Let’s get real about 401(k) fees.
401(k) fees can be confusing and opaque, and there’s a good chance that you don’t know what you’re actually getting charged.
To make matters worse, plans of similar size can be charged dramatically different fees - even when they’re with the same providers. And these high fees can cause a huge hit to your employees’ retirement savings.
But how do you know if you’re paying too much for your 401(k)? Stick with us. Below, we’ll walk you through the process for finding out as well as some quick benchmarks.
Step 1: Check Your Fund Fees
When it comes to 401(k) fund lineups, we often see companies with a whole bundle of high-cost funds whose performance may not justify their cost. These high fee funds are more common than you might think, and could easily be limiting your savings.
Here’s What to Look Out For:
1. Passive vs. Active Funds
Actively managed funds (which require, well, active management), have higher fees. But often, that active management doesn’t add up to significantly improved performance.
As a matter of fact, one Morningstar study found that between June 2017 and 2018, just 36% of active funds outperformed similar passive investments in the same category. So essentially, more times than not, actively managed funds performed worse, while costing nearly five times as much as passive funds.
We’re not saying that actively managed funds have no place in a plan, but if your fees are too high, these funds could be one reason. It could also be...
2. 12b1 Fees
12b1 fees are intended for fund marketing costs and basically act as sales commissions for the broker or advisor who recommended that fund. Not only does this fee often get baked in your funds’ expense ratios, but this also means that brokers have a real incentive to pack a plan full of higher-cost funds (that include those 12b1 fees). So to keep your fund fees low, be sure your plan funds don’t have 12b1 fees.
Clearly, fund fees can rack up pretty fast. So now it’s time to find out...
Are Your 401(k) Fund Fees Too High?
Since high quality passive funds are now so widely available, you should be able to build a low-cost lineup of well-performing investments for less than 0.20%. Anything higher could be needlessly costing your employees a lot more than it should.
What To Do Next:
The solution is pretty simple. All you have to do is adjust your fund lineup to remove any low-performing, high-cost active funds in favor of lower cost passive funds. A good advisor should help you with this transition.
Once you’ve assessed your fund fees, you should take a look at all-in expenses.
Step 2: Check Your All-In Fees
There are many other 401(k) fees in addition to the typical fund fees we just covered. These add up to your all-in asset-based costs. We frequently see plan sponsors with all-in fees that are way too high. Since you might not have this number readily available, you’ll need to find your 408(b)(2) fee disclosure to find out what your all in fees are. Here are a few big ones to watch out for:
What To Look Out For:
1. High recordkeeping fees
A plan’s recordkeeper performs an essential function, but that doesn’t mean they need to be paid an exorbitant rate for that work. Recordkeepers can charge plan sponsors dramatically different rates, even if their plans are of similar size and participant count. Not only that, recordkeeper pricing differs by provider, with some recordkeepers offering more attractive pricing than others based on assets, participant count, and new contributions made into the plan.
2. High advisory fees
Just as the recordkeeper shouldn’t be charging a premium for basic service, nor should an advisor.
Are Your All-In 401(k) Fees Too High?
At ForUsAll, our average all-in fees are 0.59%. Generally, we like to see all-in fees lower than 0.75%. Anything more can cause some serious damage to your and your employees’ retirement savings.
What To Do Next:
There’s no shame in getting some help to ensure you actually are being charged reasonable fees. After all, you’re not only negotiating for your own benefit, but for the long-term financial health of your coworkers and/or employees.
The right partner can help you negotiate lower fees and build a plan that works for your specific situation.
Asset-based fees make up the majority of your 401(k) fees, but there’s one more area where costs have the potential to be lowered a lot - the annual 401(k) audit.
Step 3: Check Your Audit Fees
The annual 401(k) large plan audit is a pretty substantial expense - one that can be a major burden on the bottom line, particularly for smaller businesses. Generally, we see plans with fairly simple payroll setups and plan design paying anywhere from $10-$15k for their audit every year.
That sum is nothing to shrug at, particularly when it could be distributed as bonuses or put back into the business.
What Makes an Audit Cost So Much?
Time and effort. The auditor has to do a lot of work and spend a serious chunk of time reviewing transaction details, troubleshooting mistakes, digging up documents, and assessing the plan. And generally, the more mistakes that show up during this review, the longer it’s going to take the auditor to do the work.
What To Do Next:
The first step to lowering your audit costs is to eliminate administrative mistakes. But as with anything involved in 401(k) administration, this is much easier said than done. One of the best ways to do this is to automate your 401(k) payroll processes with an integration between your payroll and recordkeeper.
Next, you’ll want to implement a process whereby you essentially audit your plan periodically - whether that’s quarterly, every month, or every time you run payroll. Document your process, make note of any mistakes you uncover, and then provide documentation for their resolution. If the auditors can see that your plan is error-free and you’ve already essentially done the work for them, getting their stamp of approval should be a lot cheaper.
When it comes to 401(k)s, fees can be so high that they essentially negate the built-in tax advantage intended by the plan. Essentially, high fees can defeat the purpose of having a 401(k). If you find that you’re paying too much, you should move quickly to get those fees lowered. It could save you and your employees a lot of money in the long run.
Want to learn how low your 401(k) fees could be? Use our 401(k) Fee Calculator to instantly receive low-cost price quotes on 3 major recordkeepers!