Good benefits packages are important to attract and retain the best talent for your business. Retirement plans, such as a 401(k) or 403(b), are among the most popular benefits offered by employers. But is your company overpaying for 401(k) programs? What about your employees?
401(k) fees can cost the median earner almost $155,000 and take up a third of their investment returns. Although there will always be fees, a company overpaying for 401(k) plans could be shortchanging both themselves and employees by not getting the best deal possible.
The Impact on Small Businesses
The fees hit small business owners the hardest. Nearly 90% of all 401(k) plans in the country have fewer than 100 participants. Despite that large number, these smaller plans have less bargaining power than those purchased by larger companies.
The result is a significant difference in fees. On the low end, small businesses pay 1.19% in fees. That’s already a bit higher than the average of 0.97. But a small company overpaying for their 401(k) program could find their fees as high as 1.95%, over double the average. That 1% difference might not sound like much, but over 20 years, it could cost a typical small business seven figures worth of retirement savings. To further put these numbers into perspective, large businesses could pay as little as 0.30%.
The worst part is that finding all these fees isn’t always easy. If your company is overpaying for 401(k) services, you might not even know it. That’s why it’s important to have a knowledgeable pair of eyes go over your 401(k) or 403(b) plans and ensure that you aren’t leaving any money on the table. Our team of experts can examine your retirement plans and let you know how much you’re overpaying.
A Breakdown of Fees
Understanding the fee structure for a retirement plan can be difficult, which is why a company overpaying for 401(k) services might not realize that they’re paying more than they should be. To gain a better understanding of how small and large businesses alike may be spending more than they need to on 401(k) and 403(b) plans, let’s take a look at some of the popular fees that are associated with them.
SEC Rule 12b-1 allows mutual fund providers to charge a fee to cover aspects of managing the plan, such as marketing and distribution or shareholder services. These fees are often referred to by the name of the rule. Not every plan has 12b-1 fees, and those they do might not include both types.
These fees may seem like a good thing. Paying a fee to increase marketing, in theory, will bring in more investors to the plan and reduce the expense per investor. In reality, it doesn’t always work out that way. In fact, a 2010 Motley Fool report found that, on average, plans that charge 12b-1 fees earn less of a return than those that don’t.
Managing a 401(k) or 403(b) plan has costs associated with it. Two of those costs are administrative processes and filings. To cover these costs, plan providers will charge an administration fee. This fee could be a monthly or annual fee.
Thankfully, increased awareness of such fees has led to investors searching for the best deal. Also, to remain an attractive option, providers are lowering their administration fees. This is another area where a company overpaying for 401(k) programs may need to pay more attention. A retirement plan audit can tell you how your plan’s administration fees compare to the average.
In theory, investment fees go to the manager of the plan. However, revenue-sharing agreements can increase the cost of investment fees in a number of ways. It isn’t uncommon for plan managers to pass record-keeping duties on to a third party. When this happens, these fees are often paid indirectly through increased investment fees rather than from a more transparent record-keeping fee. There may be other services your company is paying for this way, making it difficult to know exactly where the money is going.
Computers are increasingly doing jobs that were once reserved for humans. With the advent of robo-advisors, that now includes managing 401(k) and other investment funds. If your 401(k) is managed by a robo-advisor, there will be fees associated with it, just as there are investment fees for human plan managers. These fees are usually significantly less than what a human would charge, however. Sometimes, a human 401(k) manager will make use of a robo-advisor for some aspects of managing the plan. In these cases, the fee may or may not be passed on to plan participants.
Individual Transaction Fees
While these can’t lead to your company overpaying for 401(k), high individual transaction fees can make plans less attractive to employees. Companies charge these fees for services that go above and beyond traditional 401(k) functions. One of the most common such fees is for program participants who wish to borrow money from their 401(k). When they do, your service provider may charge an origination fee.
Other Hidden Expenses
There are other expenses beyond just fees that can balloon the cost of a retirement plan. For example, consulting fees may add an hourly fee for services rendered. Many plans also have fees paid on a per-employee basis. These are a big source of overpaid money. If a company fails to take the proper steps to update the plan manager when an employee is terminated, they could be paying a higher rate than they would have to with an accurate employee count. These are the types of things that a financial services audit can catch.
A company overpaying for 401(k) services is doing a disservice to themselves and to their employees. We offer a complete range of services to reduce monthly costs, including 401(k) and 403(b) financial audits. To find out how much you’re overpaying for your company’s retirement plan, contact us today. We’ll help you learn how to get a refund or decide whether it’s time to move on to a more affordable provider.