I’ve mentioned several times I have a Self-Employed 401k account. It’s a somewhat unique thing, so here’s a little bit more about it.
What’s a Self-Employed 401(k) and who’s eligible?
A Self-Employed 401(k) is a tax-advantaged 401(k) retirement account that is available to self-employed individuals or business owners with no employees other than a spouse, including sole proprietors, partnerships, corporations, and S-corporations. It is also referred to as an Individual 401(k) or a Solo 401(k). You can even get them in Traditional or Roth versions.
For more details, see these other posts:
I chose a Solo 401k over other options like SEP-IRA due to the increased contribution limits for those with relatively low self-employed incomes. I ended up picking Fidelity Investments as my plan administrator, and here are my experiences after using it for the last year:
It’s been a while, so I don’t have a rundown of dates or anything, but I remember the application being a bit long, but very straightforward. You can either print the forms out online, or have them mail you a nicely bound copy. I mailed it in, they set it up, and I had my own Solo 401k. No hassles.
There were no setup fees, no maintenance fees, no minimum balance requirements, no annual fees. I only thing I’ve ever paid is for the expense ratios in the mutual funds I bought. As you’ll see below, that’s barely added up to $20 so far!
Whenever I want to make a salary deferral contribution to my Solo 401k, since my business is a corporation and I am an employee, I first have to use my payroll provider and make sure the deduction is accounted for in my paycheck. After that, I print and fill out a contribution form detailing the amount of the contribution, the tax year it is for, and whether it is a salary deferral or a profit-sharing contribution. Finally, I just write a check from my business to Fidelity. With the profit-sharing contribution, I just note it in my books and write the check and mail it in. A few days later, it shows up online at Fidelity.com.
I think Fidelity also files a IRS Form 5500 once a year when the plan’s asset value exceeds $100,000. I think they file it either way, which helps during tax time. Otherwise, there is not really any other paperwork to mess with.
Investment Management and Options
My contributions show in my default cash sweep account that pays decent interest (FDRXX) and stays there, it does not automatically invest in some pre-set mix of mutual funds like many other 401k plans. Basically, it is like having a full brokerage account at Fidelity. I can buy mutual funds, individual stocks, ETFs, even individual bonds like TIPS and Treasury Bills. Lots of flexibility.
One downside as compared to other 401(k) plans is that I am subject to all the usual mutual fund minimums as a retirement account. As I primarily invest in low-cost index funds, here are the funds that fit that criteria:
Stock Funds ($10,000 minimum, 0.10% expense ratio)
Spartan 500 Index Fund (S&P 500)
Spartan Extended Market Index Fund (Wilshire 4500 Completion Index)
Spartan Total Market Index Fund (Wilshire 5000 Composite Index)
Spartan International Index Fund (MSCI EAFA Index)
Bond Funds ($10,000 minimum, 0.20% expense ratio)
Spartan Short-Term Treasury Bond Index Fund
Spartan Intermediate Treasury Bond Index Fund
Spartan Long-Term Treasury Bond Index Fund
In addition, there is a 4-in-1 Asset Allocation index fund, a Nasdaq index fund, and a U.S. Bond Index Fund as well. All the asset classes aren’t covered, and they have high entrance minimums, but they are cheap! 0.10% of $10,000 is only $10 a year. There are also many other Fidelity funds like Contrafund and Magellan and the Freedom 20XX All-In-One Funds that are also available with no transaction fees.
As for stock trade commissions, they range from $8 to $20, depending on activity and total balances across all accounts. I’m personally aiming for the $10.95 per trade tier with $50,000 in household assets. This way, I can diversify into ETFs at a somewhat reasonable price if needed.
Fidelity’s customer service remains one of the best that I have ever dealt with. I can usually reach a human within a minute, which is awesome. Overall, I have thrown a lot of questions at them and they have always been courteous and knowledgeable. One person did give me some incorrect information once about the contribution limits, but they might not have understood my somewhat complicated question.
If you are looking for a simple Traditional Solo 401(k), this is a solid option. (They currently don’t offer a Roth version.) Pros include high flexibility, no setup or maintenance fees, good customer service, and low cost index funds. Cons include high minimum balance for index funds, and $20 stock trades at the basic level. I do expect more competition in this area as time goes on, but for now I am very satisfied with this account.