important benefit for U.S. employees? That's actually a good question, even though it might sound like a basic question. A lot of people get a little bit confused about what a 401k actually means. By definition, 401k refers to participant contributions in an employer-sponsored plan. So you could have an employer-sponsored group retirement plan that actually isn't a 401k that's simply called a profit-sharing plan. And that profit-sharing plan refers to the contributions that the employer makes. So your 401k doesn't mean your employer's contributions.

1:58It actually refers to your contributions to an employer-sponsored plan. And one of the basic advantages is the ease with which you can start saving through retirement, where you register on a website and you give all of your information and your beneficiary designation, and you designate whether you want to go into what's called a Roth or traditional 401k, which is sometimes something that people get confused about, as well as the percentage contributions that you want to make, or that can be a hard dollar amount. And every two weeks or every week or however often payroll contributions are made, that percentage or that dollar amount is deducted from your paycheck.

2:37And you can change that amount anytime you want. And that's as opposed to an IRA, which is an individual retirement account. And that individual retirement account can be what's called a traditional or a Roth IRA. The Roth refers to after-tax dollar contributions versus the traditional, which is pre-tax dollar contributions. And people often ask me, should I do a Roth or a 401k? And those are not necessarily something different. The 401k just means the contributions you make to your employer's plan, and that could be a traditional or a Roth. And the advantage of the employer-sponsored plan is higher contribution limits, where the contribution limits are often not enough for people in the individual retirement account, you can make much higher contribution limits in the 401k plan, and they're not subject to income limitations.

3:28So oftentimes people based on their income are phased out of contributing to an IRA and the contributions are limited. But no matter what your income is, you're always able to contribute up to the maximum limit. And I believe for 2025, it's$23 ,500. And then there's a catch-up of$7 ,500 for those who are 50 years of age or older. So no matter what you're making, that limit is going to apply to you anyway, as opposed to the IRA, where making above a certain amount will not allow you to contribute. Did you know that Builders is sponsored by business.com. I'd love to tell you about a new free membership from business.com for small business decision makers.

4:14It's called business.com plus, and it's designed to address the pain in selecting new products and services. What is the pain you might ask? It's things like knowing which vendor is best for your specific business, negotiating pricing, having access to someone who can answer questions for you. The new membership business.com plus handles all of that with a dedicated advisor, pre-negotiated pricing, and solutions tested and reviewed by experts. Check it out at business.com slash plus. That's business.com slash P-L-U-S. I have kids in high school, so I'm about to tell myself advice that I'm trying to give my kids right now, but I've always done a 401k and started small and then you wake up 5, 10, 15, 20, 25 years later and it's not a small amount anymore.

5:12So 401k, I think is a great way to help build a nest egg. But I am not sure outside of knowing whether or not my employer's matching some of the contributions. I'm not sure if I know if I have a good plan or a bad one. You do work as a 401k forensic consultant. Maybe you could break down a few of the signs that you might not have a good 401k plan administrator. Very, very good point to touch on. There's actually multiple parties. In addition to a 401k administrator, there's also a 401k advisor. there's a 401k custodian and there's a 401k record keeper. Sometimes the party who's providing the 401k record keeping and administration services is the same party and sometimes it's a different party.

6:01Sometimes it's actually the same party as the custodian and sometimes that's a different party. Sometimes even the advisor and the administrator are I guess you might call double dipping where the administrator is actually getting brokerage commissions and there's actually different types of advisors. Some are brokers where they can only provide investment recommendations and education because they can't actually provide advice as a result of only being able to earn compensation through these commissions, otherwise known as kickbacks, built into certain investment choices and not others. Sometimes the administrator can get paid through kickbacks, known as sub-transfer agent revenue, where in addition to the fee that they're often and sometimes but not always directly billing to the employer, they're getting an additional fee out of the investment expenses, which is really confusing.

6:55Sometimes the advisors don't get paid that way, but they still charge based on a percentage of the account value. And sometimes advisors, and this is the ideal situation, will charge a fixed dollar fee that is not based on how much money is in the plan, but based on the amount of time that the advisor is actually spending. However, that fixed dollar fee is often billed to the participants. And in the most ideal scenarios, which is often how I structure things personally, is where the fee, all the fees are billed not to the participants, but to the employer. And when you have zero service charges, that being the record-keeping administration, advisory, and custodial fees being passed on to the participants, That's one sign of a very good plan because the service charges are extremely significant over time.

7:46Another sign of a good plan is where there are no restrictions whatsoever on the investments. Granted, most investments in these 401k plans are pretty much the same. There's almost always a generic lineup of basic passively managed index funds that are low cost and simply mirror what the market does as a basic explanation. But there are alternative investments, and I'll get to this in future questions, that I think should be available that aren't correlated to the rest of the market. And there are many plans, most plans, in fact, that don't offer them to the participants, and some plans that don't even allow the employer to add those particular funds, even if they wanted to.

8:26So two signs of a good plan are either zero or very low fees and a total open architecture investment platform that doesn't put any restrictions on the investment. and investment options. And from the employer standpoint, it's ideal to have a very good level of service, which is kind of hard to find, where you have an actual human being assigned to your account, where that human being knows what he or she is doing, and something called 360 payroll integration, where the contributions are seamlessly uploaded to the accounts and there's no additional administrative work for the employer to make sure that those contributions get uploaded to the accounts in a timely manner.

9:09Hope that helps. Yeah, I'm actually, I like it. I'm going to divide that into a couple of questions. So my first question is about fees. So let's say that I'm an employer and I want to provide my employees the lowest fee for one or one that you would call like best practices. Where do I start? Am I trying to find a 401k advisor, a 401k plan? Where do I go first if I want to reevaluate everything that I have? Yeah, it depends on the size of your plan. Are you talking about a startup plan? Do you want to start there where you're just starting a plan? Let's say that I've got a couple dozen employees and I realize I should really start something.

9:53As I'm scaling, my employees are going to want this, et cetera? Well, oftentimes you do start with an advisor, but you really have no idea who the advisor is going to recommend. And in many cases, and this was true at my old firm, but any firm where you're part of what's called a broker dealer, you're restricted as to which administrators and record keepers that you can actually recommend as the advisor, because certain firms have relationships in place with certain providers of administration and record keeping services. So you might think you're getting the best recommendation, but you're only being able to choose from the menu that the advisor is allowed to choose from based on which firms that your firm is actually contracted with.

10:34Because if you recommend someone outside of one of those firms, then your firm can't make any money and they essentially don't want you doing that. There's a really good provider from the standpoint of transparency and pricing and open architecture, and they're okay on service, but there's really no provider I found that's great on service anyway. It's called Ascensus, A-S-C-E-N-S-U-S. And it's just ascensus.com. And what I really like about them is they'll literally send their fee schedule. I believe it's$4 ,250 for all record-keeping administration and custodial services for the first 20 participants.

11:11And I believe, unless something has changed, at least this was what it was until recently, $70 for each additional participant. That's really easy to understand. And there are some additional fees for non-recurring services, such as plan amendments and such as something called cross-testing, which is a way to disproportionately allocate the profit sharing contributions to the higher, highly compensated employees. And that's usually an extra maybe$800 to$1 ,000 a year. But that's a really easy fee structure to understand. They're a national provider. You can work with a separate administrator if you want better service, because some of these, what's called third-party administrators are very good.

11:51They're a little more expensive than going direct to a census for that part, but they're flexible. You can have pretty much any investment you want. You can work with the outside administrator or not. And they have a really simple transparent fee structure. And that's low cost that enables the employer to pay the expenses. And you absolutely should if you're just starting a plan, because if you pass on$5 ,000 or so in expenses to your employees when there's no money in the plan to start with, that's really, really unfair to the employees in the early years because they're going to have such a large portion of their contributions wiped out by the fees.

12:28And for the record, I get no kickbacks, no indirect or direct compensation, no benefit from recommending that firm. And you've got to be careful because, again, there's often relationships in place where advisors or firms are able to benefit from recommending certain providers. Roger that because of the sub-agent fees or whatever you call it. I'm sure they don't call it kickbacks on the invoice. Yes. And let me just add, that affects the investment recommendations oftentimes. Let's say you have an advisor that's also acting as the administrator and they're choosing funds to make their outward fees look low, like the fees they bill.

13:08And then yes, they'll have what's called an offset where they send you an invoice and then they'll give you a credit on the invoice based on the amount of revenue sharing that they're getting. And they call that transparency. Well, that's sort of transparency because they're disclosing the credit, but nobody understands that a credit is not a discount. All people think when they see that they're getting a credit on their fees is, oh, they're discounting their fees. But all they're doing is recognizing that they're getting their revenue from another source. But the only reason they're getting that revenue is because only certain funds have that amount of revenue built in.

13:45Certain funds don't allow for that revenue to built in, which affects the objectivity of the investment recommendations and the investments that are made available. And this is a little bit too nuanced and too complicated for the average person to understand. So while the TPA can claim transparency, hey, I showed the credit on the statement, so I was transparent. But people don't understand that that credit never would have taken place had other funds, funds I often want to recommend, have been chosen and made available in the participant lineup. So there's different layers and levels of transparency that I don't think are being fully explained to the average person.

14:26How did you figure all this out? I want to ask you about sort of how people should approach investments and doing things beyond like the traditional stock market and index funds and so on. But maybe talk about the business that you currently run and how you got to becoming a forensic consultant. I saw so much just ridiculous, ridiculous corruption in the industry. And the way I, if you don't mind me just explaining how I got into what I'm doing exactly, I had a conversation 20 years ago with an old colleague of mine who was always researching information on taxes and is always, you know, has had buried in a book and, you know, a really bright guy and just had a lot to offer.

15:08And one thing he knew and told me, I don't know when I would have, if, or if I ever would have figured this out as Paul, did you know that you can look up retirement plan tax forms online. That's 401k, 403b, and profit sharing tax forms. 403b is really the same thing. It just refers to a nonprofit retirement plan. I thought, really? All this is public? That's cool. But I didn't know what to do with that information. But then a few years later, I started looking into the forms more closely. I started making phone calls to some business owners, especially business owners who had tax forms with charges that I felt were especially high, often egregious.

15:48And I would let them know, thinking I'd be a hero, for alerting them to this fact that there are these huge expenses coming out of participants' accounts without their knowledge. Because these providers, the record keepers and the advisors especially, the administrators will send a bill. But again, that offsets a little bit confusing. But the biggest charges are the advisory and the record keeping fees that are shown on the short form, The 5500 form is what it's known as, lines 8F, 8G, and 10E. And 10E is where the advisor commissions are shown. And when I would let people know about these huge charges that they never got billed for, which is a huge problem that you make all this money and you don't even send an invoice to your clients.

16:29And I'll get into a conversation I just had with another podcast host, actually, just today, how defensive he got when I was telling him these things because he was also an advisor. But hey, we're supposed to keep it real on these podcasts, so I don't want to hold back. No doubt. I won't mention the names. But the point was that these business owners would tell me, oh, no, Paul, I'm fine. I'm all taken care of and or my friend handles that. Well, first of all, whether or not you're taken care of doesn't address the question as to whether or not these service charges are reasonable in proportion to the time spent.

17:02I'm taken care of just meant they think I'm trying to sell them something, which I wasn't, and that they don't want to get into or address the substance of what I said. And when they say, well, my friend handles that and watches that for me, I want to pull my hair out. And I'm trying to tell them, your friend is the one taking this money. That's the one I'm warning you about. And you should ideally pay your friend with a check at the employer level and get an actual bill because people are always more sensitive to the costs. Second is that the fees are passed down in proportion to the account balances.

17:37So the business owner is often paying the largest share of these fees anyway, and with non-tax deductible dollars, which might be the craziest part, that you can't even get a tax deduction for these fees, which would be nice because the whole point of getting investment advice, or one of the whole points, is to get tax advice and to have a choice as to whether it's better to write a check at the employer level and get a tax deduction as you would for any other business expense versus paying the fees out of the funds with non-tax deductible dollars and in an account that's already tax-advantaged where you get tax-free or tax-deferred growth.

18:14And every advisor I've ever heard of is always preaching, save more money in a retirement account because it's so tax-advantaged. Well, if that's true, then why are you advising your clients, especially the owner who's paying the majority of the fees in almost all cases anyway, especially medical practices and law firms, for example, because those are the ones, again, with the most money. Why are you advising them to pay in such a tax efficient way? And by the way, even if they could get a tax deduction, they wouldn't even know it because they don't even see the total service charges. Milton Friedman, a famous economist, talked about the four ways to spend money.

18:51And this pretty much sums up the entire industry in one chart. You can spend your own money on yourself, your own money on somebody else, somebody else's money on yourself, or somebody else's money on someone else. The latter is where you do not economize and you don't seek the highest value, which causes a moral hazard. And that's essentially how the entire retirement plan industry operates. And I can see that because I have to make an election if I'm an employee and I have to decide certain things and I'm maybe going to spend an hour, an hour doing it. And I might not have the time to sort of unpack all of this stuff.

19:29I sort of want to shift to what you were talking about a little bit earlier, which are the types of investment options employees should have. You know, maybe I'm curious as to what you were referring to, maybe crypto, maybe real estate, maybe, maybe other types of investments. But I'd like to ask what in your mind is best practice. But then also, and I'm not sure if you provide investment advice yourself, but even if you don't, what are generally best practices for someone early in their career when they're thinking about investment options versus later in their career, mid-career, towards the end of your career?

20:05Yeah, great questions. And yes, to answer the first question, my official title, well, along with recovering CPA and forensic 401k consultant, crime fighter and 401k vigilante, as I say in my LinkedIn profile, my official title is registered investment advisor. And by definition, a registered investment advisor does not receive kickbacks from third parties, from investment fund companies, mutual fund companies. And that allows me to legally provide advice versus a broker who can only get commission payments from certain investments and not others, can only provide what's known as investment advice or investment, not advice, but recommendations and education.

20:47So if you give me$100 and I tell you what to do, that's advice. If you ask me which funds you should pick and I sell you a fund to get a commission, that's not advice. So as for the options that should be in the plan, I want to back up a little bit and talk about Ted Benna. Ted Benna is the inventor of the 401k, who's echoed the exact same criticisms of financial advisors as I have, that they're getting paid as if they're doing an original piece of work, which is just bizarre and inefficient. They need to get back to a fee-for-service model that is not an asset-based fee, which is nuts, but a fixed-dollar fee-for-service model like any other professional service provider would charge, like an attorney charging for their time.

21:30They need to get back to simply that kind of model and helping people retire and not get primarily paid to fake manage an account by selecting and monitoring the funds that a fifth grader could pick or maybe someone younger than a fifth grader because they're all a bunch of generic index funds that literally require no monitoring and no expertise. They're all pretty much the same. And I like those fund options. That's fine. I'm not against having low-cost, basic, passively managed investment options in the plan. And by definition, an index fund is a fund that just mirrors the market. You don't try to outperform with an index fund.

22:11You don't compare your index funds to the benchmark. They are the benchmark. The benchmark. So to invest in what's called the S &P 500 doesn't require a financial advisor. Now, they can help you with your fixed income to equity to alternative asset allocation. that's fine. But if you're just sitting waiting for a call and there's no selection and monitoring really required and there's no investment changes ever done and there's no participant meetings done. And by the way, when you pay at the participant level and don't get a bill, you have no incentive to monitor the advisor and understand the extent to which the advisor is conducting meetings because, hey, I'm not paying for it and I've never seen a bill.

22:55So what do I care if I'm getting enough value out of the advisor for a service that I don't think I'm paying for in the first place? But as for the investments you should be investing in, this is formerly an unconventional allocation. But now that Morgan Stanley, of all firms, and it's not just Morgan Stanley, I think other firms are starting to talk about this too, has recently recommended that everybody, their whole client base, with their 60-40 portfolio, sell half of their bonds and buy gold. That sounded unheard of. Just until a few months ago, I only crazy preppers like me were talking about gold and silver.

23:33But now it's gone mainstream. And I was a little early with recommending gold and silver to my clients a few years ago. But now when a firm like Morgan Stanley is not only recommending gold, I thought if they would do it, it would be a 5 % to 10 % allocation. But they're talking 20. And if they're saying 20, it should probably for some people be even more. So for anyone that's a middle-aged investor or young investor, I will warn you that from 1968 to 1981, we had no growth whatsoever in the market. And people can't even imagine a period of five years without growth, let alone 13 years. And it's been a long time since the big drop in 2008.

24:12And while some people are cautious saying, all right, I'll just have more bonds. Well, Morgan Stanley just told you to sell half your bonds. And we are going to be in a period as we are now of what's called negative real interest rates, which means the true rate of inflation is higher than the risk free rate. So if you buy conservative investments, short or long-term bonds, you're guaranteed to lose purchasing power because the cost of living is going to rise more than your fixed income investments are going to rise. So I want to prepare people, if they're going to be investing, not to be worried about dollar cost averaging, but to consider dollar cost averaging into investments like gold and silver instead of a generic S &P 500 fund and consider other funds like emerging markets funds, which are often available, but only very, very lightly allocated.

25:06And that over the next five, 10 years is absolutely going to change. I feel like I've learned a ton. That's the idea. Yeah, exactly. What would you recommend someone go if they're like, I heard a lot on this podcast, some of which I understand, some of which I don't. And I want to sort of like freshen up. Is there a book? Is there a website? Is there something that you'd recommend for someone to say, okay, I've got to really, really take a closer look at this? I would say, and I'm not saying this to be self-promotional because when I go on other podcasts, I really don't talk about, well, this is why you should work with me.

25:52I'm just giving everyone a general structure because if you set your plan up, so I'd say my own website, which is paulsippel.com, S-I-P-P-I-L.com. There's also a paulsippelel.com. Again, if you want to check that site out, go for it. But I am IL, so that's not necessarily going - We'll put that in the show notes for people. Yeah, yeah, exactly. But absolutely my website. There's no other place where you're going to get this kind of information about 401k plans. Just about every advisor is going to give you that I've ever heard, the generic story about why a 401k is a good investment. And sure, I mean, I talked about that initially.

26:28That's not unimportant. But at least from what I've talked about so far is I've tried to take a deeper dive into 401k plans and tell people, don't just blindly trust your advisor's recommendation because if they're affiliated with a firm, their recommendation of a record keeper is going to be affected by who they're allowed to recommend. If you're working with a broker, they can only make money off certain funds. And if you're working with a registered investment advisor, they're often going to want to charge based on a percentage of the overall assets. I hate that, especially for professional services firms like lawyers, doctors, architects, engineers.

27:06Imagine, and most of these plans are set up like this, where you have$5 million in an account total amongst all the participants and there's only 15 people. Well, what happens when that account goes to 7 million and the number of people stays about the same, 8 million, 10 million? Has there been any additional work performed? No. Is there any additional work to do just because one plan has 7 million versus 1 million? And in all of these cases, there's always a disproportional amount of assets and huge contributions amongst the employer and the employee that's pushing up the assets versus the number of participants or in proportion to the number of participants.