Until recently, a small company wanting to offer a 401(k) plan to its employees would have few options to choose from. A smattering of "small plan" 401(k)s were peddled by insurance companies through local brokers, but the high fees and less-than-inspiring investment choices scared many employers away. But now, some of the biggest names in the mutual-fund and brokerage industries -- including Fidelity, Charles Schwab, and T. Rowe Price -- have entered the field, offering more affordable fees and some of the nation's hottest mutual funds.

The accompanying table details offerings from eight sponsors, ranging from MassMutual, a traditional insurer turned financial-services firm, to discount broker Charles Schwab, known for its mutual fund supermarket. The good news: Nearly every plan takes care of such complex tasks as financial and government record-keeping (so-called IRS eligibility testing). The main differences revolve around service and investment choices. Key points to consider:

Number of investment choices: In a 401(k) plan, employees design their own investment strategy, typically picking from a menu of mutual funds and money-market accounts. The higher the number of available funds, the more an employee can customize his investing. But don't go only by the numbers: If a fund company offers dozens of funds that are universally weak, having a choice becomes meaningless. That's why plans such as those offered by Charles Schwab and Merrill Lynch -- which allow you to choose from independent fund companies -- might be attractive. Give employees too many options, however, and they tend to get overwhelmed. Schwab, for instance, allows plan investors to choose from its huge universe of 2,000 funds, but, in reality, most will need no more than a dozen. To narrow them down, employees will need some guidance. This brings us to:

Employee education: What if you threw a party and no one showed up? That's dangerous for sponsors of 401(k) plans, many of whom depend on participation from employees at all levels to meet government "nondiscrimination" tests. All of the programs will load you up with videotapes and written materials to explain the program, which presumably will encourage employee participation. But only some will send a representative to answer employee questions and help employees sort out their investment choices. At Merrill Lynch, for instance, the on-site visit is free, while Vanguard charges $900, plus travel expenses, for an in-person Q&A.

Startup fees: These fall into two categories: conversions and new plans. Conversions are, as the name suggests, asset transfers from existing 401(k) plans. New plans start from scratch. Here, again, costs can range from zilch up to several thousand dollars. Many of the fees are also differentiated by "per eligible employee" and "per participant." This is a crucial distinction: "Per eligible employee" essentially means you must ante up for all workers who qualify for the plan, whether they participate or not. (Typically, employees aren't eligible for 401(k) plans until a year or more of service.) Per-participant fees only kick in for workers active in the 401(k) plan.

Annual fees: This is usually a flat fee covering administrative costs. It often includes a per-employee charge that alternates between "per eligible employee" and "per participant." But watch out: These fees come on top of administrative fees charged by each mutual fund, which can cost each participant up to 2.5% of his or her assets every year. Ask about the "expense ratio" on each fund, and be leery of anything that exceeds 1.5%. And if you're going with a provider that restricts you to its own house brand of funds, make sure your employees won't be charged a sale commission or "load" on their investments. This can take an additional 3% to 5% of assets, which is hard to justify since your employees (and you) are captive customers of the sponsor.

Selectivity: Some 401(k) administrators won't take on your company's plan unless they already have a minimum level of assets -- or promises to reach that level in the year ahead. Vanguard, for instance, turns away 12 plans for every one it accepts. Although plan sponsors are beginning to embrace small companies, it's still not exactly a bear hug.

By Dennis Berman in New York
dennis_berman@businessweek.com

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TABLE: 401(k) Plans for the Rest of Us
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