401(k) Advisor Fee Study: How Much Fiduciary Advice Lowers Plan Costs

On April 23, 2024, the U.S. Department of Labor (DOL) released its much-anticipated Retirement Security Rule for retirement plans. This final rule redefines the term "investment advice fiduciary" under ERISA by expanding the circumstances in which a financial advisor must provide fiduciary-grade advice that prioritizes the interests of retirement investors. It replaces a 1975 fiduciary rule that left retirement investors vulnerable to conflicted advice prioritizing profits in certain situations. The new rule is set to take effect on September 23, 2024.

We fully support the new rule. In our experience, fiduciary-grade investment advice tends to lower the total cost of a 401(k) plan. Lower fees mean higher investment returns for participants, resulting in more savings to compound until retirement.

This month, we conducted a study on the fees charged by 1,109 fiduciary-grade financial advisors to demonstrate how affordable a small business 401(k) plan with fiduciary-grade investment advice can be. Here’s what we found.

Background

The Employee Retirement Income Security Act of 1974 (ERISA) imposes significant requirements on "fiduciaries" of 401(k) plans. In 1975, the DOL released a fiduciary rule defining the circumstances under which a person rendering investment advice to an employee benefit plan would be considered an “investment advice fiduciary” under ERISA. This definition is important because an investment advice fiduciary must meet rigorous conduct standards under ERISA – including a duty to put client interests first.

The 1975 definition of “investment advice fiduciary” is a five-part test. One of the parts requires advice to be provided on a “regular basis.” In general, investment advisers meet this requirement, while brokers and insurance agents that receive commissions for one-time product recommendations don’t. This loophole has left many brokers and insurance agents subject to lesser conduct standards that do not prohibit "conflicted” advice that puts profit ahead of client interests.

The new Retirement Security Rule closes the loophole by subjecting all financial advisors, including brokers and insurance agents, to the same stringent ERISA conduct standards when providing investment advice for a fee.

401(k) Financial Advisor Fee Study

Employee Fiduciary partners with hundreds of 401(k) financial advisors nationwide. All of them are investment advisers, making each an investment advice fiduciary under the 1975 fiduciary rule.

Recently, we studied the annual fees charged by 1,109 of our advisor partners. The following table summarizes our findings. Please note our study does not account for the depth and breadth of each advisor’s services.

A plan-level breakdown of our study can be found here.

The Total Cost of 401(k) Plans with a Fiduciary-Grade Advisor

All 401(k) plans require three basic administration services: asset custody, participant recordkeeping, and Third-Party Administration (TPA). Employee Fiduciary provides all these services. Financial advisors partner with providers like us to offer a bundled 401(k) solution to employers.

To illustrate the cost-effectiveness of a small business 401(k) plan with fiduciary-grade investment advice, we combined advisor fees from our study with Employee Fiduciary fees. Here are the results:

These figures do not include investment expense ratios. However, the investment advisers that work with Employee Fiduciary are legally obligated to recommend funds with reasonable fees as ERISA fiduciaries. Many choose low-cost investments like index funds and ETFs, which can result in an average expense ratio as low as 0.10% of plan assets.

Comparing the Total Cost to National Averages

The 401k Averages Book is an often-cited source for 401(k) benchmarks. For 2020, they found that 401(k) plans with $500,000 in assets paid an average of 1.71% for bundled administration services (0.66% recordkeeping + 1.05% revenue sharing). That’s higher than the 1.63% average we found for smaller plans that averaged $189,367.06 in assets.

Key Takeaway - Fiduciary-Grade Advice Lowers the Cost of 401(k) Plans

When 401(k) fees are deducted from participant accounts, they reduce returns dollar-for-dollar, leading to less savings to compound until retirement. This “cumulative effect of 401(k) fees” can cost a worker hundreds of thousands of dollars in retirement.

Given the stakes, it is crucial to keep 401(k) fees as low as possible. Our study shows that hiring a fiduciary-grade advisor can significantly reduce these fees. The DOL’s Retirement Security Rule will make it easier than ever to achieve this by subjecting all 401(k) financial advisors—not just investment advisers—to the ERISA fiduciary standard of care.