Better 401(k)s For Law Firms: How Lawyers Can Optimize Their 401(k)

November 16, 2017
4 min read
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Attorneys may not think of themselves as running a small business, but even law firms with 50 or 100 attorneys and support staff have much in common with small business when it comes to offering a 401(k) plan. Law firms, like other small and mid-sized businesses, are often charged high fees and receive little administrative and compliance support from their providers and advisors.

Why Law Firms Care About 401(k) Fees

Law firms, just like other smaller companies, tend to pay 401(k) fees that are substantially higher than larger companies. Research from the 401(k) data vendor, Brightscope, has shown that smaller firms are paying much more than their larger counterparts:

“Large plans (over $100m in assets) almost uniformly have fees below 1%. The largest plans are usually below 0.50%. The large end of the 401(k) marketplace is incredibly competitive. The small plan marketplace is a different story. Average fees for small plans are between 1.5-2%, with plenty of plans paying more than 2% a year in fees.”

Fees have a dramatic impact on retirement savings, since many 401(k) fees typically are paid directly from the participants’ assets. This means that a partner at a small law firm maxing out his or her 401(k) each year will sacrifice a substantial amount of assets at retirement in the form of fees. How big is the impact on the partner’s savings at retirement? It could easily add up to hundreds of thousands dollars lost to fees.

Fee Impact on Lawyer’s Retirement Savings at the Age of 65*

**Low Fee Plan****High Fee Plan**
*Gross Annual Return*7%7%
*Fund Expenses (including 12b-1 fees)*0.58%1.40%
*Return Net of Fees*6.42%5.60%
*Partner’s Savings at Retirement*$3,128,992$2,655,189
*Amount lost to fees*-$473,803
What happens when a law firm adds in matching or profit sharing, increasing the amount put into the partner’s retirement plan? Assuming $6,600 (we’ll discuss how we came to this number later in the article) in match or profit sharing a year and the drag from fees is even higher.

Fee Impact on Lawyer’s Retirement Savings at the Age of 65 – Including Law Firm Contributions*

**Low Fee Plan****High Fee Plan**
*Gross Annual Return*7%7%
*Fund Expenses (including 12b-1 fees)*0.58%1.40%
*Return Net of Fees*6.42%5.60%
*Partner’s Savings at Retirement*$3,557,865$3,033,618
*Amount lost to fees*-$524,247
That’s over half a million dollars – per partner, so you could imagine that a law firm with half a dozen partners maxing out their 401(k)s could result in millions of dollars in lost savings due to fees.

How do law firms manage 401(k)s and other retirement plans?

According to the Department of Labor data, there are 28,000 law firms in the United States who file Short Form 5500’s reporting on their firm’s 401(k) plans. This dataset generally includes companies with less than 100 employees, so it excludes the largest law firm’s 401(k)s (which you can read about here).

**Law Firm Employee Count****Number of Law Firms with 401(k) Plans**
**Grand Total ****28,046 **
Not surprisingly, the bulk of the law firms in the United States with 401(k)s have under 25 employees. Collectively these smaller firms have over $25 billion in assets saved in their retirement accounts – so you’d think they would have some serious purchasing power. However, we have found a wide range of fees paid by companies of this size, and encourage law firms to regularly benchmark their 401(k) to make sure their plan is meeting their specific needs.

What can law firms do to improve their 401(k)?

Beyond regularly benchmarking fund performance and fees, there are some steps law firms should consider to make sure their retirement plan is going to provide for the partners’ and staff’s retirement. We have produced a white paper, “5 Ways to Optimize Your Law Firm’s 401(k),” designed to help lawyers take a critical look at their plan. Download the white paper for free here.

Since 2012, there have been significant changes in 401(k)s that have created new risks and opportunities for small and mid-sized law firms’ 401(k) plans. Due to the fast pace of change, many busy partners, and even some small 401(k) advisors and recordkeepers, have not kept up. Whether you have staff devoted to running and monitoring your 401(k), or have outsourced some administrative and investment functions, we suggest that there are areas where there is likely room for improvement and at least five things you should consider doing:

  • Perform a Compliance Checkup
  • Reduce Administration Overhead
  • Increase Plan Effectiveness by Lowering Fees
  • Increase Employee Participation and Engagement
  • Make saving more tax efficient

*Assumptions: Assumes a 40 year-old partner with $350,000 in their 401(k) at the age of 40. Assumes the partner saves the maximum possible per year until the age of 65 ($18,500 until 50, $24,500 when 50 and over). For the scenarios that include law firm contributions assumes $6,600 annual firm contribution, based on the average firm contribution for the 2016 plan year as reported on Short Form 5500 filings by law firms with over $1 million in assets.

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1 Schwab 2022 401(k) Participant Study - Gen Z/Millenial Focus, October 2022.
2 As of 12/31/2022. Employees include both current employees and terminated participants with a balance.
3 "Morgan Stanley At Work: The Value of a Financial Advisor" Morgan Stanley, March 2022.
4 Sarah Britton was a client when she provided this testimonial through an independent third party review website. She received no compensation for her remarks. There are no known conflicts of interest in the provision of her comments related to the services provided.