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Is Your Firm Paying Too Much for Your 401(k)?

By Sean Condon, CFP^®

If you are a small business owner who offers a 401(k) plan, you are already ahead of the curve. Only 53% of small- to mid-sized businesses offer retirement plans, and the numbers skew higher the larger the business gets.^[1]

However, do not get too complacent yet. It is not enough to simply offer a 401(k) plan. Not all retirement plans are created equal, and some can actually hurt workers instead of helping them. So, how do you know if your retirement plan is a valuable benefit or if you may be inadvertently damaging your employees’ savings?

Read Your Annual 401(k) Fee Disclosures

Retirement plan providers are legally required to provide both you and each of your employees with an annual fee disclosure (408b-2 to the business and 404a-5 to the employee). The problem is that you must read the fee disclosure for it to be of any use to you. A recent survey conducted by the Pew Charitable Trusts found that 44% of employers had not read their fee disclosure in the past year^.[2]

If you do not read your fee disclosure, how are you going to know what you are paying? How are you going to know if you are paying what you should be? Granted, the fee disclosures can be confusing. In fact, 7% of those surveyed had read their disclosure but simply did not understand it.

As a business owner, you have a lot on your plate, and it is easy to let something like fee disclosures fall to the bottom of your priority list. But that is dangerous. It is important for you to understand your retirement plan fee disclosure to ensure that your plan is working in your own and your employees’ best interests.

Why Reading 401(k) Fee Disclosures Matters

The two main reasons that reading fee disclosures matters are that 1) as an owner, you have a fiduciary obligation to monitor the fees and the quality of your plan, and 2) not being aware of fees can cost both you, the owner, and your employees a lot of money in retirement.

401(k) Fiduciary Obligation

If you sponsor a retirement plan, you are by law a fiduciary. This means you are legally obligated to act in the best interest of the retirement plan participants. Failure to do so can result in personal liability.  There are several primary fiduciary responsibilities that come with offering a retirement plan, and one of them is to regularly monitor the plan and ensure you are paying only reasonable and necessary fees.

It is not enough to analyze the fees when you first hire a service provider. Retirement plan fees change regularly, and what was reasonable five years ago may not be reasonable today. The government requires service providers to disclose their fees on an annual basis because they understand the changing nature of fees. As a business owner, you need to make sure to both read and understand those disclosures and act on your findings if necessary.

Excessive 401(k) Fee Consequences

So, why do fees matter so much? Every dollar adds up over a lifetime and can make a significant difference in retirement. For a worker making about $30,000 a year and saving 5% of his or her income each year, public policy think tank Demos found that he would pay a total of $154,794 in 401(k) fees over his lifetime. That is over 5 years of his life spent working just to pay 401(k) fees. For a high-income worker making $90,000 a year, around $277,000 will go towards paying fees.^[3]

When looking at fee disclosures, the difference between 1% and 2% may seem minuscule. But compound that over a person’s lifetime and it becomes substantial. Think about how much you are saving for retirement. How much will each percentage cost you over your lifetime? How about your employees?  

Perform A 401(k) Plan Benchmark

You do not want to waste your money on excessive 401(k) fees and you do not want to breach your fiduciary duty. What can you do about it?

Evaluating your 401(k) does not need to be difficult.  It only takes two steps:

• Collect the “408(b)(2)” disclosure from your 401(k) plan service provider
• Benchmark the service provider’s fees for reasonableness

Benchmarking is done by comparing your service provider’s fees to competitors to demonstrate they are appropriate. Simply calculate the “all-in” fee (service provider fees + investment expenses) for your plan and compare this fee to the all-in fee of 3 or more competing 401(k) providers (other providers will be glad to send you a fee proposal for your plan).

Once you compare the fees charged by each provider and adjust for any difference in service and experience, you can show that you have met your fiduciary duty.  Should your current fees prove to be excessive, you now have three new plan provider options to switch to.

If you would like assistance in 401(k) plan benchmarking, we offer a benchmarking report that will show you how your plan compares against others. Call us today at (844) 377-4963 or email windgate@windgatewealth.com for a complimentary consultation and customized recommendations to lower your plan fees. You can also book an appointment online here.

[1] https://www.planadviser.com/only-53-of-small-to-mid-sized-businesses-offer-retirement-plans/

[2] http://www.pewtrusts.org/en/research-and-analysis/articles/2018/05/07/many-small-business-leaders-express-limited-knowledge-of-retirement-plan-fees#0-fees-change-so-employers-shoul

[3] Source:  The Retirement Savings Drain:  The Hidden and Excessive Costs of 401(k)s

Perritt Capital Management, Inc. is the registered investment advisor for Windgate Wealth Management accounts
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