There are few industries where the phrase “you get what you pay for” is less applicable than the 401(k) industry. Equally competent 401(k) providers can charge dramatically different fees for comparable administration services and investments. This variability is a big problem for employers – who have a fiduciary responsibility to protect the interests of plan participants by paying only “reasonable” 401(k) fees. Employers that fail to meet their responsibility can be personally liable for restoring participant losses due to excessive fees.
Why does this fiduciary responsibility exist? Because cost matters a LOT when saving for retirement. When 401(k) fees are paid from plan assets, they reduce the investment returns of plan participants dollar-for-dollar. The missed compound interest on these losses can cost a participant hundreds of thousands of dollars in retirement.
Given the erosive effect of 401(k) fees, I recommend employers keep their amount a minimum. In other words, not settle for “reasonable.” Every dollar not paid by their plan means more money accruing compound interest for participants. How much these savings can increase the future value of participant accounts can be shocking.
Jack Bogle - the founder of the fund company Vanguard – is an idol of mine. I cannot think another person who has done more to help the average American save for retirement than him.
Bogle's guiding principle was simple: costs matter. Fees reduce investment returns, so their amount should be kept to a minimum to maximize the power of compound interest over time.
To demonstrate how much cost matters when saving for a retirement, see the table below. It shows how much Employee Fiduciary lowered the “all-in” fee (administration fees + investment expenses) of the 104 small business plans from our latest 401(k) fee study and how much the annual savings would increase a hypothetical participant’s account balance at retirement age. The following assumptions were used:
|
Current age |
30 |
|
Retirement age |
65 |
|
Current balance |
$50,000 |
|
Annual contributions |
$10,000 |
|
Interest rate |
7% |
|
Compounding periods |
Daily |
|
Provider |
Parts(1) |
Assets(1) |
Provider All-In(2) |
Retirement Balance |
EF All-In(2) |
Retirement Balance |
Additional Savings |
|
ADP |
23 |
$583,215 |
1.56% |
$1,386,955 |
0.49% |
$1,834,272 |
$447,317 |
|
Alerus |
24 |
$2,098,716 |
0.90% |
$1,645,743 |
0.27% |
$1,944,483 |
$298,739 |
|
American Funds |
14 |
$444,087 |
1.74% |
$1,322,972 |
0.54% |
$1,809,824 |
$486,852 |
|
American National |
11 |
$1,542,542 |
1.92% |
$1,264,119 |
0.30% |
$1,931,088 |
$666,969 |
|
Ameritas |
10 |
$713,342 |
1.80% |
$1,301,448 |
0.41% |
$1,873,535 |
$572,088 |
|
Ascensus |
16 |
$1,293,503 |
0.94% |
$1,625,761 |
0.32% |
$1,919,511 |
$293,750 |
|
Aspire |
17 |
$869,876 |
1.31% |
$1,478,066 |
0.38% |
$1,887,355 |
$409,289 |
|
AXA |
43 |
$2,508,235 |
0.97% |
$1,615,638 |
0.28% |
$1,938,412 |
$322,774 |
|
CUNA |
30 |
$1,420,521 |
0.80% |
$1,690,111 |
0.30% |
$1,926,768 |
$236,657 |
|
Empower |
15 |
$2,238,643 |
1.06% |
$1,577,536 |
0.27% |
$1,945,649 |
$368,113 |
|
Fidelity |
29 |
$2,741,477 |
0.93% |
$1,633,809 |
0.26% |
$1,947,710 |
$313,901 |
|
Guideline |
34 |
$196,057 |
1.97% |
$1,247,491 |
0.97% |
$1,613,281 |
$365,790 |
|
John Hancock |
25 |
$1,889,738 |
1.23% |
$1,508,677 |
0.28% |
$1,938,351 |
$429,674 |
|
Lincoln |
21 |
$2,841,065 |
1.09% |
$1,567,098 |
0.25% |
$1,954,255 |
$387,156 |
|
LT Trust |
14 |
$834,435 |
0.42% |
$1,868,194 |
0.35% |
$1,903,609 |
$35,414 |
|
MassMutual |
21 |
$684,923 |
1.86% |
$1,281,769 |
0.44% |
$1,860,448 |
$578,679 |
|
Mutual of Omaha |
14 |
$2,668,746 |
1.20% |
$1,521,182 |
0.26% |
$1,952,467 |
$431,284 |
|
Nationwide |
12 |
$564,615 |
1.97% |
$1,247,452 |
0.46% |
$1,846,034 |
$598,582 |
|
OneAmerica |
16 |
$2,068,204 |
1.06% |
$1,579,127 |
0.27% |
$1,943,933 |
$364,806 |
|
PAi |
37 |
$1,345,444 |
0.37% |
$1,895,101 |
0.31% |
$1,925,431 |
$30,330 |
|
Paychex |
28 |
$1,077,421 |
0.93% |
$1,632,239 |
0.36% |
$1,896,367 |
$264,128 |
|
PCS |
9 |
$568,276 |
1.90% |
$1,269,438 |
0.43% |
$1,861,555 |
$592,117 |
|
Principal |
15 |
$822,751 |
1.49% |
$1,411,312 |
0.38% |
$1,887,592 |
$476,280 |
|
Sentinel Benefits |
18 |
$758,973 |
1.06% |
$1,578,688 |
0.40% |
$1,879,876 |
$301,188 |
|
Sentry Life |
20 |
$732,388 |
1.71% |
$1,334,095 |
0.40% |
$1,876,275 |
$542,180 |
|
ShareBuilder |
12 |
$506,111 |
1.15% |
$1,540,934 |
0.50% |
$1,830,982 |
$290,048 |
|
T. Rowe Price |
91 |
$4,950,881 |
0.60% |
$1,782,126 |
0.27% |
$1,946,682 |
$164,556 |
|
Transamerica |
52 |
$812,311 |
1.03% |
$1,588,908 |
0.46% |
$1,845,916 |
$257,008 |
|
Ubiquity |
21 |
$684,690 |
0.44% |
$1,858,218 |
0.38% |
$1,889,578 |
$31,360 |
|
Vanguard |
12 |
$146,033 |
2.71% |
$1,037,669 |
1.21% |
$1,517,291 |
$479,623 |
|
Voya |
17 |
$2,096,929 |
1.42% |
$1,437,176 |
0.27% |
$1,944,451 |
$507,275 |
|
Average |
22 |
$1,207,267 |
1.18% |
$1,529,926 |
0.33% |
$1,912,307 |
$382,380 |
(1)Average of plans.
(2)Weighted average of plans based on assets.
It can be tempting to buy a 401(k) plan from a provider you see on TV or giving into a salesperson sent by your company’s payroll provider. After all, shopping for a 401(k) plan is not going to make anybody’s list of fun things to do – most business owners just want the chore off their plate.
However, choosing the “path of least resistance” can often lead to an overpriced 401(k) plan. As our latest 401(k) fees study shows, the fees for small business 401(k) plans can vary dramatically. Taking the time to find a low-priced provider can make retirement much more affordable for plan participants down the line. Employers should settle for no less.