Products May 1, 2013

New IRA Is Plan Option for Small Businesses

Starter(k), a payroll deduction individual retirement account (IRA) for small businesses, has been released.
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The Online 401(k) designed the IRA specifically with small businesses of 100 or fewer employees in mind.

“Approximately 92% of the smallest businesses do not have a retirement savings option for their employees, with cost and liability cited as two key reasons why they don’t,” said Chad Parks, founder and CEO of The Online 401(k). “We believe that the Starter(k) solution will benefit those businesses that want to enable retirement savings without cost or complexity to their human resources function.”

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According to Parks, benefits of Starter(k) include: 

  • Cost: Employers pay $25 a month, versus a 401(k) that may cost several thousand dollars per year, and participants pay $4 a month.
  • Investments: The plan features 10 target-date model portfolios made up of exchange-traded funds (ETFs) for a fee of only 0.25%, which are inclusive of the investment expenses, fiduciary advice and trading costs. The portfolios are carefully selected and monitored by a third-party investment expert.
  • Savings: Participants’ savings are automated so they do not have to remember to set aside money each month. Once they pick their investment portfolio, no other decisions need to be made.
  • Navigation: The Online 401(k) offers a web-based platform, so employers do not need to worry about paperwork and employees can check their accounts online.
  • Setup: Offers out-of-the box, simple setup in a matter of minutes.
  • Liability: Unlike 401(k)s, IRAs such as Starter(k) do not fall under the Employee Retirement Income Security Act (ERISA), so business owners can offer a retirement plan without incurring overhead compliance costs of complying with ERISA.

More information is at http://www.theonline401k.com.

The Markets May 1, 2013

Another Argument for Smaller Investment Menus

A new study offers another argument for providing plan participants with a shorter menu of investment options.
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Rather than noting the confusion investors can experience when offered a wide array of investment options, the study, authored by researchers at the University of Toronto’s Rotman School of Management and the Bank of Canada, suggests a shorter menu of options is often better than a longer one because “menu-setters” who develop shorter lists have superior selection skills, on average.   

“Skilled menu-setters will put together a shorter menu because they will hit on the most important features, but less-skilled menu-setters, knowing that they’re less skilled, will put together a longer menu, just to cover all of their bases,” says David Goldreich, a  finance professor at the Rotman School who co-wrote the study with Hanna Halaburda of the Bank of Canada.  

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Using mathematical models and analysis of U.S. pension plans in 2007 from 300 organizations, they found that shorter lists of available investment options proved to be of higher quality than longer ones. The researchers used a commonly-used measurement called the Sharpe ratio to evaluate the quality of the investment choices available to the organizations’ employees.  

The study will be published in a forthcoming issue of Management Science.

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